           Presidential Appointment of the Board of Directors
                of Radio Free Europe/Radio Liberty, Inc.

Statute conditio n in g further funding o f R adio Free Europe/R adio Liberty, Inc. on the President’s
   selection o f its B oard o f Directors w ould not underm ine the public purposes of this nonprofit
   co rp o ratio n , and it is therefore unlikely that the D elaw are courts would strike it down under that
   sta te’s laws.

                                                                                          August 31, 1982

   MEMORANDUM OPINION FOR THE CHAIRPERSON, BOARD FOR
             INTERNATIONAL BROADCASTING

   This responds to your request of July 12, 1982, for our opinion whether
Delaware law would prohibit a proposed amendment to the certificate of incor­
poration of Radio Free Europe/Radio Liberty, Inc. (RFE/RL) and confirms the
oral advice I gave you on this subject in July. RFE/RL is a nonprofit company
incorporated under Delaware law with a private Board of Directors. The Board
for International Broadcasting Authorization Act for Fiscal Years 1982 and 1983,
Pub. L. No. 9 7 -2 4 1 ,9 6 Stat. 273,295 (1982), which was signed last week by the
President, requires RFE/RL, if it is to receive any future federal funding, to
amend its certificate of incorporation so that its Board of Directors would be
selected by the President of the United States, with the advice and consent of the
Senate. For the reasons set forth in detail below, we believe that it is unlikely that
the Delaware courts would strike down such an amendment to RFE/RL’s certifi­
cate of incorporation.

                                              I. Background

   Although RFE/RL is a private corporation, it currently receives over 99
percent of its operating funds from congressional appropriations' and is subject to
numerous federal restrictions on its operations as a condition for this funding.
This unusual hybrid of private and public control is largely an historical artifact.
Over 30 years ago the Office o f Policy Coordination, and later the Central
Intelligence Agency (CIA), established and secretly funded two separate, non­
profit corporations, Radio Free Europe and Radio Liberty, which were the


  1 According to your letter, its current budget request is for more than $95 million, although private contributions
have never exceeded $200,000 per annum since 1975.


                                                       512
historical antecedents of RFE/RL.2 In 1973, after Congress had by legislation
directed that all connections between the CIA and the two corporations termi­
nate, Congress created the Board for International Broadcasting (BIB) to oversee
the funding and operation of these two radio stations. See Pub. L. No. 93-129,87
Stat. 456 (1973), 22 U.S.C. §§ 2871-2879. Subsequently, Radio Free Europe
and Radio Liberty merged to become RFE/RL, over which the BIB retained
funding and oversight authority.
   As provided in the 1973 Act, as amended, the BIB is composed of five
members appointed by the President with the advice and consent of the Senate.
The BIB has general authority to assure that RFE/RL is operated efficiently and
consistently with the broad foreign policy objectives of the government. See 22
U.S.C. § 2873 (1981). Pursuant to this authority, the BIB has promulgated
regulations which make RFE/RL “ responsible for assuring compliance of its
operations with the policy guidelines” established by the BIB and which provide
for any remedial action the BIB determines is necessary because of violations of
these guidelines. 22 C.F.R. § 1300.6(c)-(f). The Chairperson of the BIB may
also veto any nomination made by the RFE/RL nominating committee for a
position as an officer of RFE/RL, and, under the by-laws of RFE/RL, as a new
director.3 Finally, the regulations require that RFE/RL obtain the approval of the
BIB before it amends its certificate of incorporation. See 22 C.F.R. § 1300.13(c).
   These overlapping lines of authority have resulted in continuing disagreements
between the BIB and the Board of Directors of RFE/RL over the goals and
operation of RFE/RL. The Board of International Broadcasting Authorization
Act for Fiscal Years 1982 and 1983 would resolve these conflicts by granting the
BIB absolute authority over RFE/RL. Under § 403(a) of the Act, RFE/RL is
required, as a condition for future funding from the BIB, to amend its certificate
of incorporation so that the members of the BIB serve as RFE/RL’s Board of
Directors.4 Since the Board of Directors of RFE/RL are also the members of
RFE/RL, see RFE/RL, Inc., By-laws, § 2.1, this would give the BIB complete
control of the corporation. Moreover, the Board of Directors of RFE/RL would be
appointed by the President of the United States and would be removable by the
President at his pleasure.
   In response to this legislation, RFE/RL solicited an opinion from its Delaware
counsel whether Delaware law would permit the continued incorporation of
RFE/RL were this amendment to RFE/RL’s certificate of incorporation to be
adopted. You have provided us with a copy of that opinion. See Opinion of Potter,

