The Nonprofit Revitalization Act of 2013 (“Act”), many parts of which are effective July 1, will affect New York nonprofit corporations and wholly-charitable trusts as well nonprofit corporations formed in other jurisdictions that are required to register with the state to solicit charitable contributions in New York. The Act represents the first overhaul of New York’s not-for-profit corporation law in over 40 years and is intended to reduce unnecessary and outdated burdens on nonprofits while enhancing nonprofit governance and oversight to prevent fraud and improve public trust.
Unless otherwise indicated, the effective date of the provisions of the Act is July 1, 2014. The governing boards and officers of New York nonprofit corporations may want to review the governance and operating procedures of the organization with counsel to ensure compliance with the new requirements.
The following provisions of the Act apply to New York nonprofit corporations, other than charitable corporations. Additional information for underlined terms can be found on page 3 of this alert.
GOVERNANCE, POLICIES, AND PROCEDURES — Provisions of the Act that affect governance, policies, and procedures are as follows:
- Policies - Nonproft corporations must now ensure that their policies are up-to-date.
- Conflict of interest policy - The Act requires that every nonprofit corporation and wholly-charitable trust adopt a conflict of interest policy and annual disclosure statement to ensure that an organization’s officers, directors, and key employees act in the organization’s best interest. The Policy must: (i) define circumstances that constitute a conflict of interest; (ii) provide a procedure for disclosure of a conflict to the audit committee or the board, if there is no audit committee; (iii) prohibit the person with a conflict from being present or participating in the deliberation of the conflict and/or otherwise attempting to influence a vote with respect to the conflict; (iv) require documentation of the existence and resolution of the conflict; and (v) provide procedures for disclosing, addressing, and documenting related party transactions. Organizations that have adopted a Conflict of Interest Policy within the last ten years, based on the IRS model, should be compliant with the law but may want to review the current policy. The annual statement signed by directors must disclose: (i) all entities in which s/he is an officer, director, trustee, member, owner, or employee, with which the organization has a relationship and (ii) any transaction or arrangement in which the organization is a participant and s/he has a financial or other interest that may be in conflict with the interests of the organization.
- Whistleblower policy - Every nonprofit corporation and wholly-charitable trust with 20 or more employees and annual revenue over $1 million is required, under the Act, to adopt a whistleblower policy to protect those who report suspected misconduct from retaliation.
- Electronic communication (members, governing board, and committees) - The Act allows increased use of technology in governance and communication. Email, electronic signatures, and video conferencing supplant references to telegrams and augment existing rules about the appropriate means of communication for members of the corporation and directors. For example, in lieu of a meeting of members, directors, and committees, a unanimous written consent may be obtained using electronic signatures.
- The Act defines the term "entire board" as the total number of directors entitled to vote which the corporation would have if there were no vacancies. If the bylaws provide that the board shall consist of a fixed number of directors, then the entire board shall consist of that number of directors. Where the bylaws provide for a range between a minimum and maximum number of directors, then the entire board shall consist of the number of directors within the range that were elected as of the most recently held election of directors.
- Chair of the Board - An employee of the organization may not serve as chair of the governing board or hold other title with similar responsibilities. (Applicable beginning January 1, 2015)
- Residential address of directors - Nonprofit corporations are no longer required to provide the residential addresses of directors.
OPERATIONS - Certain provisions of the Act affect the operation and categorization of the organization.
- Types of nonprofit corporations - The Act replaces the current system of four types of nonprofit corporations with a simplified two-type system. The two types of nonprofit corporations under the Act are charitable and non-charitable corporations. Existing nonprofit corporations are not required to file revised organizational documents. Organizations formerly categorized as Type B and C corporations, as well as Type D with a charitable purpose, will be deemed charitable corporations for all purposes. Type A corporations and Type D with a non-charitable purpose will be deemed non-charitable corporations.
- Change of a purpose or power of a corporation - The New York Attorney General, rather than a court, may now approve the change of purpose or power of a nonprofit corporation.
- Compensation - No person may be present or otherwise participate at a meeting of the governing board or committee deliberating that individual’s compensation but the person may present information to the board or committee, as necessary.
- Related party transaction procedures - A director, officer, or key employee must disclose, in good faith, material facts regarding any interest in a related party transaction to the governing board or authorized committee addressing such transactions. Prior to entering into a related party transaction, the governing board or authorized committee of a nonprofit corporation or wholly-charitable trust must ensure that the transaction is fair, reasonable, and in the best interest of the organization. No related party may participate in the deliberations or voting on the matter, but may present information to the governing board or authorized committee considering the transaction. The New York Attorney General has authority to bring an action to enjoin, void, or rescind any related party transaction or proposed related party transaction that violates applicable New York law or was otherwise not reasonable or in the best interests of the organization at the time the transaction was approved, or to seek restitution, and the removal of directors or officers. If a related party transaction involves a charitable corporation or trust, in addition to the procedures discussed above, the governing board or authorized committee must (i) consider alternatives to the transaction, if available; (ii) approve the transaction by at least a majority of those present at the board or committee meeting; and (iii) contemporaneously document the basis for approval and alternatives considered.
- Real estate transactions - The Act permits nonprofits to conduct routine real estate transactions by a simple majority of the governing board, replacing the two-thirds majority requirement currently in place. Board approval of third-party leases is no longer required. The Act retains the requirement that two-thirds of the board approve transactions involving all or substantially all of a corporation’s assets if the nonprofit has 20 or fewer directors.
- Sale or disposition of substantially all of the organization’s assets - Two-thirds of the governing board must approve a transaction involving all or substantially all of a corporation’s assets if the nonprofit has 20 or fewer directors. In lieu of receiving court approval to sell all or substantially all of a nonprofit’s assets, to merge, or to consolidate, the corporation may petition the New York Attorney General for review.
- Mergers - Mergers may now be approved by the New York Attorney General, rather than a court.
An affiliate of a corporation means any entity controlled by, in control of, or under common control with the corporation.
Key employee means any person who is in a position to exercise substantial influence over the affairs of the corporation, as referenced in the Internal Revenue Code and Treasury Regulations. Factors that tend to demonstrate that a person has
substantial influence include: the person’s compensation is primarily based on revenues derived from a particular department or function of the corporation and the person manages a discrete segment or activity that represents a substantial portion of the activities, assets, income, or expenses of the corporation, as compared to the corporation as a whole.
Related party means:
- any director, officer, or key employee of the organization or any affiliate of the corporation;
- any relative of any director, officer, or key employee of the organization or any affiliate of the corporation; or
- any entity in which any individual described above has a 35% or greater ownership or beneficial interest or, in the case of a partnership or professional corporation, a direct or indirect ownership interest in excess of 5%.
Related party transaction means any transaction, agreement, or any other arrangement in which a related party has a financial interest and in which the corporation or any affiliate of the organization is a participant.
Relative of an individual means his or her spouse, domestic partner, ancestors, siblings, children, grandchildren, great- grandchildren, and spouses of siblings, children, grandchildren, and great-grandchildren.