The Clinton Foundation: Legal Deficiencies In Its Organizational Structure & Their Implications
This is a revised and explanded version of an article I originally posted on Medium on August 31, 2017.
To understand the legal deficiencies in the organizational structure of the Clinton Foundation (the legal name of which is the “Bill, Hillary & Chelsea Clinton Foundation,” hereafter “CF”) it is necessary to consider (A) two types of corporate governance documents:
- Articles of Incorporation (originally filed with the Arkansas Sectretary of State in 1997)
And (B) three different types of laws:
- Corporate Law Of The State of Arkansas;
- US Federal Tax Law (IRS regulations, but also its policies as well as such instructions and conditions the IRS imposed on CF in making its initial determination of CF’s status as what is known as a 501c3 non-profit); and
- Depending on where and how CF functions, the laws, rules and regulations of numerous other jurisdictions (States in the US but also foreign countries).
The Importance Of Organizational Structure Relative To Other Issues
With any organization, but especially one such as CF that has grown from a relatively small organization with a quite limited purpose to one that is quite complex both with respect to the types and amounts of assets as well as the scope of its operations (national and international), it is essential that the organizational structure is legally sound. A legal deficiency in an organizational document of a corporation can effectively be made the basis for challenging the legal sufficiency of relevant regulatory approvals as well as the enforceability of any and all contracts such a corporation might otherwise be bound by or be deemed to be able to rely upon (for example, an insurance contract). Another type of deficiency relates not just to one clause or even one provision, but to the aggregate effect of the organizational documents: courts have found that the very recognition of a corporation can be disregarded based on how the organizational documents were drafted and the way they have been put into effect or not.
Therefore, although there are many problematic issues with CF that have been and continue to be researched and discussed, the point of this post is to focus solely on the organizational documents of CF. Furthermore, the focus will be limited to certain key provisions in CF’s bylaws and not a number of other issues related to name changes, inconsistencies in reported addresses and other corporate formalities that have been inconsistently followed. As is now apparent, CF changed some key provisions of its bylaws at a crucial time for the Clintons: shortly after Hillary resigned from being Secretary of State. Not long after that it became apparent that she was going to campaign to be elected President well before Hillary formally announced her intention to do so. Furthermore, it is now widely recognized based on her own statements as well those of others that she assumed she would be elected President. It is in that context that seemingly technical changes to the bylaws should viewed now as profoundly disturbing.
Arkansas Corporate Law
As is typical of the corporate law of most states in the US, the corporate law of Arkansas allows for a corporation to be organized in a variety of ways and using a variety of terms in its organizational documents. Nevertheless, it is necessary for a corporation to have articles of incorporation filed with the Secretary of State, including any amendments thereto. As is typical of the corporate law of most states, a corporation is not required to specify much in its articles of incorporation and can rely on:
(a) statutory provisions to be deemed applicable to the corporation and/or
(b) adopt bylaws providing such specifics as to board of director configuration (including subcommittees), officer appointments and such other organization matters as its incorporators or other duly authorized corporate officials deem appropriate.
CF’s Articles of Incorporation (“AOI”)
Notwithstanding that it was not required to do so, CF specified in its AOI that it would have a board of directors that would be referred to as the “Board of Trustees” that would intially consist of 3 Trustees. The number of Trustees could be increased, but could not be fewer than 3. Here is a screenshot of the relevant provision of the AOI:
Based on available disclosure, the AOI has been amended only twice, in 2005 and in 2013, in each case solely to change the name of CF. It is notable that in filing such amendments CF referred to its “Board of Trustees.” Here is a screenshot of the signature page for the 2013 amendment:
CF’s Amended & Restated Bylaws
The bylaws of a corporation (whether for profit or not for profit) typically specify the way such corporation is going to be administered, including the quorum and vote requirements at meetings of relevant corporate officials. In part because of the routine nature of the matters bylaws cover, as is the case with many states, Arkansas does not require an Arkansas corporation to file bylaw amendments. When CF amended and restated its bylaws in November 2013 (the “2013 Bylaws”), it did not file them with Arkansas.
IRS Determination of CF’s Status And Its Ongoing Review Of CF
Notwithstanding that CF organized itself as a non-profit corporation in Arkansas, the IRS was and remains responsible for determining its status as a non-profit for US tax purposes (primarily related to allowing deductions for donations to it). Pursuant to the original IRS determination letter, CF would have been required to send its 2013 Bylaws to the IRS for an assessment of their appropriateness (in the excerpt of the IRS determination letter below, please note in the second paragraph, first sentence, “consider effect of the change” and in its second sentence, “please send us a copy of the amended document or bylaws”):
The fact that CF briefly referred to the 2013 Bylaws in its required IRS filing (the 990) is not by itself legally sufficient. There is no evidence that CF sent a copy of the 2013 Bylaws to the IRS. On the contrary, there is a solid basis for concluding that CF did not do so, and that is because of CF’s need to comply with the third of the three types of laws mentioned above with which it must comply.
