Nonprofit Membership Certificate Is Not a Stock Certificate

An arbitrator recently ended a controversy involving the $311 million sale of Community First Foundation’s membership interest in nonprofit Exempla Healthcare System’s hospitals to the other member of Exempla, the Sisters of Charity of Leavenworth Health System.

The arbitrator’s ruling prohibited the sale of Community First Foundation’s Exempla membership interest, but did not prohibit Community First Foundation from transferring its membership interest to the Sisters of Charity, if it received no payment for the transfer.

While the arbitrator’s summary decision in this case is subject only to limited review, it is likely that the decision will be scrutinized by other nonprofit organizations as consolidation pressures mount. Had the dispute been heard in court, the result may well have been different as the arbitrator’s summary conclusion that a membership interest does not carry vested property rights is contrary to precedent in many jurisdictions and was not supported by any cited authorities.

This decision should remind members of nonprofit organizations to carefully consider (1) membership transfer rights afforded under state law when considering a state under which to organize; (2) whether investments in subordinate nonprofit entities are made as “equity” or debt; and (3) charter provisions addressing exit strategies when drafting organizational documents, especially when there are philosophical tensions between the organizing members. In Exempla’s case, the organizing members had strong philosophical disagreements over reproductive rights issues.