On December 18, 2013, Governor Andrew M. Cuomo signed into law the New York Nonprofit Revitalization Act of 2013 (effective July 1, 2014). This represents the first major change to New York’s nonprofit laws in 40 years. The law is intended to reduce unnecessary and outdated burdens on nonprofits and to enhance nonprofit governance and oversight to prevent fraud and improve public trust.
These changes require all nonprofits incorporated or doing business in New York to review existing internal controls, bylaws and policies.
The recently enacted New York Nonprofit Revitalization Act, effective July 1, 2014, makes substantial changes to the New York Not-for-Profit Corporation Law (NPCL), the Estates Powers & Trusts Law (the EPTL) and Article 7-A of the Executive Law, and will significantly impact nonprofits incorporated or doing business in New York.1 In general, the law serves to (i) streamline corporate governance, (ii) enhance corporate accountability and (iii) simplify the incorporation process. The summary below highlights the key changes for nonprofit corporations.
Streamlining Corporate Governance
The NPCL modernizes board and membership communication. The following notifications may now be sent by email or facsimile:
board and membership meeting notices
waivers of notice by members and directors
consent to corporate actions by member vote
consent to a decision without a board meeting
authorization of members’ proxies
distribution of financial statements
These communications must include the signature of the member or director (a facsimile is permitted) or, in the case of an email, must appropriately indicate authorization of the sender.
Board members may also now participate in meetings using videoconferencing methods such as Skype, so long as all attendees can participate and hear each other at all times. Unless otherwise restricted by the certificate of incorporation or bylaws, individuals may consent to a board or committee action using a written or electronic signature.
Real Estate Transactions
Under the amended NPCL, real estate transactions (including a purchase, sale, lease, exchange or other disposition) may be approved by a majority of the entire board or a committee designated by the board rather than the current two-thirds requirement. However, if the property constitutes all, or substantially all, of the corporation’s assets, the transaction will continue to require approval by two-thirds of the “entire board” (unless the board has more than 21 members, in which case a majority vote is sufficient). “Entire board” is redefined to mean the total number of directors entitled to vote if there were no vacancies or, if the bylaws provide for a fixed number, that number is the “entire board”; if the bylaws provide for a number with a range, the “entire board” is that number of directors (within the range) elected at the most recent election.
Disposition of Assets; Mergers and Consolidations
The current process for approval of a sale, lease, exchange or disposal of all or substantially all of a corporation’s assets is cumbersome, requiring Supreme Court approval following an attorney general review. Although nonprofits will continue to have the right to seek Supreme Court approval of any transaction, the act provides one-step approval, permitting a corporation to obtain the approval only of the attorney general, unless:
the corporation is insolvent or would become insolvent as a result of the transaction, or the attorney general concludes court review is appropriate
The amended NPCL also permits the attorney general, rather than the Supreme Court, to approve mergers or consolidations of nonprofits unless he or she concludes that a court review is appropriate.
Amendments to the Certificate of Incorporation
The act permits a certificate of amendment of a charitable corporation that changes, eliminates or adds to a power or purpose enumerated in the certificate of incorporation to be approved by either the attorney general or the Supreme Court. If the attorney general does not approve the amendment or concludes that court review is appropriate, the corporation may apply to the Supreme Court for approval, upon notice to the attorney general.
The attorney general will have the power to approve plans of dissolution for the following entities: charitable corporations
non-charitable corporations holding assets legally required to be used for a particular purpose
If the attorney general does not approve the petition, or concludes that court review is appropriate, the corporation may apply to the Supreme Court for approval, upon notice to the attorney general.
Number of Directors
The NPCL no longer distinguishes between corporations with members and corporations without members in describing the procedure for fixing the number of directors. Under the act, the number of directors of a corporation, whether with or without members, may be fixed (but may not be less than
three) by the bylaws, or by action of the members or of the board under the specific provision of a bylaw allowing such action, or within any range set forth in the bylaws.
Enhancing Corporate Accountability
Financial Reporting Requirements
Generally, under the act, a nonprofit must register with the attorney general and submit annual financial reports if it:
is incorporated in New York
is doing business or holds property in the state, or
solicits or intends to solicit contributions from any person or governmental agency in New York2 These filings may be submitted electronically.
Depending upon the organization’s gross annual revenue, it may also be required to file an independent CPA review or audit report. To reduce the reporting burden on smaller nonprofits, the act increases the revenue thresholds triggering various filings. Nonprofits with revenues of $250,000 or less may file unaudited financial reports on a form provided by the attorney general. Nonprofits with revenues in excess of $250,000 but not more than $500,000 must submit an independent CPA review report (unless, after review, the attorney general requests an independent CPA audit report) and those with revenue of more than $500,000 must submit an independent CPA audit report.3
Oversight of Audit Reports - Audit Committee
The amended NPCL provides that a corporation required to submit an independent CPA audit report to the attorney general (described above) must have a board-designated audit committee comprised solely of independent directors4 (with at least three members) charged with oversight of the corporation’s accounting, financial reporting and auditing process.5 Specifically, the committee (or board functioning as the committee) must perform the following tasks:
annually retain or renew the retention of an independent auditor
Under the EPTL, an individual or entity that holds or administers property for charitable purposes pursuant to a will, trust or other instrument must also register and submit financial reports to the attorney general.
