Outlook 2010 Error - 'One or more users cannot be added to the folder access list. Non-local users cannot be given rights on this server'
Outlook will show you this error if you attempt to grant rights to a "distribution group" on an object for example, a public folder, or for calendar permissions.
You would think that converting the "Universal Distribution Group" to a "Universal Security Group" would solve this problem, but it does not.
This has been a known problem since Exchange 2007. Essentially there's an active directory attribute called "msExchRecipientDisplayType" that does not get changed properly when you convert the group using the GUI interface.
Run the following Powershell command in the Exchange Management Shell:
Set-Distributiongroup–identity {group name} –MemberDepartRestriction Closed