CF’s Inconsistency In Disclosing The 2013 Bylaws
While CF did not need to file its 2013 Bylaws with Arkansas and may or may not have sent a copy of them to the IRS, it clearly was required to file them with numerous States where it operated at the time. Curiously, CF’s compliance with applicable State law in this regard has been inconsistent. As noted by the Daily Caller on June 25, 2017, CF filed its 2013 Bylaws in at least three States, but failed to file them, for example, in New York. This is stunning for a number of reasons, but primarily because New York has been for years the de facto headquarters of CF.
Such inconsistency is one of many indicia of mismanagement at CF, but the lack of awareness of CF’s inconsistency also attests to a problem with the reporting system for charities generally. Because there is no centralized database for charities comparable to the SEC’s EDGAR system for public corporations, CF’s failure to file in New York would have been known to only a relatively small number of people. Clearly, the IRS needs to come up with the equivalent of a ‘most favored nation’ policy with regard to filing requirements and create a centralized, national and even international filing system for all charities that rely directly or indirectly on its determination to solicit tax deductible donations.
The Implications Of The 2013 Bylaws: Is CF A Public Charity? Is CF Even A Corporation?
The underlying motivation for such failure likely relates to the nature of the changes in corporate governance the 2013 Bylaws effect and their implications. They are difficult to identify except for those who have a background in corporate law — -precisely what is relatively common in New York compared to other regions of the country. It is fair to question how it is that the Secretary of State of New York and/or the Attorney General for New York did not (a) know of the 2013 Bylaws and (b) their implications (this matters with respect to the Attorney General regardless of whether or not his now known personal problems were relevant to his failure to know about CF’s changes in its corporate governance).
The Relevance Of The June 27, 2017 Filing In New York State
On June 27, 2017 CF filed its amended and restated bylaws with the State of NY. It is not clear what prompted this filing. It was possibly in response to an article in the Daily Caller on June 25, 2017 that publicized the fact that CF had changed its bylaws and disclosed such changes to other states; it is reasonable to speculate this led to an inquiry from NY state officials as to why such filing had not been made in NY since CF in fact has its corporate headquarters there. It is otherwise difficult to explain what prompted such a filing since the amendment and restatement dates from September 10, 2015:
Note that it states that the provisions are “subject to and controlled by” applicable law as well as the Articles of Incorporation of CF. The primary purpose relates to the “Board of Directors” and its configuration, specifying that there are two classes of directors:
There are two problems with this: (i) there is no “Board of Directors” of CF specified by the Articles of Incorporation (unless it has been amended — but based on the 2013 filing cited above there is no indication it has been amended with respect to the Board of Trustees) and (ii) the Class A/B directorship structure is inconsistent with the requirment that the Board of Trustees have at least three members.
Because it is possible that the apparent problem (i) with the terminology “directors” versus “trustees” had been addressed in an amendment of the AoI that has not been disclosed it is not worth dwelling on that issue for now. By contrast, the problem (ii) with the Class A/B is significant. For regardless of how many Class B directors there are, the Class A directors have veto power over most significant actions by CF. This effectively results in a Board of Directors that consists not of three, but two ‘directors’ or ‘trustees.’
See the provision for majority voting with the proviso that at least on Class A director votes:
In addition it gives unusually broad powers to the Board:
The phrase “retroactively authorize” is odd. It is common for past actions of officers of a company to be “ratified” (note that a cognate term is used in the last sentence of Section 23 (see below)), but that implies that any such action remains open to cancellation pending such ratification. Arguably the term “retroactively authorize” is a far looser standard as it implies that practically anything could be done with the anticipation that it would be retroactively “authorized.”
The power given to the Executive Committee (which consists only of Clinton family members (Bill & Chelsea) and a director appointed by a Class A director) essentially means CF is run by the Clinton family (note the final clause of Section 23 “not be subject to ratification” (emphasis mine: the “not” implies that even “retroactive authorization” is not necessary):
Because the Executive Committee essentially functions as the entire Board of Directors “during periods between meetings” and yet its actions “shall not be subject to ratification by the Board” there is nothing that it is authorized to do that requires any action whatsoever by Class B members.
This is especially troubling given the unusual provision regarding gifts:
Is The Clinton Foundation Even A Corporation?
Quite apart from the substantive provisions of the bylaws of CF, a case can be made that the evident sloppiness in corporate formalities should deprive CF of its corporate status for both liability as well as tax exemption purposes. While the Board changes CF made in 2013 do not appear to violate applicable law, it is apparent that such changes effectively constitute an amendment to the Articles of Incorporation. Such an amendment would have been required to be filed in AR. It therefore appears that CF used the bylaws as a mechanism to avoid disclosing the changes it was making.
Indepedent of the foregoing analysis regarding the motivation for using the bylaws to evade applicable diclosure requirements, the substantive provisions effectively merge the corporate identity of CF with that of Bill Clinton and his daughter. Such a merger of identity is all but acknowledged by the penultimate sentence of Section 23 cited above regarding the use of the Clinton name and the renaming of CF. The reality is thus that CF not only does not deserve to be considered a non-profit corporation, it does not even deserve to be considered a corporation.