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Corporate Alert >> Governor Signs Nonprofit Revitalization Act of 2013 Into Law

February 26, 2014

Background
In December 2013, New York Governor Andrew M. Cuomo signed The Nonprofit Revitalization Act of 2013 into law. The Act passed overwhelmingly through both houses of the New York State Legislature this past summer, and constitutes the first major revision to New York nonprofit law in more than 40 years. The Act significantly revises the New York Not-for-Profit Corporation law, as well as other New York State statutes related to nonprofits. Most provisions of the Act will become effective July 1, 2014.

The Act provides more streamlined procedures and eliminates unnecessary burdens with respect to incorporation, certain corporate governance issues, dissolution, and merger. At the same time, the Act mandates the adoption of conflict of interest and whistleblower policies for certain organizations, imposes enhanced audit procedures and requires oversight measures for related party transactions.

Key Provisions
The following provisions of the Act ease administrative burdens:

Consolidation of certain corporate “types”
Instead of classifying organizations as Type A, B, C and D, organizations will be characterized as “charitable” or “non-charitable.” Current Type B and C entities and Type D entities formed for a charitable purpose will become “Charitable” organizations. Current Type A and all other Type D entities will become “Non-Charitable” organizations. “Charitable purposes” of a corporation means purposes contained in the certificate of incorporation that are “charitable, educational, religious, scientific, literary, cultural or for the prevention of cruelty to children or animals.”

Elimination of pre-incorporation approvals
An organization with an educational purpose that does not include the operation of a school, university, library, museum or historical society will no longer need prior approval from the New York State Education Department before incorporating. Instead, these organizations only need to provide notice to the Education Department after the certificate of incorporation has been filed.

Modernization of communication
Notice of member meetings may be sent by email and fax (notice was formerly required by mail or in person). Members and directors may also sign unanimous written consents via email. Board and committee meetings may be held via video conferencing, such as Skype.

Streamlined procedures for certain real estate transactions
For transactions involving the purchase, sale, mortgage, lease or disposition of real property by organizations with fewer than 21 directors, which do not constitute all or substantially all of the corporation’s assets, authorization is only required by a simple majority of the board or committee, rather than by two-thirds vote of the board only. Where the transaction involves all or substantially all of the corporation’s assets, board approval by two-thirds vote is required.

Streamlined procedures for change of purposes, assets sales, mergers and consolidations and dissolutions
For transactions involving a change in the purposes clause of an organization’s certificate of incorporation, a sale of all or substantially all of an organization’s assets, mergers and consolidations and dissolutions, an organization can now seek the approval of the Attorney General. Court approval on notice to the Attorney General was previously required. The organization would still have the option of seeking court approval, either in lieu of seeking approval from the Attorney General or if the Attorney General does not approve the transaction. 

The Act also imposes the following governance and oversight provisions: 

Conflict of Interest Policy required
All nonprofits, whether charitable or not, must adopt a conflict of interest policy that covers directors, officers, and key employees. Director certifications regarding the policy are required to be provided by directors before being elected, and on an annual basis. Some additional required provisions of the policy include: a definition of conflict of interest, procedures for disclosing a conflict, a requirement that a person with a conflict not be present or participate in deliberations regarding the conflict, and documentation procedures for detailing the existence and resolution of the conflict. The board, or a designated audit committee of the board, is required to oversee the adoption, implementation and compliance with any conflicts policy (unless performed by another committee comprised of independent directors).

Whistleblower Policy required
A whistleblower protection policy is now required for corporations that have 20 or more employees and, in the prior fiscal year, revenue in excess of $1,000,000. The policy must include procedures for reporting violations of the policy, a requirement that an employee, officer or director be designated to administer the policy, and a requirement that a copy of the policy be distributed to all directors, officers, employees, and volunteers who provide substantial services to the corporation. The board, or a designated audit committee of the board, is required to oversee the adoption, implementation and compliance with any whistleblower policy (unless performed by another committee comprised of independent directors).

Policies and procedures for related party transactions
A “related party transaction” is a transaction in which a “related party” (director, officer or key employee of the corporation or any affiliate of the corporation) has a financial interest and in which the corporation or its affiliate is a participant. Corporations are prohibited from entering into a related party transaction unless it is fair, reasonable and in the corporation’s best interest. A related party who has an interest in a related party transaction must disclose the material facts of such interest to the board or authorized board committee. 

Additional requirements for a related party transaction in which a related party has a substantial financial interest are: 

  1. alternative transactions must be considered before entering into the transaction; 
  2. the transaction must be approved by majority vote of directors or committee members present at meeting; and 
  3. contemporaneous written documentation is required, which provides the basis for approval. 

A related party is furthermore prohibited from participating in such deliberations or voting.

Board independence
There is an express prohibition against an employee serving as chair of the board (not effective until January 1, 2015).

New higher thresholds for annual financial reporting with the Attorney General
Pursuant to revisions to the Executive Law, gross revenue thresholds for requiring audited financial statements of corporations registered with the Attorney General are raised from $250,000 to $500,000, with subsequent increases to $750,000 (effective in 2017) and $1,000,000 (effective in 2021). 

The new financial reporting provisions provide that: 

  1. for corporations with gross revenue under $250,000, unaudited financial reports are required; 
  2. for corporations with gross revenue between $250,000 and $500,000 (or $750,000 in 2017 and $1,000,000 in 2021), an accountant’s review report is required (not an audit report); and 
  3. for corporations with gross revenue greater than $500,000 (or $750,000 in 2017 and $1,000,000 in 2021) audited financial statements are required.

Enhanced audit procedures
Corporations required under the Executive Law to file audited financial statements with the Attorney General (as referenced above) are now subject to new audit procedures. The board, or an audit committee comprised of independent directors, is responsible for overseeing the accounting and financial reporting processes of the organization and the audit of its financial statements, and annually retaining an independent auditor and reviewing the audit results. 

In addition, corporations with annual revenues in excess of $1,000,000 are subject to more extensive audit duties (in addition to the basic duties described above), which include: 

  1. reviewing the scope and planning of the audit with the auditor prior to commencement of the audit; 
  2. discussing with the independent auditor upon completion of the audit: (a) any material risks and weaknesses in internal controls the auditor identifies, (b) any restrictions on the scope of the auditor’s activities or access to requested information, (c) any significant disagreements between the auditor and management, and (d) the adequacy of the corporation’s accounting and financial reporting processes; 
  3. annually considering the performance and independence of the independent auditor; and 
  4. if these duties are performed by an audit committee, reporting activities of the committee to the board.
 

Bottom Line

The New York Nonprofit Revitalization Act simultaneously eliminates certain obstacles to the formation and governance of nonprofits, while also instituting stricter oversight procedures. In light of these changes, each New York nonprofit will now generally need to examine whether to: (1) adopt a conflict of interest policy or revise its existing policy, (2) adopt a whistleblower policy, (3) form an audit committee, (4) ask an employee who is acting as chair of the board to resign, and (5) revise certain provisions of its by-laws.

Author(s)

BRIAN GALLAGHER
Partner
212.468.4816
bgallagher@dglaw.com
Taxation