Barclay Damon
Barclay Damon

Legal Alert

New York State Not for Profit Law Reform Awaits Governor’s Signature

Prior to suspending its legislative session in June 2013, the New York State Assembly and Senate passed the “Nonprofit Revitalization Act of 2013” (the “Act”). Although the Act has not been enacted into law, we expect that it will be by (or soon after) the end of this year. This summary describes the Act’s current status and key provisions.

Current Status. The Legislature has not forwarded the Act to the Governor for approval. The legislative session was “suspended” in June, so the Assembly and Senate are technically still in session. The Legislature may forward legislation to the Governor at any time before the end of the session. According to the Legislative Research Service, the Legislature has been sending legislation to the Governor in batches. However, the Act has not been included in any batch yet to make its way to the Governor. If the Legislature sends the Act to the Governor, it will become law after 15 days unless the Governor vetoes the legislation.

If the Legislature does not forward the Act to the Governor, it will be automatically sent to the Governor when the legislative session ends. The legislative session will end on December 31 unless the Legislature votes to end the session sooner. If the Governor receives the legislation automatically at the end of the session, he will have 30 days to sign or veto the Act. If he does not sign the Act into law within 30 days after the end of the session, the Act will be vetoed (i.e. a “pocket veto”).

At this time, most observers believe that the Act will become law. If enacted, the Act will take effect on July 1, 2014.

Key Provisions. Among the Act’s key provisions are: 

  • Thresholds Raised for CPA Audits and Reviews. The Act raises the gross revenue thresholds triggering the requirement to obtain an independent CPA audit from $250,000 to $500,000, and for an independent CPA review from $100,000 to $250,000. The gross revenue threshold for an audit will increase to $750,000 on July 1, 2017 and $1 million on July 1, 2021. The Attorney General will have authority to request an independent audit from nonprofits with gross revenue over $250,000 after reviewing their annual filings.
  • The Act adds a new requirement that, in cases where nonprofits are required to obtain an independent audit, the board or an audit committee of the board perform certain oversight responsibilities with respect to the audit. These responsibilities include reviewing the scope of the audit with the auditor, discussing material risks with the auditor, resolving conflicts between the auditor and management with respect to the report, and annually assessing the auditor’s performance. 
  • New Prohibitions on Self-Dealing and New Board Oversight Obligations. The Act requires that boards, or board committees, undertake an independent review of transactions between the nonprofit and related parties, and affirmatively determine that such transactions are in the nonprofit’s best interest.

    The Act clarifies that individuals who may benefit from compensation paid by the corporation cannot participate in deliberations or voting on their own compensation.

    The Act prohibits any employee of a nonprofit corporation from also serving as the chair of its board, or any other position with responsibilities similar to chair of the board.

    The Act requires that nonprofits adopt written conflict of interest policies. The Act also requires that nonprofits with twenty or more employees and annual revenue exceeding $1 million adopt whistleblower policies. Corporations that adopt conflict of interest and whistleblower policies pursuant to any other law that are substantially similar to those required will be deemed in compliance.

    The Act adds to the list of persons that the Attorney General may take legal action against for matters such as breach of fiduciary duty or to compel an accounting to include “key employees.” For this purpose, a “key employee” means an employee who would be treated as a key employee under IRS rules imposing excise taxes on prohibited transactions.
  • Simplification of Corporate Governance. The Act authorizes facsimile and e-mail transmission of board and membership meeting notices, waivers of notice and votes requiring unanimous written consent. The Act also allows board members to participate in meetings via videoconference, Skype, and other forms of video communication.

    The Act also eliminates the distinction between standing and special committees of the board.

    The Act permits approval of non-substantial real estate transactions by majority vote of the nonprofit’s board or a committee of the board, rather than a two-thirds vote of the entire board. If a committee approves the transaction, it must promptly notify the board. The two-thirds voting requirement is retained for transactions involving real property that constitutes all or substantially all of the nonprofit’s assets.
  • Simplification of Corporate “Types”. The Act simplifies corporate “types,” by eliminating the current four types (Types A, B, C and D) and replacing them with two categories of corporations (“charitable corporations” and “non-charitable corporations”). The Act treats existing Type B and C corporations as “charitable”, and existing Type A corporations as “non-charitable.” The classification of existing Type D corporations depends on whether the corporation was formed for charitable purposes. 
  • Simplification of Incorporation and Corporate Filings. The Act clarifies current law to make clearer that nonprofits need only state their corporate purposes, and not specific activities they plan to undertake, when completing certificates of incorporation for delivery to the Department of State.

    The Act allows the Department of State to correct non-material typographical errors in certificates of incorporation and other instruments upon written authorization from the incorporator.

    The Act also clarifies that the Attorney General may accept nonprofit registrations and other filings electronically. 
  • Less Intervention by Education Department in Incorporation Process. The Act eliminates the requirement that certain types of nonprofits obtain pre-approval from the State Education Department prior to incorporation. Schools, libraries, museums and historical societies will continue to require the State Education Department’s approval, but other nonprofits may notify the State Education Department of their formation after incorporation. The Act also amends the Education Law to make clear that only schools, colleges, universities and entities providing postsecondary education must obtain the consent of the commissioner of the State Education Department in order to incorporate. 
  • Simplification of Approval Process for Mergers, Amendments and Other Major Transactions. The Act allows nonprofit corporations seeking to merge, or to sell, lease, exchange or dispose of all or substantially all of their assets to go through a one-step approval process (Attorney General approval) instead of the current two-step process (court approval upon notice to the Attorney General). Nonprofits will retain the right to seek court approval of the transaction at any time.

    The Act also grants the Attorney General authority to approve changes in a nonprofit’s corporate purpose or charitable corporation’s plan of dissolution. Charitable corporations will retain the right to appeal to the courts at any time. The Attorney General will have the option to refer petitions for dissolution to the courts if judicial review is more appropriate.

    The Act also amends the Education Law and the Religious Corporation Law to permit education corporations and religious corporations, respectively, to enter into merger transactions in addition to consolidation transactions. 
  • Application to Charitable Trusts. The Act makes the new requirements concerning audits, related party transactions, conflict of interest policies and whistleblower policies that are applied to charitable corporations applicable to charitable trusts.

Hiscock & Barclay has substantial experience advising nonprofits and their boards regarding corporate, tax, fiduciary, conflict of interest and other related issues. Should you have any questions regarding the issues raised in this Legal Alert, please contact Melissa M. Zambri, Chair of the firm’s Health Care & Human Services Practice Area at (518) 429-4229 or mzambri@hblaw.com or Raymond N. McCabe at (716) 566-1408 or rmccabe@hblaw.com or any member of our firm’s Health Care & Human Services Practice Area.