As of September 12, 2010, a mistake that was never intended was undone. On that date, the 2010 amendments to the New York law regarding powers of attorney, signed by Gov. David A. Paterson on August 13, 2010, went into effect. Previously, New York had adopted, effective September 1, 2009, sweeping revisions to its statute regarding powers of attorney. On their face, the 2009 amendments appeared to apply to all powers of attorney, including those used in corporate transactions. This circumstance led 51 law firms to generate a white paper in January 2010 explaining why such a broad interpretation would be inappropriate and, in several instances, inconsistent with existing New York law. While this white paper had much support among the corporate bar, the ambiguity remained. New York finally clarified its law in the 2010 amendments to make it clear that the 2009 amendments were not intended to apply to all powers of attorney. The 2010 amendments, which were retroactively effective as of September 1, 2009, effectively eliminated the unintended consequences of the 2009 amendments.
Background – the 2009 Amendments
The impetus for the 2009 amendments was an admirable concern for the elderly. The New York State Law Revision Commission had come to the conclusion that an older individual looking to appoint a person to help him or her manage his or her personal finances and estate planning might not realize the extent to which powers of attorney can give away control of the individual’s assets and property, making the elderly person more susceptible to fraud by those agents. To protect older individuals, New York adopted the 2009 amendments, which required, among other things, that certain mandatory wording be used in powers of attorney, including a warning to the principal that “you give the person whom you choose (your ‘agent’) powers to spend your money and sell or dispose of your property during your lifetime without telling you.” The 2009 amendments also required that powers of attorney be manually signed and notarized to be effective. Finally, the 2009 amendments created a default rule that, unless a power of attorney stipulated otherwise, any power of attorney executed in New York would automatically revoke all other powers of attorney previously executed by the same individual. The problem was that powers of attorney are used in numerous corporate contexts that have nothing to do with the above concerns. In these contexts, the 2009 amendments caused ambiguity and expense, in the best case, and subjected companies to risk of failed process, in the worst case.
By drawing the definition of a power of attorney broadly, defining it as any “written document by which a principal with capacity designates an agent to act on his or her behalf,” the requirements of the 2009 amendments appeared on their face to apply to the powers of attorney signed in connection with numerous routine corporate transactions, including: registration statements and periodic filings with the SEC; the filing of Section 16 reports, such as Form 3 and Form 4; many LLC and LP agreements enabling managers and general partners to take certain actions; and the granting of a proxy in connection with shareholder voting, which is arguably a specialized, limited form of power of attorney. In these contexts, the 2009 amendments: (i) added unnecessary cost and expense by requiring notarization; (ii) required misleading wording in that these limited purpose powers of attorney clearly did not give the agent the right to dispose of a principal’s property as suggested in the mandated form; (iii) created a new risk of failure to comply with SEC reporting where a director who signed a power of attorney regarding a corporate filing, subsequently and before the applicable document was filed, executed another power of attorney regarding an unrelated personal matter, thus revoking the first power of attorney, potentially without the company’s knowledge; and (iv) threatened the proxy process of all companies that received any proxies from residents of (or anyone who signed their proxy in) New York, as those proxies would not only be arguably invalid for failure to comply with the form and notarization requirements, but also would also be subject to revocation without company knowledge.
This overbroad application of the 2009 amendments was probably not intended by the Law Revision Commission that recommended the amendments. For example, the Commission expressly stated in its recommendation: “A power of attorney may also be used in commercial and business transactions but powers of attorney used for those purposes are beyond the scope of the Commission’s Recommendation.” In addition, the title of the law as passed was “Statutory Short Form and other Powers of Attorney for Financial Estate Planning (emphasis added).” In short, it appears that the intent was that the 2009 amendments be limited in scope, unfortunately the drafting did not clearly reflect this intent.
In response to this conundrum, 51 law firms signed a white paper that, in essence, stated that in some corporate contexts, the 2009 amendments made no sense. Among other things, the white paper (i) highlighted the several inconsistencies between the 2009 amendments and New York Business Corporation Law Section 609, which expressly deals with proxies, and argued that the NYBCL should govern, and (ii) raised the question of the internal affairs of corporations and whether New York has the right to interfere with the proxy process of a Delaware corporation, for example, just because the proxy of one of its shareholders is executed in New York. Notwithstanding the collective thinking of a number of prestigious New York law firms reflected in the white paper, the problems with the 2009 amendments remained embedded in the language of the statute and many corporations were reluctant to rely on the white paper in the face of the explicit language of the 2009 amendments. In addition, several other law firms published alerts and memos advising their clients of the problems outlined above. In due course, the New York legislature got the message.
The Fix – the 2010 Amendments
New York took the better part of a year to correct these issues, but it did get them corrected, and did so retroactively. The 2010 amendments add a new Section 5-1501C to the statute that exempts certain powers of attorney from the applicability of the statute, specifically:
- a power of attorney given primarily for a business or commercial purpose, including without limitation:
- a power to the extent it is coupled with an interest in the subject of the power;
- a power given to or for the benefit of a creditor in connection with a loan or other credit transaction;
- a power given to facilitate transfer or disposition of one or more specific stocks, bonds or other assets, whether real, personal, tangible or intangible;
- a proxy or other delegation to exercise voting rights or management rights with respect to an entity;
- a power created on a form prescribed by a government or governmental subdivision, agency or instrumentality for a governmental purpose;
- a power authorizing a third party to prepare, execute, deliver, submit and/or file a document or instrument with a government or governmental subdivision, agency or instrumentality or other third party;
- a power authorizing a financial institution or employee of a financial institution to take action relating to an account in which the financial institution holds cash, securities, commodities or other financial assets on behalf of the person giving the power;
- a power given by an individual who is seeking to become a director, officer, shareholder, employee, partner, limited partner, member unit owner or manager of a corporation, partnership, limited liability company, condominium or other legal or commercial entity in his or her capacity as such;
- a power contained in a partnership agreement, limited liability company operating agreement, declaration of trust, declaration of condominium, condominium bylaws, condominium operating plan or other agreement or instrument governing the internal affairs of an entity authorizing a director, officer, shareholder, employee, partner, limited partner, member, unit owner, manager or other person to take lawful action relating to such entity;
- a power given to a condominium managing agent to take action in connection with the use, management and operation of a condominium unit;
- a power given to a licensed real estate broker to take action in connection with a listing of real property, mortgage loan, lease or management agreement;
- a power authorizing acceptance of service of process on behalf of the principal; and
- a power created pursuant to authorization provided by a federal or state statute, other than this title, that specifically contemplates creation of the power, including without limitation, the power to make health care decisions or decisions regarding disposition of remains.
For good measure, the 2010 amendments also flipped the presumption regarding revocation, providing that, unless the principal explicitly provided otherwise, the execution of a power of attorney does not revoke any power of attorney previously executed by the principal. The 2010 amendments therefore address the various concerns that had been raised in response to the 2009 amendments since they became effective in September 2009. Moreover, the 2010 amendments apply retroactively to September 1, 2009, and, therefore, validate any powers of attorney that were executed in the corporate context between the two sets of amendments, the validity of which may have been in doubt under the 2009 amendments. The correction provided by the 2010 amendments should ease any concerns regarding the use of powers of attorney in New York in the corporate context, returning the use of powers of attorney in the business context to pre-2009 business as usual.