New York Overhauls Nonprofit Corporation LawFebruary 12, 2014
At the end of 2013, Governor Cuomo signed into law the New York Nonprofit Revitalization Act of 2013 (the "Act"). The Act represents the first major overhaul in the New York Not-for-Profit Corporation Law (the "Law") in more than 40 years. Among other things, the Act is intended to simplify and improve the efficiency of administrative procedures for nonprofit organizations and to strengthen nonprofit governance and oversight. The Act will become effective on July 1, 2014. A summary of the key changes under the Act are discussed below.
Related Party Transactions
The Act prohibits a corporation from entering into a related party transaction unless the transaction is determined by the corporation's board of directors or an authorized committee of the board to be fair, reasonable, and in the corporation's best interest at the time of the determination. A "related party transaction" includes any transaction, agreement or any other arrangement in which a related party has a financial interest. A "related party" includes any director, officer or key employee of the corporation, his or her relatives and any entity in which any such individual has a 35% or greater ownership or beneficial interest (or, in the case of a partnership, a greater than 5% direct or indirect interest).
Under the Act, a nonprofit charitable organization must consider alternatives to any related party transaction, approve the transaction upon the vote of at least a majority of the directors, and contemporaneously document the basis of the board's approval. The Act authorizes the Attorney General to bring an action to enjoin, void or rescind any transaction or proposed transaction between a nonprofit and a related party that was unreasonable or not in the best interest of the nonprofit at the time the transaction was approved. The Attorney General may also seek to have the related party return any profits to the nonprofit corporation or, in the case of willful and intentional conduct, have the part pay double the amount of any improperly obtained benefit.
Real Estate Transactions
Under current Law, if the nonprofit organization has less than 21 directors, the approval of the two-thirds of the entire board is required to engage in real estate transactions. The Act permits approval of real estate transaction upon the vote of a majority of the board, unless the property constitutes all or substantially all of the nonprofit's assets.
Significant Corporate Transactions
Under current Law, court approval following review of the Attorney General is required in order for a charitable organization to merge or consolidate, change its purposes or sell, lease, exchange or dispose of all or substantially all of its assets. The Act simplifies the approval process — permitting the organization to seek the approval of the Attorney General instead of going through a court proceeding.
Under the Act, the revenue thresholds for determining the type of financial reports that must be filed with the Attorney General have been increased. Organizations conducting charitable solicitations in New York with revenue up to $250,000 may file unaudited financial statements (previously the limit was $100,000). Organizations with revenue between $250,000 and $500,000 must file financial statements accompanied by an independent certified public accountant's review report, and organizations with more than $500,000 in revenue must file financial statements that have been audited by an independent certified public accountant.1
Mandatory Conflicts of Interest Policy
The Act mandates that every nonprofit corporation adopt a conflict of interest policy that includes the following: (i) a definition of what constitutes a conflict of interest; (ii) procedures for disclosing a conflict of interest; (iii) a prohibition against any attempt by the person with the conflict of interest to improperly influence the deliberation or voting on the matter giving rise to the conflict; and (iv) a requirement that the existence and resolution of the conflict be documented in the corporation's records, including the minutes of any meeting at which the conflict was discussed or voted upon.
Mandatory Whistleblower Policy
The Act requires nonprofit organizations with 20 or more employees and annual revenue in excess of $1 million in the prior fiscal year to adopt a whistleblower protection policy. The whistleblower policy must prohibit intimidation, harassment, discrimination, adverse employment consequences or other retaliation against a person who, in good faith, reports any action or suspected action that is allegedly illegal, fraudulent or in violation of a corporate policy. In addition, the whistleblower policy must include the following: (i) procedures for reporting violations and suspected violations of laws or policies, including procedures for preserving the confidentiality of the reported information; (ii) a designated employee, officer or director tasked with administering the policy and reporting to the audit committee or other committee of independent directors, or if no such committee exists, to the board; and (iii) a requirement that copies of the policy be provided to employees, directors, officers, and volunteers.
According to the Act, a person whose compensation is being determined during a meeting of the nonprofit corporation's board of directors may not be present at or otherwise participate in any deliberation or vote on his or her compensation.
Under the Act, board and membership meeting notices may be transmitted by fax or email and posted on the homepage of a nonprofit organization's website. The Act also permits board members to participate in meetings through video communication.
The Act replaces the four types of nonprofit corporations (Types A, B, C and D) with two types: charitable and non-charitable.
What to do now?
In preparation for the Act becoming effective on July 1, 2014, nonprofit organizations should review their governing documents to determine if any changes are needed or are appropriate based on the Act. Such changes may include amendments to revise the approval requirements for real estate or other significant transactions and adopting or amending conflict of interest and whistleblower policies to comply with the Act.
For more information on this alert or other nonprofit matters, please contact:
Fred R. Green at +1 212 592 5910 or [email protected]
1 On July 1, 2017, the $500,000 threshold is schedule to increase to $750,000 and on July 1, 2021, the $750,000 threshold is schedule to increase to $1,000,000. As a result, after July 1, 2021, organizations with revenue between $250,000 and $1,000,000 may file financial statements with CPA's review report and organizations with revenue in excess of $1,000,000 must file audited financial statements.