United States: New York Legislature Passes Nonprofit Revitalization Act of 2013 — Governor Action Pending

In what is characterized as a "Revitalization Act," and which certainly is a modernization, the New York State legislature has passed and placed before Governor Andrew Cuomo changes to the Not-for-Profit ("NFP") Corporation Law. The current version of the law, if signed by the Governor, will allow for use of electronic communications (e-mail and fax) more broadly, increase the gross revenue floor for reporting and mandatory independent audits, eliminate the NFP corporation types that have bedeviled New York lawyers for years, mandate conflict of interest and whistleblower protection polices, establish clearer rules on related-party transactions, and enhance the Attorney General's authority to approve (without further review by a Court), certificates of amendment and corporate mergers and dissolutions. The law will also specifically allow the use of committees for certain super-majority board approval matters such as leases, make every officer and director subject to the jurisdiction of New York courts no matter where they may reside, prohibit employees of NFP corporations from serving as chair of its board, and otherwise generally conform and improve the existing law.

Details of some of the proposed changes include:

  • In a critically important victory for common-sense corporate governance, notices and consents under the not-for-profit corporation law may be sent by e-mail and fax.
  • The New York Executive Law requires certified audits for entities registered to solicit and collect funds for charitable purposes. The new law raises the gross revenue thresholds for such audits, over time, as follows:
    • Starting on the law's current effective date of July 1, 2014, certified audits will be required for those entities with revenue and support in excess of $500,000. Accounting reviews are required for entities with between $250,000 and $500,000 in such receipts, and only unaudited and un-reviewed statements are required for entities with less than $250,000.
    • As of July 1, 2017, certified audits will be required for entities with revenue and support in excess of $750,000. Accounting reviews are required for entities with between $250,000 and $750,000 in such receipts, and only unaudited and un-reviewed statements are required for entities with less than $250,000.
    • As of July 1, 2021, certified audits will be required for entities with revenue and support in excess of $1 million. Accounting reviews are required for entities between $250,000 and $1 million in such receipts, and only unaudited and un-reviewed statements are required for entities with less than $250,000.
  • Instead of defining NFP corporations as Type A, B, C, or D, such entities will be simply charitable or not non-charitable; former Type-A corporations will be non-charitable, while all others will be charitable.  Charitable purposes are defined as "charitable, educational, religious, scientific, literary, cultural or for the prevention of cruelty to children or animals."
  • The new law focuses on corporate integrity by tightening the related-party transaction rules.  The interested director must give notice of his interest and not participate except on request of the board to provide background.  Before acting, the board, by its independent directors, must consider alternative transactions to the extent available (the law does not say if a formal request for proposal would be required), approve the transaction as fair and reasonable to the corporation by a majority of those participating at a meeting, and contemporaneously document the approval and consideration of alternatives.  The Attorney General is given broad power to enjoin or seek recoupment from the beneficiaries of any improper transaction.
  • In this regard, every corporation must have a conflict of interest policy, and every corporation with annual revenue in excess of $1 million (the word "support" is not used, so presumably this is just operating revenue) and twenty or more employees must adopt a whistleblower policy as well.
  • Certain major corporate actions, such as changes to the certificate of incorporation, mergers, sale of all or substantially all assets, and dissolutions may now be approved by the Attorney General, in lieu of obtaining a Supreme Court order.
  • The requirements for certain real-property transaction approvals are clarified.  Such transactions must be approved by a majority of the board or committee thereof unless the real property constitutes (or will constitute upon purchase) all or substantially all of the assets of the corporation.   In the latter case the action must be approved by a majority of the entire board, except if there are fewer than 21 members, in which case two-thirds of the entire board must approve. "Entire board" is defined as the exact number set forth in the bylaws, or the bylaws provide for a range of directors, the number of board members within such range who were actually elected at the last election of directors constitutes the entire board.
  • Any person, by becoming a director, officer, key employee or agent of a not-for-profit corporation is subject to personal jurisdiction of the New York Supreme Court.
  • No employee of an NFP corporation, including its CEO, may serve as the chair of the corporation's board or hold any other title with similar responsibilities.
  • There are numerous other conforming and less-significant changes (unless they are critical to the issue you are dealing with) to the NFP corporation law, such that a full review of the statutory changes is recommended.

As noted above, the law is set to go into effect on July 1, 2014. As of this writing, however, Governor Cuomo's office has not officially received the bill for review, and has not stated whether it will sign the bill into law or whether it will recommend substantive edits. A press release from the Attorney General regarding the law can be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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