Article Detail

New York Modernizes Its Not-for-Profit Corporation Law
Date: April 14th, 2014    Written by David E. Paseltiner


Effective July 1, 2014 (the "Effective Date"), New York’s Not-for-Profit Corporation Law (the "Law") will be significantly revised for the first time since it became effective in 1970. The purpose of the Non-Profit Revitalization Act of 2013 (the "Act") is to reform the governance of nonprofit organizations (including wholly charitable trusts), to expand the enforcement powers of the Attorney General, and to modernize, clarify and simplify certain mechanical and procedural rules. The following is a brief summary of the more significant provisions of the Act; we recommend that interested persons review the Act in its entirety. 

Elimination of "Types" of Non-Profits

The Law currently divides not-for-profit corporations into four types, depending on the purpose for which the corporation was formed. As certain corporations may fall into one or more of the classifications, the Law further included a hierarchy, specifying which type would apply in such event. These classifications caused confusion and were unnecessarily complicated. The Act simplifies matters by providing for but two designations – charitable and non-charitable.  A "charitable corporation" is, as one might expect, any corporation formed for charitable purposes, which are defined as purposes that are charitable, educational, religious, scientific, literary, cultural, or for the prevention of cruelty to children or animals. All other nonprofit corporations are "non-charitable." All Type A nonprofit corporations and all Type D nonprofit corporations formed other than for charitable purposes will be deemed to be non-charitable corporations as of the Effective Date. All Type B and Type C nonprofit corporations and all Type D nonprofit corporations formed for charitable purposes shall be deemed to be charitable corporations as of the Effective Date.

Incorporation Simplified

The Act simplifies the incorporation process with regard to obtaining state agency consents for corporations that include education as a purpose.  With certain exceptions, most corporations that would have been required to obtain advance approval from the Department of Education will be required to provide notice instead. In addition, corporations will not be required to set forth at the time of incorporation how the purpose or purposes stated in the certificate of incorporation will be achieved or the specific activities the corporation will pursue in furtherance of such purpose(s).

Independent Directors and Key Employees

The Act contains new definitions of "independent director" and "independent trustee", providing that to be "independent", such individual must be someone who (a) is not, and has not been within the last three years, an employee of the nonprofit or an affiliate of the nonprofit, and does not have a relative who is, or has been within the last three years, a "key employee” of the nonprofit or an affiliate of the nonprofit, (b) has not received, and does not have a relative who has received, in any of the last three fiscal years, more than $10,000 in direct compensation from the nonprofit or an affiliate thereof (other than reimbursement for expenses reasonably incurred as a director or trustee or reasonable compensation or trustee commissions as permitted by law), and (c) is not a current employee of or does not have a substantial financial interest in, and does not have a relative who is a current officer of or has a substantial financial interest in, any entity that has made payments to, or received payments from, the nonprofit or an affiliate of the nonprofit for property or services in an amount which, in any of the last three fiscal years, exceeds the lesser of $25,000 or two percent of such entity's consolidated gross revenues.  For purposes of this definition, "payment" does not include charitable contributions.
The Act also contains a new definition of "key employee", being any person who is in a position to exercise substantial influence over the affairs of the nonprofit, as referenced in certain Treasury Department regulations.

Related Party Transactions

The Act requires that related party transactions be fair, reasonable and in the nonprofit's best interest, and expands disclosure of such transactions to include key employees in addition to officers, directors and trustees.  The Act adds a new requirement for the board, trustees or an authorized committee to consider alternative transactions, to the extent available, prior to entering into a related party transaction.  Such transactions must be approved by not less than a majority vote of the directors, trustees or committee members present at the meeting, and the board, trustees or committee must document in writing the basis for the approval, including its consideration of any alternative transactions.  No related party may participate in deliberations or voting relating to related party transactions.

Compensation

The Act prohibits a member, director or officer of a nonprofit corporation from being present for or otherwise participating in the decision-making process concerning his or her own compensation.

Mandatory Conflict of Interest Policy

The Act requires every nonprofit corporation to adopt a conflict of interest policy. The purpose of this requirement is to mandate that a nonprofit’s directors, trustees, officers and key employees act in the nonprofit's best interest and comply with applicable legal requirements.  The policy must include, at a minimum, (a) a definition of the circumstances that constitute a conflict of interest, (b) procedures for disclosing a conflict of interest to the audit committee, board or trustees, (c) a requirement that the conflicted party not be present at or participate in board, trustee or committee deliberations or vote on the matter giving rise to the conflict, (d) a prohibition against any attempt by the conflicted party to influence improperly the deliberation or voting on the matter giving arise to the conflict, (e) a requirement that the existence and resolution of the conflict be documented in the entity's records, including the minutes of any meetings where the conflict was discussed or voted upon and (f) procedures for disclosing, addressing and documenting related party transactions.
The policy must require that each director or trustee, prior to his or her initial appointment and annually thereafter, to complete, sign and file with the records of the nonprofit a statement identifying any entity of which he or she is an officer, director, trustee, member, owner or employee and with which the nonprofit has a relationship, and any transaction in which the nonprofit is a participant and in which such director or trustee might have a conflicting interest.

