Barclay Damon
Barclay Damon

Legal Alert

More Changes Coming for New York Not-for-Profits

More changes are coming for New York State Not-for-Profit corporations. In 2013, the Non-Profit Revitalization Act (the “Act”) introduced new, complex rules governing conflicts of interests, related party transactions and duties reserved to “independent” directors. New York Not-for-Profit corporations were required to update their corporate by-laws and adopt new conflict of interest policies to comply with the Act. New York enacted amendments to the Act in December 2015, and most recently in November 2016. The most recent amendments to the Act (the “Amendments”) generally take effect on May 27, 2017.

The Amendments are intended to provide corporations relief from some of the more onerous provisions of the Act. They do so largely by changing the definitions that underlie the Act. These changes will require corporations to review and possibly update their By-Laws. Corporations will almost certainly have to update their conflict of interest policies and whistleblower policies to incorporate the new definitions.

New Terminology For Related Party Transactions And Director Independence. The Act prohibits not-for-profit corporations from entering into a “related party transaction” unless the board makes an affirmative finding that the transaction is “fair, reasonable and in the best interests” of the corporation. For transactions in which the related party’s interest is “substantial” (a term not defined by the Act or the Amendments), the board must consider alternatives to the related party transaction.

Whether a proposed transaction involves a “related party” depends upon the relationship between the other party to the transaction and certain individuals in a position to influence the affairs of the not-for-profit corporation. Under the Act, such individuals included “key employees.” This term was criticized by many, in part because it singled out employees of the not-for-profit corporation while ignoring other influence makers who are not employees (such as substantial donors and other stakeholders). The Amendments address this criticism by replacing the term “key employee” with “key person.”

A “key person” is any person other than an officer or director, who: (i) has responsibilities or powers similar to an officer or director, (ii) manages the corporation or a segment of the corporation, or (iii) determines (alone or with others) the corporation’s capital or operating budget. The provision of the Act naming officers and directors as potential related parties remains unchanged.

The Amendments also replace the term “key employee” with “key person” for purposes of determining whether a director is independent.

Post-Transaction Ratification of Related Party Transactions. The Attorney General may sue a not-for-profit corporation and its directors and officers to enjoin or set aside any unlawful conveyance or transfer of corporate assets if the transferee knew that the conveyance or transfer was unlawful. If such a transfer is unlawful because it was a related party transaction that was not approved by the Board under the related party transaction rules, the Amendments allow the board to ratify the transaction after the fact. The corporation may use such post-transaction ratification as a defense to an action by the Attorney General to set aside the transfer. To avail itself of this defense, the Board (i) must identify offending transaction before receiving an inquiry from the Attorney General, (ii) must determine that the transaction was fair, reasonable and in the best interest of the corporation, (iii) in connection with the foregoing, must apply the enhanced standard to approve the transaction (requiring the board to have considered alternatives to the related party transaction), (iv) must document the nature of the violation resulting in the related party transaction; and (v) must put in place procedures to ensure that similar violations do not occur in the future. These requirements create a narrow exception from the Act’s pre-transaction approval requirement.

New Exceptions of Related Party Transactions. The Amendments add a number of exceptions to the related party transaction rules. The Amendments clarify that the following are not related party transactions: (i) de minimis transactions, (ii)transactions not customarily reviewed by the board (or boards of similar organizations) and offered on terms available to the general public, (iii) benefits offered to individuals as members of a charitable class served by the corporation.

Changes to the Definition of “Independent Director.” The Act allocates certain board duties to independent directors. These duties include the selection and monitoring of the corporation’s independent auditors, review of the corporation’s annual audited (or reviewed) financial statement, and maintaining the corporation’s conflict of interest policy. Under the Act, a director is not independent if he or she has a substantial business interest in any entity that, currently or in the previous three years, provided or received payments, property or services to or from the corporation in excess of the lesser of $25,000 or 2% of such entity’s consolidated gross revenue.

The Amendments replace the “lesser of $25,000 or 2%” standard with the following sliding scale based on gross revenues of the other entity:

 

Changes to Board Committees. The Amendments increase the threshold to elect an executive committee. If the board has fewer than 30 members, the election must be by a majority of the entire board. If the board has 30 or more members, the election must be by ¾ vote of directors present at a meeting at which a quorum is present.

The Amendments also add the following to the list of actions board committees are not authorized to take to include (i) election or removal of directors, (ii) approval of a merger or plan of dissolution, (iii) recommending to the membership the approval of the disposition of substantially all of the assets of the corporation, and (iv) approving amendments to the corporation’s certificate of incorporation.

Loosening of Prohibition of Employee Serving As Board Chair. The Act added a prohibition against an employee serving as the chairperson of the board. The Amendments allow an employee to serve as the board chair if approved by a 2/3 vote of the entire board, provided that the basis for the election is contemporaneously documented by the board. In no event may an employee/chairperson be treated as an “independent” director. This provision took effect on January 1, 2017.

Required Change to Whistleblower Policy. The Act requires all not-for-profit corporations with 20 or more employees or annual revenue in excess of $1 million to adopt a whistleblower policy. The Amendments provide that the whistleblower policy must include a provision prohibiting the person who is subject to a whistleblower complaint from being present at or participating in board or committee deliberations relating to that complaint.


If you have questions or require further assistance regarding the information contained in this Legal Alert and the impact on your organization, please contact Susan A. Benz, Co-Chair of the Barclay Damon Health Care & Human Services Practice Area at sbenz@barclaydamon.com or Melissa M. Zambri, Co-Chair of the Barclay Damon Health Care and Human Services Practice Area at mzambri@barclaydamon.com.