How can a for-profit firm take control of a non-profit organization?
One of my current research projects asks: How can a for-profit firm take control of a non-profit organization? I look at this question through the case of Club Intrawest, a non-profit non-stock association that was created by Intrawest ULC (a for-profit firm). The report is in the publishing process.
Disclaimer. All views expressed in the report are my own and do not represent the opinions of any entity whatsoever with which I have been, am now, or will be affiliated.
Synopsis of Research Report
This report (1) assists current members to understand both their standing in the timeshare program, and (2) informs prospective buyers on the possible consequences of purchasing an Embarc timeshare product. The findings demonstrate discrepancies between what the original developer, Intrawest, sold to consumers and what they reported to shareholders, specifically as it relates to the ownership of the timeshare property itself. Findings also explain how the nonprofit member association, presented as a stand-alone organization that acts as an agent for the members (the timeshare consumer), is actually controlled by the developer (Diamond Resorts, DRI). This report significantly expands upon two key findings of the Canadian tax case.
First, the Club is not an agent of the members; rather, it is a stand-alone entity that provides a mere service to consumers who are required to renew their membership on an annual basis in order to use the Club’s services. Should a member not pay their annual service fee, they forfeit their points, so the ability to book room nights is not a right that is received when purchasing points (as the documents claim); rather it is a right that must be renewed annually with the payment of a service fee that is established by the Club itself, without member input.
Second, the members do not have beneficial ownership of the properties in trust. It is not clear if the Club itself has beneficial ownership or even beneficial interest, aside from the fact that the trust indentures provide allowance for the Club to use the properties. Regardless, if the Club does have beneficial ownership, the ownership does not transfer to the members; it stops at the Club.
The control of the Club by the developer is by design; the developer controls all revenue streams while passing on risk to a 3rd party (the Club), who then passes the risk on to individual consumers. As an analogy, the purchase of points from Embarc is akin to a golf membership, whereby there is a high initiation fee (the purchase price of the points themselves) and an ongoing membership fee (the annual resort fee, which covers the operating costs of the properties). Should a member default on the annual fee, the membership may be withdrawn; the initiation fee is a sunk cost, simply the entry price to get into the club. Once in the club, the member essentially has one role, to fund the operations of the club, without any voice. The developer, as the declarant, manager and Board, controls all decisions, running the nonprofit organization as if it was one of its own wholly owned subsidiaries. Accountability for revenues and profits, through the sale of points and financing, is to the shareholders of the for-profit organization, in this case Apollo, who owns Diamond Resorts. Control is made possible through the Club documents, specifically through the role of the declarant.
Research note: Using longitudinal case research methods, the report demonstrates how a for-profit public firm controls a nonprofit organization, through the case of Diamond Resorts and its timeshare program, Embarc. The report demonstrates how the governance structure allows the for-profit firm to control the assets and revenue streams of the nonprofit organization, while passing on the costs and risk to the timeshare consumers. The research is one of the first to expose this non-standard governance structure, that is possibly without legal foundation and most certainly unethical.
 Club Intrawest and Her Majesty the Queen, Case 2012-3401(GST)G, Tax Court of Appeal Proceedings, pp. 162.