Decision-Makers Without Duties: Defining the Duties of Parent Corporations Acting as Sole Corporate Members in Nonprofit Health Care Systems

Abstract:     
Whereas for-profit corporations have shareholders, nonprofit
corporations often have one or more "members," who vote for directors and on other major corporate decisions. Like typical shareholders, members do not owe fiduciary duties toward their corporations. When nonprofit health care corporations join together in systems, as has become increasingly common, they often do so by a transaction in which the new parent nonprofit corporation becomes the sole member of the subsidiary nonprofit corporation. After such a transaction, the parent-acting-as-sole-corporate-member ("PASCM") holds the power to elect shareholders and make major corporate decisions as sole member, and also generally reserves additional director-type powers to itself. Because the law does not impose fiduciary duties on members, a PASCM can make decisions for its subsidiary solely in service of the goals and interests of the parent, and without considering the impact of those decisions on the subsidiary or its beneficiaries. This Article first explores the genesis and consequences of the PASCM structure, and then considers the possibility of regulating PASCM-subsidiary relationships through the imposition of fiduciary duties upon PASCMs. It examines several models for such a fiduciary duty, drawing on standards of fiduciary obligation applied to directors of nonprofit corporations, parents of for-profit, wholly-owned subsidiaries, and controlling shareholders in for-profit corporations with minority shareholders. Ultimately, the Article advocates the establishment of fiduciary duties for PASCMs modeled on the duties that for-profit controlling shareholders owe to minority shareholders.

Accepted Paper Series