Robert A. Katz


What are the legal limits on a charity's ability to change its mission and redirect donations to new purposes? The answer often turns on the charity's legal form, whose essential elements are encapsulated in a few nonmandatory default rules. Absent extraordinary circumstances, a charitable trust's controllers (a.k.a. "trustees") may not deviate from the specific charitable purposes selected by the trust's creator (a.k.a. the "settlor"), unless the settlor expressly expanded the trustees' discretion. By contrast, a nonprofit corporation's controllers (a.k.a. its "board of directors") are typically free to change the charitable purpose and redeploy donations, unless the corporate charter or a gift instrument expressly curtails its authority to do so. In recent years, the wide scope of board discretion has aggravated concerns about nonprofit accountability. To address these concerns, some commentators seek to import more restrictive, trust law default rules into nonprofit corporate law. This Article criticizes this program of "trust law parallelism" on grounds that it will increase the costs of charitable activity and thereby deter philanthropy. It will curtail the diversity of off-the-rack legal forms available for charitable endeavors, and therefore increase the transaction costs of philanthropists who favor more discretion for controllers. Moreover, because many philanthropists will be unaware of the restrictive default rules, they will not know to opt out of them, even if they favor more discretion or have no opinion on the matter. As a result, boards will be restrained to an extent that does not enhance accountability. At bottom significant restraints on board discretion over the mission are socially costly: they impair a board's ability to respond to changing needs and fresh opportunities, which facilitates the application of charitable resources to more socially valuable uses.

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