Avoiding state intervention in not-for-profit/for-profit affiliations

States attorneys general recently have intervened in transactions involving not-for-profit organizations that wish to convert to or transfer assets to for-profit status. These interventions are significant for two reasons: first, they reflect a tendency amount state attorneys general to involve states in the governance of not-for-profit healthcare organizations, and second, they demonstrate that attorneys general are paying renewed attention to the legal obligation of such organizations to provide a community health benefit, which imposes a charitable trust on not-for-profit healthcare organizations and the fiduciary duties of care and loyalty to that charitable trust on the organizations' officers and directors. To avoid state intervention in such transactions, officers and directors of not-for-profit organizations need to understand the circumstances under which attorneys general justify such intervention, which include the undervaluation of the organization's charitable assets; lack of a private letter ruling from the IRS; failure to adequately consider alternatives to the transaction; conflicts with the best interest of the organization; and inadequate responses to the attorney general's requests for information.