Deadline Approaching for Not-For-Profit Corporations to Update By-Laws, Policies and Governance Procedures

Not-for-profit organizations have until July 1, 2014 to comply with many of the provisions of the New York Non-Profit Revitalization Act of 2013 (the "Act"). The Act affects all not-for-profit organizations incorporated in or doing business in New York State. The Act requires the revision of corporate by-laws, and the adoption or revision of policies relating to conflicts of interests and retaliation against whistleblowers. This Alert provides an overview of the new requirements. Unless otherwise noted, these requirements take effect on July 1, 2014.

1. Rules Relating to Compensation: The organization should amend its by-laws to prohibit any person who could benefit from a compensation arrangement from being present at or otherwise participating in any Board or committee deliberations concerning that arrangement. Also, effective July 1, 2015, no employee of the organization may serve as chairman of the board or a similar position.
2. Mandatory Conflict of Interest Policy: All not-for-profit corporations must adopt a conflict of interest policy that includes:
   1. a definition of what constitutes a conflict of interest;
   2. procedures for disclosing conflicts of interest to the Board's Audit Committee (or the full Board if there is no Audit Committee);
   3. a requirement that the person with the conflict not be present or otherwise participate in any Board or committee deliberations concerning the transaction involving the conflict;
   4. a prohibition against any attempt by the person with the conflict of interest to improperly influence the deliberations or voting on the matter;
   5. a requirement that the existence and resolution of the conflict be documented in the organization's records, including minutes of any meeting in which the conflict is discussed or acted on; and
   6. procedures for disclosing, addressing and documenting related party transactions.
3. Basic Related Party Transaction Rules: The organization's conflict of interest policy (or alternatively, its by-laws) must include the following basic related party transaction rules. If the organization is "charitable" (discussed below), the conflict of interest policy (or by-laws) should also include the enhanced related party transaction rules described in paragraph 4 below.
   
   Under the basic related party transaction rules, the organization may not enter into a "related party transaction" unless the Board affirmatively determines that the transaction is fair, reasonable and in the organization's best interest. For this purpose, a "related party transaction" means any transaction, agreement or arrangement to which the organization is a party in which a related party to the organization (such as a director, officer or key employee) has a financial interest.
   
   A director, officer or key employee who has an interest in a related party transaction must disclose to the Board or committee considering the transaction the material facts concerning such interest. No person with an interest in a related party transaction may be present or otherwise participate in any Board or committee deliberations concerning the transaction.
4. Enhanced Related Party Requirements: The conflict of interest policy (or by-laws) of a "charitable organization" should also include the following enhanced related party rules:
   1. prior to entering into a related party transaction, the Board or committee must consider alternatives that would not be a related party transaction;
   2. the Board or committee must approve the transaction by not less than a majority vote of those present at the meeting; and
   3. the Board or committee must contemporaneously document the basis for its approval of the transaction, including its consideration of alternatives to the related party transaction.
      
      Note: The Revitalization Act replaces "Type A, B, C and D" corporations with two classes of corporation – "charitable" and "non-charitable". Organizations previously classified as Type B or C are "charitable" corporations. Organizations previously classified as Type A are "non-charitable", and organizations previously classified as Type D may be either charitable or non-charitable, depending on the organization's stated purpose.
5. Basic Audit Committee Responsibilities: Any corporation that is required to register with the Charities Bureau of the New York Department of Law, and has annual revenues in excess of $500,000, should amend its by-laws to charge its "Audit Committee" with certain duties under the Act. The Audit Committee of the Board must consist solely of independent directors of the Board. If the organization does not have an "Audit Committee", the organization should amend its by-laws to assign these duties to the entire board.
   
   Organizations that reasonably expect to have annual gross revenues in excess of $1 million, should also incorporate into its by-laws the "enhanced" Audit Committee responsibilities described in paragraph 6 below. Organizations with annual revenues of less than $10 million in the last fiscal year ending prior to January 1, 2014 need not comply with the basic or enhanced Audit Committee requirements until January 1, 2015.
   
   The basic duties of the Audit Committee consist of:
   1. overseeing the annual audit process;
   2. annually retaining or renewing the retention of the corporation's independent auditor;
   3. reviewing with the independent auditor the results of the audit, including the management letter; and
   4. overseeing the adoption and implementation of the corporation's conflict of interest policy.
6. Enhanced Audit Committee Responsibilities: If the corporation is required to register with the Charities Bureau and has annual revenues in excess of $1 million, it should amend its by-laws to include the following enhanced Audit Committee responsibilities:
   1. review with the independent auditor the scope and planning of the audit prior to its commencement;
   2. review and discuss with the independent auditor any material risks and weaknesses in internal controls identified by the auditor, any restrictions on the scope of the auditors' activities or access to requested information, any significant disagreements between the auditor and management and the adequacy of the organization's accounting and financial reporting practices;
   3. annually consider the performance and independence of the auditor; and
   4. if the duties are performed by the Audit Committee (and not by the Board), report its activities to the Board.
7. Whistleblower Policy: If the organization has 20 or more employees and annual revenue in excess of $1 million, the organization must have a whistleblower policy that provides that no director, officer, employee, or volunteer who reports in good faith any action or suspected action taken by the organization or within the organization that is illegal, fraudulent, or in violation of any policy of the organization shall suffer intimidation, harassment, discrimination or retaliation or, in the case of employees, adverse employment consequences. The policy must include:
   1. procedures (including confidentiality provisions) for reporting violations or suspected violations of laws or organization policies;
   2. a requirement that an employee, officer or director be designated to administer the policy; and
   3. a requirement that a copy of the policy be distributed to all directors, officers, employees and volunteers that provide substantial services to the organization.
8. Modernizing Corporate Governance: The Act includes provisions modernizing certain aspects of corporate governance. Organizations that wish to take advantage of these provisions should amend their by-laws to provide for them. These modernization provisions include: permitting directors to participate in board meetings by video conference; permitting email and fax notices and waivers of member meetings; permitting email waivers of board meetings; permitting email proxies and unanimous written consents for board, member and committee actions; and permitting notice of member meetings of large organizations (those with more than 500 members) by posting on the organization's website.

If you require further information or assistance regarding the information presented in this Legal Alert and its impact on your organization, please contact Raymond N. McCabe at (716) 566-1408 or rmccabe@hblaw.com.