   2 Radio Free Europe, Inc. was incorporated under New York law, while Radio Liberty Committee, Inc. was
incorporated under Delaware law
   3 The regulations provide that the Chairperson shall serve as an ex officio member of the Board of Directors and as
a voting member of the nominating com m itteeforthe nomination of officers.See 22C F R . § 1300.9(b). Becauseall
nominations must receive the unanimous consent of the members of the nominating committee before they may be
presented to the Board of Directors, the Chairperson can veto any nomination for an officer's position in the
corporation. The by-laws of RFE/RL also provide that the Chairperson of the BIB shall serve as a voting member of
the nominating committee for all purposes, thereby permitting him to veto any nomination for director as well. See
RFE/RL, Inc , By-laws, § 3.l3.1(b)(i)
   4 The Act would also increase the number of BIB members to ten, nine of whom would be appointed by the
President The tenth member, who would serve ex officio without voting rights, would be the chief executive officer
of RFE/RL. See Pub. L. No. 97-241, 96 Stat. 273, 296 (1982).


                                                        513
Anderson and Carroon, dated May 28, 1982 (Delaware opinion). The Delaware
opinion states that it is a “ fundamental concept” of nonprofit corporation law that
directors or members of nonprofit corporations may not delegate to outsiders
those duties that lie at the heart o f the management of the corporation. Since the
selection of a corporation’s directors is one of the most important decisions
regarding the operation of the corporation, the Delaware opinion concludes that
Delaware law does not permit the directors of a nonprofit corporation to be chosen
by the “ holder of an office,” such as the President of the United States, “ who is
neither associated with nor interested in the operations of the corporation and
whose decision[s] would be governed by considerations different from and
potentially adverse to the best interests of the corporation.” Delaware opinion
at 5.

                     II. Dtelegatnoim of Corporate DecnsDoms

   The analysis in the Delaware opinion is based on the traditional doctrine
restricting directors of for-profit corporations from delegating management deci­
sions to outsiders. See Del. Code Ann. tit. 8, § 141(a)(1974). Under the
Delaware opinion’s reasoning, the Delaware courts would extend this doctrine to
prohibit the directors of RFE/RL, a nonprofit corporation, from delegating the
selection of new directors to the President of the United States. As the Delaware
opinion recognizes, however, the organization of and laws governing nonprofit
corporations are different from those governing for-profit corporations. The
Delaware General Corporation law, which regulates nonprofit corporations as
well as for-profit corporations, specifically states that the certificate of incorpora­
tion of a nonstock corporation “ may . . . provide that the business and affairs of
the corporation shall be managed in a manner different from that provided in this
section.” Del. Code Ann. tit. 8, § 141 (j). The Delaware General Corporation law
also provides that the certificate o f incorporation of a nonstock corporation may
alter the general rule that each member shall have one vote. Del. Code Ann. tit. 8,
§ 215. Thus, nonprofit corporations have greater latitude under Delaware law in
their organizational structure than for-profit corporations, although the absence
of relevant case law leaves unclear what limits the Delaware courts would
ultimately place on the organization of nonprofit corporations in a particular
context. Accordingly, in reviewing the proposed amendment, we will examine
the underlying purpose of the restriction on managerial delegations and attempt
to assess how the Delaware courts would apply this restriction to a nonprofit
corporation like RFE/RL. We will then consider the relevance of the two cases
relied on in the Delaware opinion.

A. D elegation c f M anagerial D ecisions in a For-Profit Corporation

  The restriction on the delegation of managerial decisions is derived from Del.
Code Ann. tit. 8, § 141(a), which states that “ [t]he business and affairs of every
corporation organized under this chapter shall be managed by a board of direc­

