An Administrator's Guide to California Private School Law

Chapter 2 - Governance

A Corporation’s managers who “knowingly, willfully, and without reasonable cause” participate in an excess benefit transaction may also be sanctioned. Participating managers may be fined up to 10% of the excess, but no more than $10,000 per transaction. The Compensation Committee is tasked with providing for independent review and approval of compensation by a body composed of individuals without a conflict of interest. Prior to approving compensation, the reviewing body must look at comparability data or proof of fair market value to ensure no excess benefit. The reviewing body must document and keeps records of deliberation to defend against later claims of excess benefit by the IRS. These records should include the comparability data or proof of fair market value used, and any actions taken by members of the Compensation Committee who had a conflict of interest, such as if they abstained. For a checklist/guide for avoiding excess benefit transactions, please see Compendium. c. Ad Hoc Committees The Bylaws can and should permit for the creation of additional ad hoc committees but these committees do not need to be (and probably should not be) expressly recognized in the Bylaws. Additional committees that are often found on Boards include admissions/marketing committees, head’s advisory committees, education or school committees, financial aid committees, personnel committees, and strategic planning committees. These committees are purely optional. 4. S ELF -D EALING T RANSACTIONS The law prohibits “self-dealing” by Directors having “material financial interests” in an item before the Board. 52 To ensure that the school and Directors are protected, the Bylaws should include a provision which tracks the requirements of the applicable statute such as the following: The Board may authorize the Corporation to enter into a

transaction between the Corporation and a Director or an entity in which the Director has a material financial interest provided (i) the Director with the interest reveals his or her interest to the Board and does not vote on the transaction, (ii) the transaction is fair and reasonable to the Corporation, (iii) the Board determines in good faith after reasonable investigation that the Corporation could not reasonably have obtained terms and conditions for such transaction which are materially better from disinterested parties or sources, and (iv) the Corporation entered into the transaction for its own benefit.

5. N ON -D ISCRIMINATION S TATEMENT Even if a school has a separate non-discrimination policy, in order to qualify for tax-exempt status the IRS requires a corporation to include a non-discrimination statement in its Articles of Incorporation or Bylaws or other governing instrument. 53 The Bylaws should include the following language:

An Administrator’s Guide to California Private School Law ©2019 Liebert Cassidy Whitmore 40