Not-for-Profits, Revitalized

On December 18, 2013, Governor Cuomo signed the New York Non-Profit Revitalization Act of 2013 (“NPRA”).  This is the first time there has been a major change in the New York Not-for-Profit Corporation Law since 1970.  The Act aims “to reduce unnecessary and outdated burdens on nonprofits and to enhance nonprofit governance and oversight to prevent fraud and improve public trust.”

Re-Categorization of Corporations Types

The new Act eliminates the categorizations of Type A, B, C, and D corporations.  Nonprofit corporations formed on or after July 1, 2014 will be defined as either a “Charitable” or a “Non-Charitable” corporation. Charitable corporations are any nonprofits with a “charitable purpose,” defined as educational, religious, scientific, literary, cultural, or prevention of cruelty to children or animal purposes. “Non-charitable” corporations are all other corporations formed under the N-PCL.

For existing corporations, those classified as Type A will be recognized as “Non-Charitable” corporations.  Type B and C corporations will be classified as “Charitable” corporations.  Type D corporations formed for charitable purposes will be deemed “Charitable” and other Type D corporations will be deemed “Non-Charitable.” Corporations bearing the previous A through D designations will be “grandfathered”; additional filings to change the applicable status in conformance of the new law will not be required.

Electronic Communications and Procedures

The Act resolves certain limitations for electronic communications and contains several provisions that explicitly establish rules for conducting corporate activities electronically.  Notice of member meetings may now be given by fax or email.  Proxies for voting may be submitted by e-mail.  The intent of these amendments is to utilize technology to allow for more effective participation by directors who are unable to attend meetings in person.

Conflicts of Interest

The Act now requires every New York nonprofit corporation to adopt a conflict of interest policy to ensure that its directors, officers, and key employees act in the corporation’s best interest.  The provision sets forth basic requirements for a conflict of interest policy, including: (1) situations that constitutes conflicts of interests, (2) the procedure for disclosure, (3) a requirement that the person with a conflict of interest not be present or participate in deliberation or vote on the matter, (4) prohibition against any attempt to improperly influence the deliberation, (5) a requirement to document the existence and resolution of the conflict in the corporation’s records, and (6) the procedure for disclosing, addressing, and documenting such actions.  A corporation that has adopted a conflict of interest policy pursuant to federal or state law that is substantially consistent with this section will be deemed in compliance.

Related Party Transactions 

The Act now prohibits corporations from entering into any “related party” transaction (not just transactions with “interested directors/officers”) unless the transaction is determined by the board to be fair, reasonable, and in the corporation’s best interest at the time of such determination.  The definition of a related party is: any director, officer or key employee of the company, relatives of such individuals, any corporation in which that person has 35% or more ownership, or any partnership or professional corporation in which that person has a 5% or greater interest. If someone is determined to be a related party, they must disclose their material interests in the transaction and cannot participate in the vote and deliberations regarding the interested transaction.

While directors and officer may be reasonably compensated for services rendered, a new provision in the Act prohibits an individual from being present at the deliberation or vote concerning that individual’s compensation.  Under the Act, an employee of the corporation is now also prohibited from serving as chair of the board or holding other title(s) with similar responsibilities.

In addition, the Act gives the Attorney General heightened enforcement powers with respect to related party transactions, including the power to void or rescind any related party transaction, seek financial relief or damages, and/or remove the board members who approved such a transaction.

Whistleblower Policy

All nonprofit corporations with twenty or more employees and annual revenues of over $1,000,000 are required to adopt a whistleblower policy.  Specific provisions required in the whistleblower policy include: procedures for reporting violations and preserving confidentiality; designation of an employee, officer, or director to administer the policy and report to the committee or board; and a requirement that a copy of the policy be distributed to all directors, officers, employees, and volunteers that provide substantial services to the corporation.

Audit

A nonprofit organization that raises more than $500,000 from the public must submit audited financial statements as part of its filing with the Attorney General. All such corporations must create an internal audit committee to oversee the corporation’s financial reporting processes, hire an independent auditor, and review the findings of the audit upon its completion. The audit committee is also responsible for implementing both the required conflict of interest and whistleblower policies described above. The full board may act as the audit committee as long as all members are independent, as defined in the Act.

Robert Smith contributed this post.  Please contact Nancy Sciocchetti with any questions about the NPRA or about not-for-profit law.