• Governor Cuomo signed New York's Non-Profit Revitalization Act of 2013 into law in December. Most of its provisions take effect July 1, 2014.
• The new law, which was designed to stimulate New York's not-for-profit industry, will have a sizable impact on nonprofit corporations and charitable trusts. It both increases accountability and simplifies a number of administrative procedures

In December 2013, Governor Cuomo signed into law the Non-Profit Revitalization Act of 2013 (the "Act"), which was unanimously passed by New York's legislature last June. The Act significantly affects New York not-for-profit corporations and charitable trusts.¹ In addition, the provisions relating to audit committees and increased thresholds for audits and reviews, discussed further below, apply to all not-for-profit corporations that are required to register with the New York Attorney General's Charities Bureau to solicit for charitable contributions, irrespective of where they are incorporated.

Most provisions of the Act take effect July 1, 2014.

As its name suggests, the Act is intended to revitalize the New York not-for-profit industry. It seeks to do so by tightening internal controls and increasing accountability, but also by modernizing the way that not-for-profits conduct business and simplifying many administrative procedures. This alert is only intended to provide an overview of some of the key provisions of the Act; a full review is recommended.

Enhanced Oversight and Increased Accountability

Mandatory Conflict of Interest Policy and Required Provisions

The Act requires that all not-for-profit corporations adopt a conflict of interest policy that includes the following information: (1) a definition of what constitutes a conflict of interest, (2) procedures for disclosing a conflict to the audit committee or the board, (3) a requirement that the person with a conflict of interest not be present at, or participate in, board or committee deliberations or voting on the matter giving rise to such conflict, (4) a prohibition on any attempt by a conflicted person to influence board deliberations, (5) procedures for documenting the existence and resolution of the conflict, and (6) procedures for dealing with related party transactions. Notably, the Act provides that the conflict of interest policy must also provide that prior to the initial election of any director, and annually thereafter, directors must complete, sign and submit a written statement identifying any potential conflict.

In view of this major change, many not-for-profits will need to update their existing conflict of interest policies.

Mandatory Whistleblower Policy for Certain Entities

Not-for-profit corporations and wholly charitable trusts that have at least 20 employees and $1 million in revenue for the prior year must adopt a whistleblower policy in order to protect individuals who report against certain misconduct in good faith. The policy must include: (1) procedures for reporting suspected violations and keeping such reports confidential, (2) a requirement that a designated individual administer the policy and report to the appropriate committee or the board, and (3) a requirement that the policy be distributed to all officers, directors, employees and volunteers.

Related Party Transactions

In addition to updating the definition of a "related party" and a "related party transaction," the Act prohibits any not-for-profit corporation or wholly charitable trust from entering into a related party transaction unless such transaction is deemed to be fair and reasonable and in the best interests of the corporation. In addition, any director, officer or key employee who has an interest in such transaction must disclose in good faith to the board or an authorized committee the relevant facts concerning the interest. With respect to "charitable corporations," as that term is defined by the Act (see below), the board or authorized committee must: (1) consider alternative transactions, (2) approve the transaction by a majority vote, and (3) contemporaneously document the basis for approval, including its consideration of alternatives. The Act also grants the Attorney General authority to void such a transaction.

Compensation Approval

Individuals who are intended to benefit from proposed changes to a compensation arrangement by a not-for-profit corporation may not be present at or participate in any board or committee deliberation or vote relating to the compensation. However, such individuals may provide information or answer questions at the board's request prior to such deliberations or vote.

Prohibition on Employee Serving as Chair

Employees of a not-for-profit corporation, including the CEO, may not serve as Chair of the board or hold any title with similar responsibilities. This provision will not become effective until January 1, 2015.

Mandatory Auditing

Charities that are required to register to solicit for charitable contributions in New York and that have annual revenue in excess of $500,000 must now have an audit committee comprised of independent directors. Alternatively the independent directors on its board may perform the duties of the audit committee. Duties include: (1) overseeing accounting and financial reporting processes and auditing financial statements, (2) annually retaining an independent auditor, (3) reviewing and discussing with the independent auditor the results of the audit, and (4) overseeing the implementation of the conflict of interest and whistleblower policies. Audit committees of charities with annual revenue in excess of $1 million have additional responsibilities.

Automatic New York Personal Jurisdiction

Upon becoming a director, officer, key employee or agent of a not-for-profit corporation, all individuals, including non-New York domiciles, are automatically subject to the personal jurisdiction of the New York Supreme Court.

Modernization of Communication Mechanisms

Notice and Waivers

Notices and waivers of notice for meetings may be given by electronic communication such as email or facsimile, rather than mail or in person alone. The Act also mandates that not-for-profit corporations with more than 500 members must post notice of member meetings on the homepage of its website if it has an active website, in addition to publication by newspaper.

General Electronic Communications

Not-for-profit corporations may use electronic communications to designate a proxy or to give unanimous written consent in lieu of a meeting. In addition, a board member may participate in a board meeting through videoconference, Skype and similar types of electronic communication, provided all members can hear each other at the same time.

Administrative Simplification

Elimination of Letter Types

Under the current classification system, nonprofits are organized as Type A, B, C or D. Because the criteria for being classified as a particular letter type often overlap, this classification system has given rise to much confusion.

In an effort to simplify the formation process for not-for-profit corporations, the Act replaces the existing classification system with two classes of not-for-profit corporations: "charitable" and "non-charitable." "Charitable" corporations cover Type B and C corporations as well as Type D corporations formed for charitable purposes; all other Type D corporations and Type A corporations are considered "non-charitable." Existing organizations will not need to amend their governing documents to clarify their classification under this new system.

Increased Thresholds for Audits and Reviews

The New York Executive Law requires that entities that are registered to solicit funds in New York for charitable purposes comply with certain auditing and reporting procedures depending on their gross revenue amounts. The Act raises the threshold of the annual gross revenue amounts that trigger these procedures, as follows:

Streamlined Approval Processes for Major Corporate Changes

Major corporate changes with respect to "charitable corporations," as defined under the Act, such as: (1) the sale, lease or exchange of substantially all of a not-for-profit's assets, (2) mergers, (3) dissolutions, and (4) changes to corporate purpose are now subject to the Attorney General's approval. Previously, they were subject to the approval of the New York Supreme Court as well as notice to the Attorney General. The Attorney General may still refer the case to the Supreme Court if appropriate and the charity may likewise seek the court's review.

Less Stringent Approvals for Real Estate Transactions

For sales or purchases of real estate where the property does not constitute all or substantially all of a non-profit's assets, only a majority of the board (or a specially appointed committee) is required. Previously, a two-thirds board vote was required. Where such transaction constitutes all or substantially all of the charity's assets, a two-thirds board vote is required — unless the board has fewer than 21 directors, in which case only a majority board vote is required.

Note

¹ Reference is made throughout this alert to not-for-profit corporations. However, the Act applies the changes in this memorandum relating to conflict of interest policies, whistleblower policies, related party transactions and mandatory auditing to "trusts," through a new Section 8-1.9 of the New York Estates Powers and Trusts Law. For purposes of this new Section 8-1.9, a "trust" means "a trust created solely for charitable purposes, or a trust that continues solely for such purpose after all non-charitable interests have terminated." The changes below concerning increased thresholds for auditing and review are made applicable to charitable trusts through the New York Executive Law.