Barclay Damon
Barclay Damon

Legal Alert

New York State Enacts Sweeping Not-for-Profit Corporation Law Reform

New York State Governor Andrew Cuomo has signed into law the most sweeping reform of the State’s Not-for-Profit Corporation Law in decades. The “Nonprofit Revitalization Act of 2013” generally takes effect on July 1, 2013. Among its 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 $100,0to $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, boards or board committees perform certain oversight responsibilities. State and local authorities, which are required by the Public Authorities Law to perform substantially similar audit oversight, will be deemed to be in compliance with this section.

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 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 non-profits 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.

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 video conference, 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 property that constitutes all or substantially all of the nonprofit’s assets.

Simplification of Approval Process for Mergers 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.

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 also clarifies that individuals who may benefit from compensation paid by the corporation cannot participate in deliberations or voting on their own compensation, and prohibits any employee of a nonprofit corporation from also serving as chair of its 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 with these new sections.

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 in these areas, representing numerous not-for-profits in corporate, tax and governance issues. Should you have questions regarding any of these matters, please contact Raymond N. McCabe at (716) 566-1408 or rmccabe@hblaw.com, Melissa M. Zambri, Chair of the firm’s Health Care & Human Services Practice Area at (518) 429-4229 or mzambri@hblaw.com or Richard J. Day, Co-Chair of the firm’s Corporate Practice Area at (716) 566-1422 or rday@hblaw.com.