Clarifying Amendments to the Nonprofit Revitalization Act Signed Into LawDec 21, 2015
On December 11, 2015, Governor Cuomo signed into law Chapter 555 of the Laws of New York of 2015 (Assemb. Bill 8118-B/Sen. Bill 5868-A) making certain “clarifying amendments,”1 effective immediately,2 to provisions of the New York Not-for-Profit Corporation Law (“NPCL”), Estates, Powers and Trusts Law (“EPTL”) and Religious Corporations Law (“RCL”) that were added or amended by the Nonprofit Revitalization Act of 2013.3
The necessity of amendments to the Nonprofit Revitalization Act was contemplated with its passage in 2013.4 According to Governor Cuomo’s 2013 approval memorandum, the Legislature had “agreed to remedy” “certain technical defects and barriers to implementation” contained in the law.5 The latest amendment adopts certain of the recommendations made by the New York State Law Revision Commission, a statutorily-created State agency whose purposes include examining State laws “for the purpose of discovering defects and anachronisms . . . and recommending needed reforms,”6 and Lawyers Alliance for New York,7 a provider of business and transactional legal services for not-for-profit organizations,8 to remedy “ambiguities that complicate compliance and enforcement.”9 The law also codifies certain aspects of guidance issued by the Charities Bureau of the New York State Attorney General’s Office to assist not-for-profit corporations in their implementation of the Nonprofit Revitalization Act.10
Set forth below is a summary of certain of the most substantive provisions of the law.
The law modifies the definition of “independent directors,” who are charged with overseeing a corporation’s audit function and conflict of interest and whistleblower policies, by clarifying that payments made to the corporation by a director’s employer or other entity in which the director or director’s relative has a substantial financial interest for dues or fees for services which the corporation performs as part of its nonprofit purposes that are provided to individual members of the public on the same terms do not affect a director’s independence. NPCL § 102(a)(21). This change allows a director to be considered independent if he or she works for a company that purchases routine services from, or pays dues to, the not-for-profit.11 At the same time, the law narrows the scope of the definition of “independent director” to exclude a person who is, or whose relative is, a current owner, director, officer or employee of the corporation’s outside auditor or who has worked on the corporation’s audit in the past three years, in line with the definition of “independent director” used by the New York Stock Exchange.12
The law also amends the definition of “affiliate” of a corporation, used in the definition of “independent director” and “related party transaction,” to mean any entity controlled by or under control of the corporation. NPCL § 102(a)(19). This change limits coverage of affiliates to exclude entities under common control, as the corporation’s relationship with such entities may be attenuated and difficult to ascertain.13 Excluding organizations under “common control” should facilitate compliance by complex not-for-profit organizations by reducing the number of “related party transactions” that require special approval.
In a similar vein, revisions to NPCL §§ 712‑a(e) and 715‑a(b)(3) clarify that a director or person with a conflict of interest may attend board or committee meetings for the purpose of presenting information or answering questions prior to the commencement of deliberations or voting on the matter in which the person has an interest. Commentators argued that allowing the board or committee to request and obtain information from a person with a conflict of interest is essential during the review of the conflict, because oftentimes the pertinent information will be in the possession of that individual.14
Revised NPCL § 708(d) addresses the problem of maintaining a quorum when interested directors must recuse themselves from participating in discussions and voting on related party transactions.15 The amendment clarifies that a director present at a meeting, but not present at the time of a vote due to a conflict of interest, will be considered present for purposes of establishing a quorum for the board.
Facilitating Whistleblower/Conflict of Interest Compliance
The law also amends two provisions of the NPCL relating to the administration by not‑for‑profit organizations of whistleblower policies and conflict of interest requirements. NPCL § 715‑b(b)(3), as amended, now expressly permits a corporation to fulfill the statutory requirement to distribute its whistleblower policy to all directors, officers, employees and volunteers who provide substantial services by posting the policy on the corporation’s website or at the corporation’s offices in a conspicuous location accessible to employees and volunteers, consistent with guidance previously issued by the Attorney General.16 In addition, NPCL § 715‑a(c), as amended, now expressly permits directors to submit conflict of interest disclosure statements required by the Nonprofit Revitalization Act to a designated compliance officer, in addition to the corporate secretary.17
Remedying Inconsistencies with Federal Tax Law
The law amends NPCL § 515(b) to clarify that a director is not prohibited from voting on compensation for board service that is made available to all directors on the same or substantially similar terms. The prior version of the law prohibited a compensated director from voting on his or her compensation, in effect requiring some directors to approve compensation for other directors and then those directors to approve compensation for the first group of directors. Internal Revenue Service regulations prohibit directors from approving each other’s compensation in this manner in the context of the excess benefit safe harbor rules.18
The law also clarifies the definition of “relative” for the purpose of the conflict of interest prohibition by including “domestic partner[s]” of brothers, sisters, children, grandchildren, and great-grandchildren. NPCL § 102(a)(22).
Conforming EPTL and NPCL Governance Requirements
The law makes the changes described above applicable to charitable trusts governed by EPTL § 8‑1.9.
