In November, New York Governor Cuomo signed into law an amendment to the New York Nonprofit Revitalization Act of 2013 (“NPRA”). The 2016 Amendment clarifies and simplifies a number of provisions of the NPRA that are applicable to New York nonprofit corporations and charitable trusts. Two of these changes, which ease slightly the burdens imposed by the NPRA, are discussed below. These changes go into effect on May 27, 2017.
1. Related Party Transaction Provisions.
The NPRA originally prohibited a corporation subject to the New York Not-for-Profit Corporation Law (“NPCL”) from entering into a “related party transaction,” which was defined as “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 corporation is a participant,” unless the transaction is determined by the board to be “fair, reasonable and in the corporation’s best interest.”
The 2016 Amendment eases the related party transaction rules by redefining the term “related party transaction” to exclude the following transactions:
- Transactions where the transaction itself or the related party’s financial interest in the transaction is de minimis;
- “Ordinary course of business” transactions that would not customarily be reviewed by the board or boards of similar organizations in the ordinary course of business and are available to others on the same or similar terms; and
- Transactions that provide benefits to a related party due to the related party’s membership in a class of beneficiaries that the corporation intends to benefit as part of its mission, which benefits are available to similarly situated members of the same class on the same terms.
If an action is brought by the attorney general with regard to a related party transaction that is not in accordance with the requirements of the NPRA, New York nonprofit corporations and charitable trusts have a limited defense if:
- The transaction was fair, reasonable and in the organization’s best interest at the time the organization approved the transaction; and
- Prior to the receipt of any request for information by the attorney general with respect to the transaction, the directors/trustees: (a) ratified the transaction in accordance with the existing requirements for approving related party transactions; (b) documented in writing the nature of the violation and the basis for the directors’, trustees’ or committee’s ratification of the transaction; and (c) implemented procedures to ensure that such violations will not occur again in the future.
2. Independent Director Provision.
The NPRA requires certain functions to be carried out by a board or audit committee comprised solely of “independent directors,” including oversight of the corporation’s accounting and financial reporting process. The 2016 Amendment re-defines the term “independent director” by providing a sliding scale to trigger disqualification in certain limited situations, thereby causing the result that fewer directors will be disqualified from being an “independent director.”
Now, a director who is employed by or has a financial interest in an entity that receives payments from or makes payments to a corporation subject to the NPCL may still be independent, depending on the gross revenues of the entity and the size of the payments to or from the entity. For example, a director who is employed by or has a financial interest in an entity that receives payments from, or makes payments to, a corporation subject to the NPCL will be considered “independent” as long as the amount paid or received during each of the past three fiscal years does not exceed 2% of the entity’s consolidated gross revenues and the entity has consolidated gross revenues of less than $500,000. The maximum permissible amount paid to or received from the entity increases in relation to the entity’s consolidated gross revenues.