On June 21, 2013, the New York State Legislature passed the Non-Profit Revitalization Act of 2013 (the “Act”), which is now awaiting signature by Governor Cuomo. If signed, most provisions of the Act would take effect on July 1, 2014 (“Effective Date”).1 The Act would amend the New York Not-for-Profit Corporation Law (“NPCL”) and related laws affecting non-profit organizations. It would eliminate and modify various provisions of the NPCL and other laws which are burdensome, confusing, or outdated; reduce the time required to form certain not-for-profit corporations; and strengthen governance requirements and board accountability. Described below are certain key provisions and requirements of the Act applicable to not-for-profit corporations.

The Act Makes the Formation of Certain Not-for-Profits Simpler and Major Transactions Less Burdensome

  • Certain Pre-Approvals Are No Longer Required2 The Act provides that statutory agency approval and notice requirements will be satisfied if an entity includes in its certificate of incorporation a statement that its powers and purposes do not include certain purposes set forth in the NPCL; in such cases agency pre-approval is no longer required.3
  • Education Department Notification vs. Pre-Approval4 An entity whose purposes are education-related (other than a school, university, college, entity providing post-secondary education, library, museum, or historical society) will no longer be required to obtain Department of Education preapproval prior to formation. Instead, the entity must provide the Commissioner of Education a certified copy of its certificate of incorporation (or, in the case of an amendment, a certificate of amendment) within thirty business days of receiving notice of filing by the Department of State.
  • Increased Flexibility with Respect to Mergers, Consolidations, Changes in Purpose, and Dissolutions. “Charitable” not-for-profit corporations (the Act eliminates types “A” through “D” and divides not-for-profit corporations into “charitable” and “non-charitable”) seeking to merge, consolidate, or change a purpose will have the option of seeking either supreme court or Attorney General approval, except where the Attorney General decides that the supreme court should review the applicable application and make a determination.5 In addition, supreme court approval is no longer required in order for a charitable corporation (or noncharitable corporation with assets to be used for a specific purpose) to dissolve. A corporation petitioning the Attorney General to dissolve has the option of seeking supreme court approval at any time (even if the Attorney General does not approve the dissolution petition).6
  • Real Estate Transactions7 Currently, two-thirds of the entire board must approve the purchase, sale, mortgage or lease of real property (if there are over twenty directors, only a majority of the entire board must approve). After the Effective Date, a two-thirds approval is required only if a real property transaction is a purchase or sale of all or substantially all of the assets (if there are over twenty directors, only a majority of the entire board must approve). A majority of the entire board (or an authorized committee) must approve other real property transactions.

The Act Strengthens Requirements Regarding Governance and Fiduciary Duties

Increased Audit Oversight8 The Act requires that the board (or audit committee consisting of independent directors) oversee a corporation’s “accounting and financial reporting processes” and its audit, retain an independent auditor each year, and review audit results with the auditor. In addition, if the corporation had in the prior fiscal year (or reasonably expects to have in the current fiscal year) revenue greater than $1 million, its board (or authorized committee) must take certain additional actions such as reviewing the scope and planning of the audit prior to the audit and, after the audit, discussing with the auditor material risks and weaknesses in internal controls, “restrictions on the scope of the auditor’s activities or access to requested information,” “significant disagreements between the auditor and management,” and the “adequacy of the corporation’s accounting and financial reporting processes,” and assessing the performance and independence of the auditor.

