The Non-Profit Revitalization Act of 2013 (the “2013 Act”) carried out the first major overhaul of the New York Not-for-Profit Corporation Law (the "NPCL") in four decades.1 A number of changes to the 2013 Act were enacted in late 2015 to clarify and correct some of its more problematic provisions.
Effective Date Extended for Provision Prohibiting Employees from Serving as Chair
In October 2015, Governor Cuomo signed into law a bill that delayed until January 1, 2017 the effective date of the provision of the 2013 Act that prohibits an employee from serving as Chair of the Board of Directors of a not-for-profit corporation.2 This was the second time the effective date of this provision has been postponed, reflecting strong opposition from many in the non-profit community. The opposition stems in part from the popularity of the practice, especially among small organizations, of having the chief executive -- often the founder -- serve as the Chair of the Board.
Amendments to Key Definitions Strive for Clarity
In December 2015, Governor Cuomo signed into law a separate bill that amends the 2013 Act, effective upon signing, with respect to some of its key definitions, including the following:3
1. Independent Director. The definition of “independent director” generally deems a director not to be independent if the director or a relative is, or within the last three years has been, compensated by the organization (or one of the organization’s affiliates—see below) or if the director or a relative has, or within the last three years has had, an employment or other type of relationship with an entity that has made significant payments to, or received significant payments from, the organization or an affiliate. With the amendments, the definition of “independent director” now also excludes a director who is or has a relative who is a current owner, director, officer or employee of the corporation’s outside auditor or who has worked on the corporation’s audit at any time during the past three years. The amended definition also clarifies that “payments” do not include dues or fees paid to the corporation for services which the corporation performs as part of its nonprofit purposes, provided that such services are available to the public on the same terms.
The definition of independent director added by the 2013 Act already posed a challenge for many organizations, particularly in connection with finding sufficient numbers of qualified independent directors to serve on an organization’s audit committee. The further exclusions from the definition are, therefore, likely to be unwelcome. At the same time, the carve-out of dues and fees from the definition of “payments” (in addition to the original carve-out for charitable contributions) should be somewhat helpful, particularly to nonprofits that provide charitable programs or services to the public on a fee-for-service basis.
2. Related Party. Under the 2013 Act, nonprofit corporations must give additional scrutiny to transactions with “related parties,” who include directors, officers, and key employees of the nonprofit corporation and its affiliates (discussed below). Under the 2015 amendments, the definition of related parties is broadened to include “any other person who exercises the powers of directors, officers, or key employees over the affairs of the corporation or any affiliate of the corporation.” With the broader definition, nonprofit corporations will have the additional burden of determining who their additional related parties are (if any), and of ensuring that they are monitoring those additional individuals with respect to related party transactions.
3. Key Employee. The definition of “key employee” under the 2013 Act referenced the excess benefit/intermediate sanctions rules under the federal tax law. Those rules use the term “disqualified person,” which includes certain employees, such as the CEO and CFO, as well as individuals who are not employees but have substantial influence over the organization. The definition of “key employee” has now has been amended to provide that the federal tax law rules govern “to the extent such provisions are applicable.” As we wrote in our June 1, 2015 Alert, guidance issued by the New York State Attorney General (the “AG”) includes a detailed explanation of the term “key employee,” noting that the term required explanation because the 2013 Act defined it only by reference to the federal rules. This amendment to the definition does little to clear up the confusion.
4. Relative. The definition of “relative” has been expanded to include the domestic partners (as defined in Section 2994-a of the Public Health Law4) of an individual’s brothers, sisters, children, grandchildren and great-grandchildren. The definition previously included the spouse or domestic partner of an individual, but only the spouses of such individual’s family members were considered relatives.
5. Affiliate. The definition of “affiliate,” which was added by the 2013 Act in connection with the Related Party Transaction and independent director rules, now excludes entities that are under common control with the organization (i.e., entities that have a common parent). Thus, “affiliates” now include only entities controlled by, or that are in control of, the organization in question (i.e., parent or subsidiary organizations). This should be a helpful change because fewer entities will be deemed to be affiliates and, as a consequence, fewer individuals and entities will constitute related parties and fewer directors will be deemed to be non-independent directors.
6. Entire Board. The new law clarifies the definition of “entire board” to make clear that what constitutes the entire board can be established by setting a range in the by-laws and having the board set a specific number of directors within such range. If the by-laws provide for such a range and the board has not set a number within that range, then the “entire board” will consist of the number of directors within the range that were elected or appointed as of the most recently held election of directors, as well as any directors whose terms have not yet expired.5
Additional Clarifications Affect Broader Provisions
The 2015 amendments also clarify certain other of the 2013 Act’s provisions as follows:
1. Approval of Board Compensation. The 2013 Act added to the NPCL a prohibition against any member, director or officer from being present at or participating in any board or committee deliberation or vote concerning his or her compensation. Now, a new sentence has been added to NPCL §515(b) to clarify that no director will be prohibited from such participation regarding compensation for board service that is to be provided to all directors on the same or substantially similar terms. Accordingly, in situations where all board members will receive compensation for their board service, the board will no longer be required to engage in an awkward round-robin process of having individual board members leave the room consecutively in order to approve such compensation for the entire board.
