Oberly v. Kirby

Supreme Court of Delaware · 1991 · Corporations

592 A.2d 445 (1991)

Updated August 22, 2026

CorporationsNonstock charitable corporationsCorporate governanceFiduciary dutiesInterested director transactionscertificate of incorporation controlsbylaws cannot contradict certificatenonstock corporation members

Facts

The F.M. Kirby Foundation is a Delaware nonstock charitable corporation whose certificate provides that new members may be elected by majority vote of existing members and requires at least three members at all times. After years as sole surviving member, Fred Kirby secretly appointed his wife and four children as members in 1984; when his siblings, who were directors, later adopted a bylaw purporting to make only directors the corporation's members, Fred and his family, acting as members, removed the siblings as directors and elected themselves. The Attorney General intervened on behalf of the Foundation's public beneficiaries and also challenged a 1985 transaction in which the Foundation exchanged its large Alleghany stock block for American Express stock held by Alleghany, a transaction approved by all four Foundation directors even though all had interests tied to Alleghany. The Foundation had to divest most of its Alleghany holdings because federal tax law prohibited its continued excess business holdings.

Issue

Was Fred Kirby validly a member with power to appoint new members and remove directors, or could the directors validly amend the bylaws to make themselves the only members? Did Fred's conduct in consolidating control breach fiduciary duties to the Foundation, and was the Alleghany stock exchange an impermissible interested transaction or one that was entirely fair to the Foundation?

Rule

The certificate of incorporation of a nonstock charitable corporation controls its governance structure, and bylaws may not conflict with it. Where the certificate gives existing members the power to elect new members, directors may not use a bylaw amendment to transfer that power to themselves or to remove specific members. For charitable nonstock corporations, corporate law principles govern fiduciary conduct and interested transactions: fiduciaries must advance the charitable purpose and protect assets, and an interested transaction is permissible if approved by a neutral body or, lacking that, if the interested fiduciaries prove entire fairness, including fair dealing and fair price.

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The Red Mesa Literacy Fund is a Delaware nonstock charitable corporation operating in Santa Fe. Its certificate states that new members are elected by majority vote of existing members, while a separate clause allows bylaws to set additional rules governing admission standards and member discipline. After a dispute with current members, the board adopts a bylaw making all current directors the only members of the corporation.

Is the bylaw most likely valid?

Explanation. The certificate controls. Where the certificate expressly provides that existing members elect new members, directors cannot use a bylaw to seize that power for themselves. A general power to regulate membership or set admission rules does not authorize directors to make the specific decision who will or will not be members if that would conflict with the certificate’s election mechanism.