The Act provides that only independent directors may deliberate or vote on audit matters. “Independent directors” are directors of a corporation who:

  1. are not and have not been within the past three years an employee of the corporation or an affiliate (and do not have relatives who are or have been within the past three years a key employee of the corporation or an affiliate);
  2. have not received (and do not have relatives who have received), within the last three fiscal years, more than $10,000 in direct compensation from the corporation or affiliate (except for reimbursement of reasonable expenses in his or her capacity as director or compensation as director as permitted by the NPCL); and
  3. are not current employees of and do not have substantial financial interests in (and do not have a relative who is a current officer of or has substantial financial interest in) any entity that has paid or been paid by the corporation or an affiliate, for property or services, an amount which, in any of the last three fiscal years, was greater than the lesser of $25,000 or 2% of the corporation’s consolidated gross revenue (charitable contributions are excluded).9

Related Party Transactions10 The Act prohibits not-for-profit corporations from entering into a “related party transaction” unless the board determines that the transaction is “fair, reasonable and in the corporation’s best interest at the time of such determination.” In addition, any director, officer, or key employee with an interest in a related party transaction must disclose to the board (or authorized committee) the material facts concerning such person’s interest. Such person may not participate in voting or deliberations with respect to the related party transaction, but may present information about the related party transaction at a meeting of the board or authorized committee prior to deliberation and voting upon request of the board or committee.

The Act broadly defines “related party transaction” as “any transaction, agreement, or other arrangement in which a related party has a financial interest and in which the corporation or any affiliate of the corporation is a participant.”11 The definition of “related party” includes directors, officers, and key employees (i.e., persons “in a position to exercise substantial influence over the affairs of the corporation” as referenced in certain federal law) of the corporation or an affiliate and such persons’ “relatives” (broadly defined in the Act).12 “Related parties” also include entities in which the foregoing persons have at least a 35% ownership or beneficial interest (or in the case of a partnership or professional corporation, a direct or indirect ownership interest greater than 5%).

Charitable corporations are subject to more stringent related party transaction requirements than non-charitable corporations. Before a charitable corporation may enter into a related party transaction in which a related party has a “substantial financial interest,” the board of the corporation (or authorized committee) must:

  1. “consider alternative transactions to the extent available;”
  2. approve the transaction by at least a majority vote of directors (or committee members) present at the meeting; and
  3. “contemporaneously document in writing the basis for the board or authorized committee’s approval, including its consideration of any alternative transactions.”

The Act gives the Attorney General wide latitude to police related party transactions. The Attorney General may “enjoin, void, or rescind” related party transactions that violate the law or are “not reasonable or in the best interests of the corporation at the time the transaction was approved” and seek certain additional relief, such as double damages for “willful and intentional conduct.”

Conflict of Interest Policy13 The Act requires that all not-for-profit corporations adopt a conflict of interest policy which includes provisions defining conflicts of interest, describing procedures for disclosing conflicts of interest, prohibiting interested persons from being present at, participating in or improperly influencing or seeking to influence voting or deliberations on any matter giving rise to a conflict of interest, and requiring proper documentation of the existence and resolution of any conflicts of interest.

In addition, the conflict of interest policy must require that each director provide to the corporate secretary, annually and prior to his or her election, a written statement identifying (to the best of the director’s knowledge) any (i) entity of which the director is an officer, director, trustee, member owner, or employee and “with which the corporation has a relationship,” and (ii) “any transaction in which the corporation is a participant and in which the director might have a conflicting interest.” The secretary must provide copies of such statements to the head of the audit committee (or if no audit committee, to the chair of the board).

Whistleblower Policy14 The Act requires that not-for-profit corporations with twenty or more employees and over $1 million in annual revenue adopt whistleblower policies. Such policies must contain provisions (i) addressing reporting of violations or suspected violations of laws or corporate policies, including procedures for preserving the confidentiality of reported information, (ii) requiring designation of an employee, officer, or director to administer the whistleblower policy and to report to the audit committee or other committee consisting of independent directors (or if no such committee, to the board), and (iii) requiring that the policy be distributed to all “directors, officers, employees, and volunteers who provide substantial services” to the corporation.