2. Action by the Board. The amendments add a new sentence to NPCL §708(d) to make clear that a director who is present at a meeting but who has recused him or herself from a vote due to a conflict of interest or a related party interest will still be considered present for purposes of determining quorum.
3. Committees of the Corporation. NPCL §712(e) has been amended to make clear that non-directors may serve on committees of the corporation.
4. Participation by Interested Persons. The new law makes clear that, in the following situations, a person with an interest may present information as background or answer questions at a meeting prior to the commencement of deliberations or voting:
a. Audit Oversight. The 2013 Act added a provision on audit oversight that requires applicable corporations (those governed by the NPCL that solicit contributions in New York State and that are required to file a certified public accountant's audit report with the AG) to ensure that the audit of the corporation's financial statements, as well as the corporation's accounting and financial reporting processes, are overseen by either the independent members of the corporation's board of directors, or an audit committee comprised solely of independent directors. The amendments make clear that while only independent directors may participate in board or committee deliberation or voting relating to audit oversight, nothing shall prohibit the board or committee from requesting that a person with an interest present information as background or answer questions at a meeting prior to the commencement of such deliberations or voting.
b. Related Party Transactions. Similarly, the 2015 amendments make clear that a related party may present information as background or answer questions at a meeting prior to the commencement of deliberations or voting relating to a related party transaction.
c. Conflicts of Interest. Finally, the amendments also clarify that a person with a conflict of interest may present information as background or answer questions at a meeting prior to the commencement of deliberations or voting relating to a conflict of interest transaction.
5. Conflicts of Interest. The 2013 Act requires that conflict of interest disclosure statements be submitted to the organization’s Secretary. As we wrote in our June 2015 Alert, the AG’s guidance clarified that the disclosure statements may be submitted to the Secretary’s designee if set forth in the conflict of interest policy. The amendments codify that guidance to make clear that statements may be given to either the Secretary or a designated compliance officer.
6. Whistleblower Policy. The 2013 Act provides that organizations that are required to adopt a whistleblower policy (entities with 20 or more employees and annual revenue in excess of $1 million) must distribute a copy of the policy to all directors, officers, employees and volunteers who provide substantial services to the corporation. As we wrote in our June 2015 Alert, the AG’s guidance provides that the distribution requirement may be satisfied by posting the policy on the organization’s publicly available website. The 2015 amendments codify this guidance by providing that one of the means by which an organization may comply with the distribution requirement is by posting the policy on its website or at its offices in a conspicuous location accessible by employees and volunteers.
7. Religious Corporations and Dispositions of Real Property. The 2013 Act streamlined the approval process for major corporate actions by allowing corporations to obtain approval of such transactions solely from the AG, rather than having to obtain court approval following AG review and consent. However, the 2013 Act did not make a corresponding change to Section 12 of the Religious Corporations Law to allow a religious corporation similarly to seek approval solely from the AG to sell, mortgage or lease its real property for a term exceeding five years. The 2015 amendments correct this oversight.
Because the 2015 amendments, for the most part, clarify provisions of the 2013 Act, they will not necessarily require New York not-for-profit corporations to make further amendments to their documents and policies that already were updated to reflect the 2013 Act. Organizations should, however, review the use of the defined terms “independent director,” “related party” and “affiliate” in their policies to ensure that they reflect the updated 2015 definitions.
FOOTNOTES1 For a comprehensive discussion of the Non-Profit Revitalization Act, please see our Client Alert of December 16, 2013, available at https://www.dwt.com/Exempt-and-Nonprofit-Organizations-Alert-New-York-Non-Profit-Revitalization-Act-12-16-2013/.
2 L. 2015, ch. 388 (October 26, 2015).
3 L. 2015, ch. 555 (December 11, 2015). The new law also makes changes to the Estates, Powers and Trusts Law that correspond to the changes to the NPCL described herein. A third bill, S5870, making technical corrections to the 2013 Act, was enacted on September 25, 2015 (L. 2015, ch. 358).
4 Under this section, "Domestic partner" means a person who, with respect to another person: (a) is formally a party in a domestic partnership or similar relationship with the other person, entered into pursuant to the laws of the United States or of any state, local or foreign jurisdiction, or registered as the domestic partner of the other person with any registry maintained by the employer of either party or any state, municipality, or foreign jurisdiction; or (b) is formally recognized as a beneficiary or covered person under the other person's employment benefits or health insurance; or (c) is dependent or mutually interdependent on the other person for support, as evidenced by the totality of the circumstances indicating a mutual intent to be domestic partners including but not limited to: common ownership or joint leasing of real or personal property; common householding, shared income or shared expenses; children in common; signs of intent to marry or become domestic partners under paragraph (a) or (b) of this subdivision; or the length of the personal relationship of the persons.
5 The new law also makes clarifying changes to NPCL §702(b) (regarding number of directors), eliminating wording that appeared to limit the means by which a self-perpetuating board could increase or decrease the number of directors comprising the entire board.