                                         514
tors, except as may be otherwise provided in the other provisions in this chapter
or in its certificate of incorporation.” By providing that a separate group such as
the directors manage the corporation, the section furthers two objectives. First, it
assures that the business affairs of the corporation are not managed by the equity
owners of the corporation. See Abercrombie v. Davies, 123 A .2d 893, 899 (Del.
Ch. 1956), rev’d on other grounds, 130 A .2d 338 (Del. 1957).
   Second, the provision assures that the group which manages the corporation,
the directors, is nevertheless responsible and accountable to the stockholders.
This would not be true if an outsider were delegated management duties. In this
regard, the directors are the agents of the stockholders and owe a fiduciary duty to
exercise their best judgment in coordinating the affairs of the corporation. See
generally 2 W. Fletcher, Cyclopedia of the Law of Private Corporations,
§§ 295-296 (rev. perm. ed. 1982). If an outsider or a stockholder were to run the
management affairs of the corporation, that person would be acting without the
authority of the stockholders and therefore would necessarily be undermining the
directors’ “ duty to use their own best judgment on management matters.”
Abercrombie v. D avies, 123 A.2d at 899. See generally Clarke M emorial
College v. Monaghan Land C o ., 257 A .2d 234 (Del. 1969); Lehrman v. Cohen,
222 A.2d 800 (Del. 1966).
   This section, however, does not require that directors make all corporate
decisions. It obviously would not preclude the stockholders as a group from
selecting the directors. The selection and removal of directors is not a manage­
ment decision which must be made by the directors themselves, but a right
normally vested in the equity owners of a corporation to choose the management.
See, e.g ., Campbells v. Loew’s, 134 A .2d 852, 857 (Del. Ch. 1957). Similarly,
this section would not prohibit stockholders from selling their stock to individu­
als who were previously outside the firm, or, subject to the requirements of
Delaware’s voting trust statute, delegating their choice of directors to outsiders
while retaining their equity interest in the firm. See Del. Code Ann. tit. 8, § 218.
See generally Adams v. Clearance Corp., 121 A .2d 302 (Del. 1956); Ringling
Bros. v. Ringling, 53 A.2d 441 (Del. 1947). Finally, under the modem view,
§ 141(a) would not prohibit the directors from delegating most management
decisions to outsiders when specifically authorized by the stockholders in an
amendment in the certificate of incorporation. See Lehrman v. Cohen, 222 A .2d
at 808. In such a case, the principal (the stockholders) has expressly authorized
the agent (the directors) to delegate his authority. See 2 W. Fletcher, Cyclopedia
of the Law of Private Corporations, § 496 (rev. perm. ed. 1982).

B. Delegation c f Decisions in Nonprofit Corporations

  Application of § 141(a) to a nonprofit corporation is complicated because the
provision is intended largely to regulate the operation of a for-profit corporation
comprised of equity stockholders and a separate board of directors. A nonprofit
corporation such as RFE/RL, however, has no stockholders. It is managed and
controlled by a self-perpetuating Board of Directors charged with furthering the

                                       515
public goals in its certificate of incorporation. In light of these differences, we
believe that the proposed amendment to RFE/RL’s certificate of incorporation
would not violate § 141(a) as that provision would be applied to nonprofit
corporations.
   First, it is important to recognize that the proposed amendment would not
delegate a management decision from the directors of the corporation, but rather
would delegate the selection of who may make the management decisions. At
least with respect to for-profit corporations, however, § 141 (a) is intended to limit
only the delegation of management decisions, not the selection of management.
Under the proposed amendment, the directors of RFE/RL still would have
authority over the management o f the business affairs of the corporation. They
merely could be replaced if the President were dissatisfied with their decisions or
performance, just as the directors of many for-profit corporations can be replaced
by the stockholders. SeeEverettv. Transnation D eve I. Corp., 267 A .2d 627 (Del.
Ch. 1970).5
   Second, delegating the selection of directors to a person outside a nonprofit
corporation raises different issues than directors delegating management deci­
sions to outsiders in a for-profit corporation. A director is prohibited from
delegating a management decision to an outsider largely because this would
allow a person not selected by the stockholders, for whom the corporation is run,
to manage its business affairs. In effect, it takes control of the corporation away
from the stockholders. A nonprofit corporation, however, is operated to pursue
the public objectives in its certificate of incorporation. Delegating the selection of
directors to an outsider in a nonprofit corporation such as RFE/RL does not
remove control of the corporation from the group in whose interest it is operated.
Rather, in the case of RFE/RL, it merely transfers control from a self-
perpetuating Board of Directors, each of whom also holds another institutional
position, to a person who technically does not hold an institutional position in
RFE/RL.
   Finally, in the unusual facts o f this case, placing control of RFE/RL in the
hands of the President is as likely to protect the public goals of RFE/RL as
selection by an internal self-perpetuating Board. For all practical purposes, the
President is an insider for purposes of selecting the directors of RFE/RL. The
President has prime responsibility for formulating the foreign policy of the
United States and is specifically charged by statute with selecting directors of the
BIB “ distinguished in the fields o f foreign policy or mass communications.” See
22 U .S.C . § 2872(b)(2).6 He is “ chief executive officer” of the “ organization”
which supplies essentially all of RFE/RL’s funds. Moreover, if the Delaware
courts refused to uphold the change, RFE/RL might very well cease to exist, at
least as incorporated in Delaware. Finally, the existing certificate of incorpora­
tion, which the Delaware opinion does not suggest violates Delaware law, already
gives the President significant control over the operation of RFE/RL through the

  5 The distinction between management and th e selection of management is inherent in § 141(a), at least in the
context o f for-profit corporations. See Abercrombie v. Davies, 123 A 2d at 899.
  6 Under the proposed amendment, no more than five members of the Board may be of the same political party.