Miscellaneous Changes

The Act contains the following miscellaneous changes to the NPCL, among others:

  • Financial Review Thresholds15 The Act increases various thresholds for financial reports required to be filed with the Attorney General. The threshold for submitting financial reports accompanied by audit reports increases from $250,000 to $500,000 on the Effective Date (and, over time, to $1 million by July 1, 2021).
  • Board Committees16 The Act simplifies the classification of board committees by eliminating special committees. Currently, there are three types of committees: standing, special, and committees of the corporation. After the Effective Date there will be only committees of the board and committees of the corporation. All members of committees of the board must be board members. Committees of the corporation may consist of non-board members; however, they cannot bind the board.
  • Electronic Notices; Video Screen Communications17 The Act permits the electronic sending of notices and waivers of notice for board and member meetings, proxy designations, and unanimous written consents. It also allows (unless prohibited by the certificate of incorporation or bylaws) attendance at board meetings using video screen communication, so long as the method of communication permits meeting attendees to hear one another and participate in the meeting.
  • Officers18 No employee may serve as chairman of the board (or as an officer with similar responsibilities).

History and Future of the Act

Frederick G. Attea, a partner with Phillips Lytle LLP, has served as Chairperson on the drafting committee of the New York State Bar Association, which worked closely with the Attorney General’s Office and the New York Law Revision Commission in drafting the Act. The Act - the first significant revision of the Not-for-Profit Corporation Law in over forty years - is a major step forward, though it reflects a certain degree of compromise necessary to address the comments and concerns of diverse constituencies.

Complying with the Act prompts consideration of various issues, including the following:

  • Certain organizations might find it difficult to comply with the Act, particularly given the “one-size-fits-all” nature of many of its requirements.
  • Non-charitable corporations such as social organizations, trade associations, country clubs, and many other non-charitable non-for-profit corporations might be surprised to learn that they must adopt whistleblower policies (assuming they meet the applicable employee and revenue thresholds) and conflict of interest policies and that they are subject to more stringent requirements regarding related party transactions.
  • Given the Act’s broad definition of “related party transaction,” the classification of certain transactions as “related party transactions” might be unanticipated or unclear.
  • Organizations in small communities might struggle with finding a sufficient number of “independent” directors to serve on the audit committee given the Act’s stringent “independent director” definition.
  • An unintended consequence of the Act might be an increased reluctance among individuals to join or continue to serve as directors of non-profit organizations.
  • Because of the focus of the Attorney General and the Law Revision Commission on enhanced fiduciary duties, no New York legislation was enacted which limits the liability of directors. Many other states and the Model Nonprofit Corporation Act permit such limitations where a director acts in good faith and does not engage in misconduct or obtain improper personal benefits. Such limitations provide directors with a certain level of comfort.

These issues hopefully will be addressed and clarified over time as the Act is implemented. For now, the numerous fiduciary changes should stimulate self-reflection and critical thinking among not-for-profit corporations about their current governance practices and how these practices can be adjusted to be compliant with the Act and optimal for their organizations.

  1. The Act amends the New York Not-for-Profit Corporation Law, the Executive Law, and various other laws.
  2. §49 of the Act (NPCL §404(w)).
  3. NPCL §404(a) through (v).
  4. §48 of the Act (NPCL §404(d)); §82 of the Act (NPCL §804(a)).
  5. §§ 82-85 of the Act (NPCL §§804(a); 907; 907-a; 907-b).
  6. §89 of the Act (NPCL §1002).
  7. §53 of the Act (NPCL §509).
  8. §72 of the Act (NPCL §712-a).
  9. §29 of the Act (NPCL §102(a)(21)).
  10. §74 of the Act (NPCL §715).
  11. §29 of the Act (NPCL§102(a)(24)).
  12. §29 of the Act (NPCL§102(a)(23)).
  13. §75 of the Act (NPCL§715-a).
  14. §75 of the Act (NPCL §715-b).
  15. §§ 3-3-b of the Act (Executive Law §172(b)).
  16. §70 of the Act (NPCL §712(a), (b), and (e)).
  17. §§62-65 of the Act (NPCL §§605(a); 606; 609 (b) and (c); 614(a) and (b)); §§68-69 of the Act (NPCL §§708(b) and (c); 711(c)).
  18. §73 of the Act (NPCL §713(f)).