What do universities owe their big donors? Less than you might think, explain 2 nonprofit law experts

education icon with silhouette of teach in front of class, holding a baton to a board.

by Ellen P. Aprill, Loyola Law School Los Angeles and Jill Horwitz, University of California, Los Angeles, [This article first appeared in The Conversation, republished with permission

Exchanging gifts with family and friends can become fraught with contradictory emotions. Instead of gratitude, the recipients of expensive gifts may wind up feeling indebted to the givers. And the givers can have regrets too.

The same kinds of complicated motivations and expectations can sour relations between big donors and the institutions they support.

This dynamic has been playing out in a very public fashion lately with some high-profile donors to prestigious U.S. universities. At issue for these donors is the schools’ response to debates and demonstrations on their campuses after Hamas’ terrorist attacks on Israel and the Israeli government’s military campaign in Gaza that followed.

Disappointed donors

Notably, hedge fund manager Bill Ackman has complained that Harvard University officials, including President Claudine Gay, have not “heeded his advice on a variety of topics,” including Harvard’s handling of antisemitism and how it should invest his donations.

Ross Stevens, another financier, threatened on Dec. 7, 2023, to take back the US$100 million he gave the University of Pennsylvania through a complex transaction in 2017 “absent a change in leadership and values at Penn.”

In a letter Stevens released to the media, he alleged that Liz Magill, who was serving as the university’s president, had “enabled and encouraged antisemitism and a climate of fear and harassment at Penn.”

Magill, also on Dec. 7, defended herself from those accusations and related criticism from members of Congress, saying: “A call for genocide of Jewish people is … evil, plain and simple.” She resigned on Dec. 9.

Other high-profile donors who have also voiced their dissatisfaction regarding Penn include Jon Huntsman Jr., a former U.S. ambassador to China and Utah governor, and cosmetics tycoon Ronald S. Lauder.

As scholars of how the law governs nonprofits, we think these developments suggest that now is a good time to review what donors do and don’t have a right to demand.

What restrictions apply

All donations to a charity must support its overall purposes. That is, a hospital can’t take the money it receives from donors and give it to, say, an animal shelter operating 500 miles away.

Donors may request specific restrictions on the use of their charitable gifts in an agreement negotiated before the donation is made. And when gifts are solicited through a specific fundraising campaign, such as a bid to raise money for a new building or for scholarships, that money must be spent accordingly.

State attorneys general and, ultimately, the courts have the power to regulate charities. But donors have some tools to police adherence to the restriction they placed on their gifts.

One way they can do this is by threatening to withhold gifts that they had planned to make unless the charity they have been funding changes course. Depending on the state laws that apply to charities, donors may be able to sue for enforcement or reserve the right to do so in gift agreements.

Some donors include in their gift agreements a “gift-over.” This kind of provision redirects the gift to another charity of the donor’s choice if the original recipient violates specified terms.

Promises of future donations from past donors have always allowed donors to informally exercise some degree of influence.

But in the current wrangling between donors and universities over claims of antisemitism on campus, threats to forgo future donations have been explicitly tied to all sorts of university actions, such as the statements universities either make or do not make regarding international relations.

The threats have become angrier and more public than in the past. Some of the regret and dissatisfaction is being expressed via op-eds and open letters. And the lengths donors have taken to assert leverage have grown more extreme.

What charities can do

Charities can take some solace in the law.

When donors make charitable gifts, they must irrevocably transfer that property to the charity receiving it. Except in very rare exceptions, disappointed donors can’t get their assets back.

In 1995, for example, Yale returned a $20 million gift to Lee Bass, an heir to a Texas oil fortune. Bass objected to the way the university was using that donation, which was supposed to support the study of Western civilization. He reached an impasse with Yale after surprising the school’s leaders with a demand they refused to accommodate: that he would personally get to approve four new professors.

And if a donor attaches too many strings to a gift, that can render it ineligible for the charitable deduction, missing out on a tax break. Just as with personal gifts, gifts with too many strings aren’t really gifts at all.

Although donors who have negotiated special conditions in a gift agreement may assert their rights to sue over a charity’s broken promises, that can take a lot of time and energy, while squandering money on legal costs. This process can also anger other donors, causing the benefactor to ultimately lose influence with the charity.

A few tips

In the University of Pennsylvania case, about two months after the donors began their public pressure campaign, Penn’s president and the chair of its board of trustees had stepped down. They resigned in the wake of a contentious congressional hearing.

In this case, some of the disappointed donors got their wish – with an assist from conservative lawmakers. Congress doesn’t usually get involved in these disputes, and with good reason. Nonprofits are private institutions using private assets, even if the assets are meant to advance purposes that are, ultimately, in the public interest.

So here is our practical advice for donors and the institutions that rely on them.

Donors shouldn’t try to control a charity through their gifts after the fact. The time to establish limits is before you’ve signed off on those gifts.

Charities should reject gifts that are offered with strings attached that they aren’t happy about. If gifts have restrictions, charities should be aware of that and adhere to them.

We fear that the failure on either side in the controversy now affecting several prestigious schools to abide by this basic guidance can potentially harm not only the freedom and academic integrity of a university, as many observers have noted, but also the freedom and integrity of the entire nonprofit sector.

The best charitable gifts, like the best personal gifts, are not meant as a means to control the recipients.

Ellen P. Aprill, Professor of Tax Law Emerita, Loyola Law School Los Angeles and Jill Horwitz, Professor of Law and Medicine, University of California, Los Angeles

This article is republished from The Conversation under a Creative Commons license. Read the original article.