Mandatory Whistleblower Policies

The Act requires nonprofits with 20 or more employees and annual revenue in excess of $1,000,000 in the prior fiscal year to adopt a whistleblower policy.  The policy must include (a) procedures for the reporting of violations or suspected violations that incorporate procedures for preserving the confidentiality of reported information, (b) a requirement that an employee, officer, director or trustee be designated to administer the policy and to report to the audit committee or other committee of independent directors or trustees or, if there are no such committees, to the board or trustees,  and (c) a requirement that a copy of the policy be distributed to all directors, trustees, officers and employees and to volunteers (who, in the case of a nonprofit corporation, provide substantial services to the corporation), and must provide that no director, trustee, officer, employee or volunteer who in good faith reports any action or suspected action taken by or within the nonprofit that is illegal, fraudulent or in violation of any adopted policy of the nonprofit will be retaliated against.

Modernization of Board Meetings

The Act modernizes the Law to permit participation in meetings through the use of video communication (unless otherwise restricted by the certificate of incorporation or the by-laws), so long as all persons participating in the meeting can hear each other at the same time and each director can participate in all matters before the board.  The Act also permits e-mail or facsimile transmission for certain types of board communications, including waivers of notice of meetings and consents made without a board meeting.

Board Chair

Effective January 1, 2015, employees of nonprofit corporations will not be permitted to serve as the chair of the board of directors of such corporation or in any other position with similar responsibilities.

Revised Financial Reporting and Audit Requirements

The Act revises the financial reporting requirements for charitable organizations required to be registered with the New York Attorney General in order to solicit charitable contributions in New York.  The reporting thresholds will increase between now and July 1, 2021, as set forth below:

Effective Date

Unaudited Financial Reports[1]

Financial Report with Independent CPA Review Report

Financial Report with Independent CPA Audit Report

July 1, 2014

Gross revenue + support of $250,000 or less

Gross revenue + support of $250,000 or more but not more than $500,000

Gross revenue + support of more than $500,000

July 1, 2017

Gross revenue + support of $250,000 or less

Gross revenue + support of $250,000 or more but not more than $750,000

Gross revenue + support of more than $750,000

July 1, 2021

Gross revenue + support of $250,000 or less

Gross revenue + support of $250,000 or more but not more than $1,000,000

Gross revenue + support of more than $1,000,000


The Act also requires the board, trustees or audit committee of nonprofits with revenue in excess of $1,000,000 per year to review with the independent auditor the scope and planning of the audit before its commencement and, upon the audit's completion, review and discuss with the independent auditor any material risks or weaknesses in internal controls identified by the auditor, any restrictions on the scope of the auditor's activities or access to requested information, any significant disagreements between the auditor and management, and the adequacy of the organization's accounting and financial reporting process.

Approval of Major Events

One of the difficulties nonprofit corporations have encountered under the Law is the requirement to obtain court approval for the disposition of all or substantially all of the corporation’s assets, to merge or consolidate, or to dissolve. Having to obtain such approval can often be time consuming and costly.
Under the Act, nonprofit corporations may now alternatively seek approval of the New York Attorney General, provided that (i) the Attorney General can refer any such approval to the New York Supreme Court, and (ii) any corporation can seek court approval on notice to the Attorney General, regardless of whether the Attorney General approved the action in question. In addition, New York Supreme Court approval will still be required for the disposition of all or substantially all of a corporation's assets if the corporation is insolvent or would become insolvent as a result of the transaction.

Approval of Real Estate Transactions

The Act reduces the required vote of directors for real property transactions of a nonprofit corporation from two-thirds of the entire board to a majority of the entire board. However, if the real property involved in the transaction constitutes all or substantially all of the nonprofit's assets, a two-thirds vote is still required unless the nonprofit has twenty-one or more directors, in which case a majority will suffice.

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New York not-for-profit corporations and charitable trusts should carefully review the Act and their existing Certificate of Incorporation, By-Laws, trust instruments and policies and procedures to determine what changes may be required to these documents to comply with the Act.

Please contact one of the attorneys in our Not-For-Profit Corporations Practice Group if you have any questions about this memo, the Act or actions that may need to be taken to achieve compliance with the Act.



[1] The form for unaudited financial reports will be determined by the Attorney General.



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