STAND. COM. REP. NO. 2455

Honolulu, Hawaii

RE:    S.B. No. 2720

       S.D. 1

Honorable Shan S. Tsutsui

President of the Senate

Twenty-Sixth State Legislature

Regular Session of 2012

State of Hawaii

Sir:

     Your Committee on Judiciary and Labor, to which was referred S.B. No. 2720 entitled:

"A BILL FOR AN ACT RELATING TO CONVERSIONS BY NONPROFIT CORPORATIONS,"

begs leave to report as follows:

     The purpose and intent of this measure is to repeal certain laws under chapter 414D, Hawaii Revised Statutes, the Hawaii Nonprofit Corporations Act, that authorize nonprofit corporations to covert to other legal entities.

     Your Committee received testimony in support of this measure from the Department of the Attorney General.

     Your Committee finds that certain laws under the Hawaii Nonprofit Corporations Act do not conform to the Revised Model Nonprofit Corporations Act, which Hawaii's law is based on, and allows the assets of a charitable corporation to be converted and used for non-charitable purposes.  These provisions are an invitation to abuse.

     Assets held for charity, whether trust, or corporate form, should be in a "lock box."  The charity may dissolve and distribute its assets to other charities, use the assets for purposes of charitable or program services, or sell its assets and use the proceeds to support its charitable purposes.  However, allowing charities to convert to a for-profit is antithetical to the concept that charitable assets should be perpetually devoted to charitable uses.

     Your Committee notes that in April 2010, the attorneys for American Pacific University notified the Department of the Attorney General of its plans to file articles of conversion to covert the nonprofit corporation into the for-profit American Pacific University Inc.  In June 2011, American Pacific University attained a for-profit status.  This measure will prevent additional charitable corporations from doing the same and ensure that charitable assets continue to be used for charitable purposes.

     Your Committee has amended this measure by:

     (1)  Inserting an effective date of July 1, 2050, to ensure further discussion; and

     (2)  Making technical, nonsubstantive amendments for the purposes of clarity and consistency.

     As affirmed by the record of votes of the members of your Committee on Judiciary and Labor that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 2720, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 2720, S.D. 1, and be placed on the calendar for Third Reading.

Respectfully submitted on behalf of the members of the Committee on Judiciary and Labor,

____________________________

CLAYTON HEE, Chair