                                                     516
regulations of the BIB, whose members he selects. Indeed, the BIB itself
presently exercises, as pointed out above, veto power over the selection of the
membership of the Board of Directors, a power that the Delaware opinion does
not suggest to be inconsistent with Delaware corporation law.
    In addition, we note that nonprofit corporations incorporated in other states
have directors chosen by public officials. Many state-related universities in the
Commonwealth of Pennsylvania, which are incorporated under its nonprofit
corporation law, have a percentage of their trustees selected by the governor
pursuant to state law.7 Similarly, members of the Board of Directors of the
National Science Foundation, incorporated under federal law,8are chosen by the
President. Thus, selection of the directors by an elected official does not neces­
sarily, or in our view, even presumptively, undermine the public purposes of a
nonprofit organization.
    Of course, it can be argued that the President may not be as sensitive to the
journalistic independence of RFE/RL as would be the private Board. Whatever
policy arguments might be made in favor of an autonomous board, we doubt that
the Delaware courts would hold this independence to be a requirement for
RFE/RL to retain its corporate status under Delaware law. Not only are there
many advantages to presidential selection, as described above, but selection by
the existing Board does not assure to any greater degree that the public goals of
the corporation will be faithfully pursued. Unlike equity stockholders in a for-
profit corporation, the directors of a nonprofit corporation have no financial
incentive to make decisions to further the stated goals of the corporation. As the
Senate report on the Board for International Broadcasting Authorization Act for
Fiscal Years 1982 and 1983 observes of RFE/RL’s Board, it is a “ self-appointed,
largely self-perpetuating board of private directors.” S . Rep. No. 7 1 ,97th C ong.,
 1st Sess. 31 (1981). For all of these reasons, we believe that transferring authority
over selection of directors from the members to the President does not undermine
the public goals of RFE/RL, and therefore that it is unlikely that the Delaware
courts would find that it violates § 141(a).

                                               III. Case Law

   Finally, we note that the two cases relied on by the Delaware opinion for its
conclusion are clearly distinguishable because in both cases the delegation raised
a substantial possibility that the public goals of the nonprofit corporation would
be undermined.
   The first case, In re Osteopathic Hospital Association c f Delaware, 191 A .2d
333 (Del. Ch.), a ffd , 195 A .2d 759 (Del. 1963), dealt with an unusual nonprofit
corporation— the Osteopathic Hospital Association of Delaware. The associa­
tion’s by-laws allowed only osteopathic physicians to be general members of the

  7 See Mooney v. Temple University, 292 A .2d 3 95,399-400 ( f t 1972) (describing selection of university trustees
by Governor)
  8 See National Science Foundation Act of 1950, Pub. L No. 81-507, § 4, 64 Stat. 149, 150, as amended, 42
U S C . § 1863.