Reducing Burdens on Religious Corporations
The law amends RCL § 12(1) to enable religious corporations to apply to the Attorney General, as an alternative to the Supreme Court, for permission to sell, mortgage or lease real property for a term exceeding five years. This amendment extends some of the procedural flexibility afforded to charitable organizations governed by the NPCL to religious corporations, which prior to the amendment were required to obtain court approval for all real estate transactions. However, the Attorney General has not provided guidance on how it will apply this provision in practice. In particular, it remains unclear whether the Attorney General will continue to require religious corporations to seek Supreme Court approval of real estate transactions, even though the Attorney General now has authority to do so. It should be noted in this connection that the Attorney General has continued to require not-for-profit health care entities to obtain Court approval of the sale of all or substantially all of their assets even though the Attorney General now has the authority to approve such transactions pursuant to NPCL § 511‑a.
Recommendations Not Included in the Amendment
Several of the recommendations made by the New York State Law Revision Commission and Lawyers Alliance for New York to align the Nonprofit Revitalization Act with Federal tax law were not adopted. These include adopting the Internal Revenue Code’s safe harbor for related party transactions that are fair, reasonable and in the corporation’s interest at the time entered into,19 limiting the definition of key employee to employees who would be considered “disqualified persons” with “substantial influence” over the affairs of the corporation consistent with the Internal Revenue Code and Treasury regulations,20 permitting reasonable compensation to private foundation managers consistent with the Internal Revenue Code,21 and limiting the application of the conflict of interest policy requirement to not-for-profit corporations that must file a Form 990 or 990 PF with the Internal Revenue Service. Certain other recommendations were also not adopted, including allowing directors to submit initial conflict of interest disclosure statements promptly after their election, rather than before,22 eliminating the requirement of special board approval for certain real property transactions involving less than all or substantially all assets,23 providing a procedure for a Type B or C corporation formed prior to July 1, 2014 to be classified as a non-charitable corporation,24 repealing the requirement that the board or designated audit committee oversee the corporation’s conflict of interest and whistleblower policies,25 limiting positions that the board chair may share to include president, secretary and treasurer and limiting the president from also serving as treasurer,26 consolidating the NPCL’s numerous indemnification provisions,27 and repealing EPTL § 8.1‑9, which makes the governance provisions implemented by the Nonprofit Revitalization Act applicable to charitable trusts.
3 2013 N.Y. Laws ch. 549. The Nonprofit Revitalization Act was the subject of our previous Clients and Friends Memoranda published on October 29, 2015 and January 10, 2014. See Nonprofit Revitalization Act Employed Board Chair Prohibition Delayed to 2017 (Oct. 29, 2015), http://www.cadwalader.com/resources/clients-friends-memos/nonprofit-revitalization-act-employed-board-chair-prohibition-delayed-to-2017; Nonprofit Revitalization Act of 2013 – Best Governance Practices Made Mandatory (Jan. 10, 2014), http://www.cadwalader.com/resources/clients-friends-memos/nonprofit-revitalization-act-of-2013-best-governance-practices-made-mandatory.
6 N.Y. St. Law Revision Comm’n website, http://lawrevision.state.ny.us.
7 Lawyers Alliance for N.Y. website, http://www.lany.org.
8 Recommendations were proposed by the Lawyers Alliance for New York on behalf of the New York State Law Revision Commission, New York City Bar Association, New York State Bar Association, and Nonprofit Coordinating Committee of New York. See Lawyers Alliance For N.Y., Memorandum to Sen. Ranzenhofer & Assemblymember Brennan – Proposed Nonprofit Revitalization Act Amendments (Apr. 28, 2015) (“Apr. 2015 Memo.”); Lawyers Alliance For N.Y., 2015 Legislative Memorandum in Support of Assemb. Bill 8118‑B/Sen. Bill 5868‑A (June 19, 2015) (“June 2015 Legis. Memo.”).
10 See N.Y. St. Att’y Gen. Charities Bur., Whistleblower Policies Under the Nonprofit Revitalization Act of 2013 (Apr. 13, 2015), http://www.charitiesnys.com/pdfs/Charities_Whistleblower_Guidance.pdf.; N.Y. St. Att’y Gen. Charities Bur., Conflicts of Interest Policies Under the Nonprofit Revitalization Act of 2013 (Apr. 13, 2015), http://www.charitiesnys.com/pdfs/Charities_Conflict_of_Interest.pdf.
16 See N.Y. St. Att’y Gen. Charities Bur., Whistleblower Policies Under the Nonprofit Revitalization Act of 2013 at 4‑5 (Apr. 13, 2015), http://www.charitiesnys.com/pdfs/Charities_Whistleblower_Guidance.pdf.
17 Guidance previously issued by the Attorney General provided that the requirement of disclosure to the secretary could be satisfied by disclosure to the secretary’s designee, including the compliance officer, if permitted by the corporation’s conflict of interest policy. See N.Y. St. Att’y Gen. Charities Bur., Conflicts of Interest Policies Under the Nonprofit Revitalization Act of 2013 at 8 (Apr. 13, 2015), http://www.charitiesnys.com/pdfs/Charities_Conflict_of_Interest.pdf.
26 Id. Our 2015 Clients and Friends Memorandum discussed the delay from January 1, 2016 to January 1, 2017 of the effective date of the provision of the NPCL prohibiting an employee of a corporation organized under the NPCL from serving as the chair of the board of the corporation or holding any other title with similar responsibilities. See http://www.cadwalader.com/resources/clients-friends-memos/nonprofit-revitalization-act-employed-board-chair-prohibition-delayed-to-2017.