NEW YORK NOT-FOR-PROFIT CORPORATION ACT AMENDED

       The Non-Profit Revitalization Act of 2013 (the “Act”), signed into law on December 18, 2013, effects an array of significant structural and definitional changes to the organization and operation of domestic and foreign not-for-profit (“NFP”) corporations in New York.  These include new corporate governance rules, streamlined administrative and procedural filing requirements and expanded state oversight power, some of which are summarized below.  NFP corporations should note the Act’s July 1, 2014 effective date and review and consider making conforming amendments to their bylaws, policies and other corporate documents.

Categories of NFP Corporations Streamlined

The four categories of New York NFP corporations (A, B, C, and D – as based on their specific purpose) are eliminated and replaced with two basic classes:

• Charitable, which includes corporations organized for charitable, educational, religious, scientific, literary, or cultural purposes, or for the prevention of cruelty to children or animals; and
• Non-charitable, which includes corporations organized for civic, patriotic, political, social, fraternal, athletic, agricultural, horticultural, or animal husbandry purposes, or for the purpose of operating a professional, commercial, industrial, trade, or service association.

Type A and certain Type D corporations formed prior to July 1, 2014 will be automatically deemed “non-charitable” corporations while Type B and Type C corporations will be deemed “charitable.”

Restrictions on Board Chairmanship and Committee Composition

The Act requires (as of January 1, 2015) greater separation between a NFP corporation’s management and board by prohibiting an employee of the corporation from serving as the chairperson of the board or holding any other title with similar responsibilities.  The Act also eliminates the distinction between standing and special committees; provides that committees of the NFP corporation which include non-directors do not have the authority to bind the corporation; and imposes an affirmative duty on any committee authorized by the board to purchase or dispose of real estate to report promptly to the board but not later than at the next scheduled meeting of the board.

Relaxed Requirements for Real Estate Transactions

A purchase, sale, mortgage or lease of real property can now be approved by a majority vote of the board or a majority vote of a committee (instead of a two-thirds vote previously required), unless the transaction involves all or substantially all of the assets of the NFP corporation (but not if the board has more than 21 members).

Related Party Transaction Approval Process

Under the Act, a NFP corporation’s board may not enter into a “related party” transaction unless it has determined that the transaction is fair, reasonable and in the corporation’s best interests.  A “related party” is newly defined as any director, officer or key employee of the organization or an affiliate; any relative of such individual; and any entity in which such individual has a 35% or greater ownership interest or, in the case of a partnership or professional corporation, a greater than 5% direct or indirect ownership interest. The Attorney General may challenge a related party transaction and impose a penalty on the corporation or its directors in the case of willful and intentional misconduct in addition to other statutory remedies.

Executive Compensation Approval Process

The Act imposes new procedural requirements on boards of NFP corporations in their review of executive compensation packages, barring persons who may benefit from such compensation from participating in any board or committee deliberation or vote concerning the compensation, except to the extent the board or committee requests that they present information or answer questions.  Directors who vote for, or concur in, a compensation arrangement without following these procedural requirements may be jointly and severally liable to the corporation.

Whistleblower and Conflict of Interest Policy Requirements

Under the Act, NFP corporations with over $1 million in annual revenues and 20 or more employees must adopt a whistleblower policy to protect against retaliation persons who report suspected improper conduct.  The Act also requires adoption of a conflict of interest policy that requires directors, officers and key employees to act in the organization’s best interests and specifies minimum required components of the policy.  Each director must submit a statement regarding potential conflicts of interest prior to election to the board and annually thereafter.

AG Approval of Certain Corporate Transactions

The Act simplifies the process for applying for approval of merger or consolidation plans, changes in corporate purposes and asset dispositions by applying for an order of approval directly from the Attorney General without the need to petition the Supreme Court.  If the Attorney General disapproves the application or determines that court review is appropriate, then judicial review of the decision may be sought.

Financial Reporting Changes

The Act clarifies and increases the revenue thresholds for nonprofits that must make annual financial reports to the Attorney General.  All NFP corporations must file unaudited financial statements, regardless of how little annual gross revenue is earned, but those with annual gross revenue between $250,000 and $500,000 must also file audited financial reports and an independent CPA’s review report, and those with greater than $500,000 in annual gross revenue, must file annual financial statements along with an independent CPA’s audit report and opinion letter.

Audit Oversight Requirement Imposed

The “independent directors” of a NFP corporation with annual revenues in excess of $500,000 that is required to register with New York State to conduct charitable solicitations must oversee the organization’s accounting and financial reporting and the audit of its financial statements. The Act defines an “independent director” as someone who is not (or whose relative is not) an employee of the nonprofit for the past three years and does not have another type of financial relationship with the nonprofit, as specifically defined in the Act.  This function may also be performed by the corporation’s audit committee composed of independent directors.  Moreover, NFP corporations with annual revenues greater than $1,000,000 that are required to register with New York State to conduct charitable solicitations are subject to certain additional audit oversight requirements, including review and discussion with the independent auditor of the scope and planning of the audit prior to its commencement, any material risks and weaknesses in internal controls identified by the auditor, any restrictions on the scope of the auditor’s activities, significant disagreements between the auditor and management, and the adequacy of the nonprofit’s accounting and financial reporting processes.  The performance and independence of the auditor must also be reviewed on an annual basis.

Simplified Corporate Governance Requirements

The Act enables NFP corporations to conduct board votes and other actions via e-mail, conduct board meetings via videoconference, and delegate the approval of small transactions to committees.

Privacy

Although the Act still requires NFP corporations to furnish a list of directors and officers upon demand from a member of the not-for profit or a law enforcement agency, it eliminates the requirement to disclose their home addresses.

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Frenkel Sukhman LLP has been assisting its not-for-profit corporate clients with formation, fundraising and other activities, compliance, and financing and other transactions and its attorneys would be pleased to answer any questions you may have about the Act and its impact on NFP corporations.