Imagine a charitable nonprofit whose mission is to educate people on the dangers of vaping. The board members, including the founder, want to advance the mission by producing and distributing a documentary film.
An individual who recently lost their child to throat cancer wants to donate $2 million to fund the production of the film. The nonprofit accepts the donation with the restriction that it be used to produce a film on the dangers of vaping and hires a filmmaker.
The nonprofit and filmmaker produce the documentary, but they know that will still need to raise money for marketing and distribution. The nonprofit’s board decides to raise such funds by creating a for-profit subsidiary and then selling equity to investors. The nonprofit creates the subsidiary and capitalizes it with the documentary film (worth $2 million). It then successfully finds a few wealthy investors to fund this joint venture with $8 million.
Here’s where the story takes a twist. Some of those investors get the filmmaker and the nonprofit’s founder to agree to push the film in another, more commercial direction. Instead of educating the public on the dangers of vaping, they want the film to become a fictionalized account of a protagonist who is also CEO of an e-cigarette company. Rather than focusing on the dangers of vaping, they want to tell the story of the budding romance between the protagonist and an anti-vaping advocate. They also don’t mind the danger of glamorizing vaping by making the protagonist a likable, super-cool person, including when they vaped. But they are open to including an anti-vaping message with the end credits.
The nonprofit’s other board members are split on whether they want the joint venture co-owned and managed by the nonprofit to pursue this shift in the film’s focus and tone. The film would no longer primarily advance the nonprofit’s mission and might even be antithetical to its mission. But the other investors believe the film could become a big commercial hit and make all of the investors millions of dollars in profit. Due to personal connections they have in Hollywood, they have lined up several well-known actors to appear in cameos and secured an additional $10 million in equity capital.
Because the joint venture (JV) was carefully constructed to help ensure the nonprofit complied with applicable nonprofit laws, the following provisions are addressed in the organizing and governing documents of the JV and were all shared with the investors prior to their respective purchases of equity :
- the nonprofit’s participation and investment in the JV must further its charitable purpose;
- the JV arrangement must permit the nonprofit to act exclusively in furtherance of its charitable purpose and only incidentally for the benefit of the other investors;
- the JV shall not be operated primarily to benefit its owners and investors; and
- the nonprofit shall serve as the manager (and ultimate governing body) of the JV.
The provisions above are not all legally required for a nonprofit to enter into a joint venture, but they were set up as safeguards. Since they were agreed upon, the nonprofit’s effective investment in the JV ($2 million) has shrunk to only 10% of the total investment in the JV, and the other investors are threatening the nonprofit board members if they don’t agree to changing the film from a documentary to the fictional story described above. The original donor of the $2 million would be horrified if such change is made.
What is the nonprofit board to do?