Over time, the revenue thresholds for independent CPA audit reports increase incrementally (on July 1, 2017 from $500,000 to $750,000 and on July 1, 2021 from $750,000 to $1 million).
“Independent director” means “a director who: (i) is not, and has not been within the last three years, an employee of the corporation or any of its affiliates; (ii) has not received, in any of the last three fiscal years, more than $10,000 in direct compensation from the corporation or any of its affiliates; (iii) is not a current employee of or does not have a substantial financial interest in any entity that has made payments to or received payments from the corporation or an affiliate of the corporation for property or services with value exceeding either $25,000 or 2% of the corporation’s gross revenue; and (iv) does not have a relative who is described in (i), (ii) or (iii).” For these purposes, “payment” does not include charitable contributions.
The board may perform this function so long as only independent directors attend and participate in “audit committee” matters.
review the results of the audit and any management letter with the auditor
The audit committee of a corporation, whose annual revenue exceeded $1 million in the previous fiscal year or expects to have annual revenue in excess of $1 million in the current fiscal year, must also:
prior to the audit, review the scope and planning of the audit with the auditor beforehand review the results of the audit under a rubric outlined in the NPCL
annually consider the performance and independence of the auditor report the audit committee’s activities to the board
Though the act is effective July 1, 2014, these provisions are not effective until January 1, 2015 for an organization with annual revenues under $10 million in its fiscal year ending before January 1, 2014.
Changes to the NPCL will require enhanced board review of affiliate transactions. To prevent self dealing, a board will have to conduct an independent review of any transaction involving a “related party.” The definition of “related party” is expanded to include key employees, as well as directors, officers and any affiliate of the corporation.6 The reviewing board or board committee must:
consider available alternative transactions
determine that the transaction is fair and reasonable and is in the best interests of the organization approve the transaction by majority vote
document its reasons for approval
The attorney general will now have expanded power to enjoin affiliate transactions and seek restitution on behalf of the nonprofit.
Conflict of Interest Policy
The amended NPCL requires that all nonprofits incorporated or transacting business in New York adopt a written conflict of interest policy, to ensure that directors, officers and key employees act in the corporation’s best interest and comply with legal requirements. The policy must include, among other things:
a definition of what constitutes a conflict of interest
procedures for disclosing a conflict of interest to the audit committee or board
a prohibition on the person with the conflict from participating in any deliberations or vote on the matter giving rise to the conflict
documentation of the conflict in the corporation’s records, including the minutes of any meeting at which the conflict was discussed or voted upon
The board or a board-designated committee comprised solely of independent directors (this may be the audit committee) must oversee the adoption, implementation of and compliance with any conflict of interest policy.
A “key employee” is “any person who is in a position to exercise substantial influence over the affairs of the corporation.”
The amended NPCL requires that any nonprofit with 20 or more employees and annual revenue in excess of $1 million in the prior fiscal year adopt a whistleblower policy. The policy must include:
procedures for reporting suspected violations of corporation policies
a requirement that an employee, officer or director be designated to administer the policy and report to the board
a requirement that the policy be distributed to all directors, officers, employees and volunteers who provide substantial services to the corporation
The board or a board-designated committee comprised solely of independent directors (this may be the audit committee) must oversee the adoption, implementation of and compliance with any whistleblower policy.
Chairman of the Board
Effective January 1, 2015, no employee of a nonprofit, including its CEO, may serve as the chair of the corporation’s board or hold any other title with similar responsibilities. This is intended to promote accountability between management and the board and to ensure independent board leadership.
A corporation may continue to reasonably compensate its members, directors and officers for services rendered, but the amended NPCL prohibits those compensated from participating in deliberations or voting on their own compensation.
Personal Jurisdiction in a Law Suit
The amended NPCL provides that any non-domiciliary officer, director, key employee or agent of a corporation formed under the NPCL is subject to the personal jurisdiction of the Supreme Court and may be served with process in any action or proceeding by the attorney general.
The amended NPCL provides that those seeking indemnification by a corporation may apply to the Supreme Court for monetary relief as specified under the NPCL, but only upon notice to the attorney general.
Simplification of the Incorporation Process
Elimination of the Types of Nonprofits
Currently, organizations formed under the NPCL are required to be categorized as Type A, B, C or D corporations. The act eliminates these designations; a nonprofit will either be charitable or non-charitable. Under the NPCL, a “charitable purpose” is defined as “charitable, educational, religious, scientific, literary, cultural or for the prevention of cruelty to children or animals.” For entities formed under the NPCL prior to July 1, 2014, Type A corporations are deemed non-charitable, Type B and C corporations are deemed charitable, Type D corporations formed for charitable purposes are deemed charitable and all other Type D corporations are deemed non-charitable.
Educational Nonprofits Approval
The act eliminates the requirement that nonprofits that include education as a purpose obtain approval from the commissioner of education prior to incorporation. Schools, libraries, museums and historical societies will continue to require pre-approval. However, all other corporations whose certificate of incorporation includes a purpose for which a corporation might be chartered by the New York State Board of Regents must only notify the State Education Department within 30 days of incorporation.
Read the complete text of the Act.
See the complete text of the bill with the changes to the NPCL highlighted.