                                                       517
Association, although the members could elect laypersons to serve on the Board
of Trustees. As it turned out, a majority of the Board was made up of laypersons.
Because the Board had authority to amend the by-laws, it voted to make all the
trustees members of the Association. The chancery court struck down the
amendment on the ground that “ a change of so fundamental a character in the
structure of this rather unique organization could not validly be carried into effect
by the unilateral action of the trustees taken here,” but rather must be achieved by
submitting the issue to the members as an amendment to the certificate of
incorporation. See 191 A .2d at 336. The Supreme Court of Delaware subse­
quently affirmed for the same reasons. See 195 A.2d 759.
   In re Osteopathic Hospital Association is distinguishable on two grounds.
First, the chancery court only held that a fundamental change such as this must be
achieved through an amendment to the certificate of incorporation ratified by the
members. See 191 A .2d at 338. The court did not hold that the members could
not give lay trustees the authority to make decisions on membership.9 Had the
members specifically amended the certificate of incorporation to allow the
trustees to make this decision, as the members of RFE/RL would amend its
certificate of incorporation to permit presidential selection, the amendment
would, we believe, have been upheld under the court’s analysis.
   Second, the chancery court specifically relied on the fact that the delegation
presented a “ real” “ possibility of abuse.” 191 A.2d at 336. Because the
Osteopathic Hospital Association was a professional association, there was a
divergence of interests between the lay board and the professional osteopathic
members. Thus, the amendment “ seriously impaired a valuable right of these
[association] members under circumstances suggesting opposition by at least a
majority of such ‘members.’ ” Id. at 338. In contrast, RFE/RL does not serve any
private membership interests which would be seriously undermined by presiden­
tial selection. It is specifically charged with “ engag[ing] in independent, profes­
sionally competent, responsible broadcast journalism, and shall thereby promote
the right of freedom of opinion and expression . . . .” RFE/RL, Inc., Articles of
Incorporation at 2. The President stands in a far different position from the
potentially self-serving lay board in In re Osteopathic Hospital Association.
   The second decision on which the Delaware opinion relies, Chapin v. Ben-
w ood Foundation, Inc., 402 A .2d 1205 (Del. Ch. 1979), a ff d sub. nom.
Harrison v. Chapin, 415 A.2d 1068 (Del. 1980) (per curiam), involved a
challenge to a voting agreement among the trustees of the Benwood Foundation.
Two of the four members of the Board of Trustees of Benwood were officers of the
Thomas Corporation. The stock o f the Thomas Corporation was the sole asset of
the Foundation. The two other Board members were directors of a Tennessee
bank with which the Thomas Corporation had close dealings. The trustees
entered into an agreement whereby each trustee would select his own successor,
or, in the event he should fail to name a successor, the directors of the institution

  9 In affirming the chancery court, (he Supreme Court of Delaware found that the members had “ retained for
themselves under the 1955 by-laws . ultimate control over the Board of Trustees on the question of who would be
admitted into the Association " 195 A 2d at 7 64-65 (footnote omitted).


                                                    518
with which he was associated would pick his successor. The arrangement was
intended to maintain a balance between the officers of the company, who would
be most knowledgeable regarding the value of the Foundation’s only asset, and
the bank directors, who would possess an independent perspective on its finan­
cial affairs. The arrangement continued in operation through several changes in
the Board. After the Thomas stock was sold, however, three of the trustees agreed
to abolish the procedure because the original rationale supporting it had ceased to
exist. The agreement was subsequently challenged in court.
   The chancery court struck down the agreement on the ground that it con­
stituted an improper delegation of the duties of trustees. It gave two reasons in
support of the decision. First, the justification for this delegation— to keep an
even split of the institutional backgrounds of the trustees on the Board— had
ended, and therefore there was no continued need for the arrangement. Second,
the ratification of this plan by all of the trustees (who were also the “ members” of
the Benwood Corporation) did not render the agreement valid. Because the
trustees were not stockholders with an equity interest in the corporation, the court
reasoned that they could not sanction this fundamental change in the operation of
the corporation.
   It is possible to interpret certain language in the opinion of the chancery court
in Chapin as prohibiting any delegation of corporate responsibility by a nonprofit
corporation. We believe, however, that the decision should be limited to its
facts— that is, a situation in which there is no indication that the delegation would
serve the public goals of the nonprofit corporation.10 In this regard, we note that
the Supreme Court of Delaware affirmed the chancery court solely on the ground
that there was no longer any justification for the agreement, and expressly refused
to reach “ the other matters argued by counsel.” 415 A.2d at 1069.

                                             IV. Conclusion

   We believe that there is no absolute prohibition against members of nonprofit
corporations delegating decisions to individuals who do not hold office within the
firm. While there may be restrictions on such delegation in individual cases, the
delegation proposed in this case would be as likely to protect the public goals of
RFE/RL as selection by a self-perpetuating Board of Directors. Finally, the cases
relied on in the Delaware opinion are distinguishable. Accordingly, in our view, it
is unlikely that the Delaware courts would strike down the proposed amendment.

                                                                     L a r r y L . S im m s
                                                        Deputy Assistant Attorney General
                                                             Office of Legal Counsel



   10 In its conclusion, the chancery court emphasized that the directors’ agreement could lead to abuse. “ To commit
themselves in advance— perhaps years in advance— to fill a particular Board vacancy with a certain named person
regardless of the circumstances that may exist at the time that the vacancy occurs, is not the type of agreement that
this court should enforce . . .” 402 A .2d at 1211.

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