On December 18, 2013, New York Governor Andrew Cuomo signed into law the Nonprofit Revitalization Act of 2013 (the “Act”). This is the first significant reform of the New York Not-for-Profit Corporation Law in more than 40 years.

While the Act creates some new obligations for nonprofits, many of its provisions are intended to streamline board operations and reduce regulatory burdens. What follows is a summary of some of the Act’s significant changes, most of which become effective on July 1, 2014 (exceptions are noted below).

Corporate Governance and Financial Reporting

Use of Technology. The Act explicitly permits use of e-mail or fax to send board and membership meeting notices, waivers of notice, and resolutions authorizing action by unanimous written consent. Board and member meetings may be held by videoconference, Skype or other forms of video communication. The Attorney General is also authorized to accept annual financial reports and other types of filings in electronic form.

Audit Thresholds. Nonprofits that solicit and collect charitable funds in New York are required to file financial reports with the Attorney General. The type of financial report a nonprofit files depends on its annual gross revenue and support. The reporting thresholds will increase over the next several years, as follows:

TABLE HERE

For nonprofits that are required to file audited financials, the Act requires that the board or a designated audit committee of the board retain an outside auditor and review the auditor’s findings with the auditor upon completion. Only independent directors may serve on the audit committee or participate in the board discussions and vote on the audit. If an organization has annual revenues of more than $1 million, there are additional audit responsibilities for the board or audit committee.

• Addressing Conflicts of Interest. All nonprofit corporations must have a written conflict of interest policy covering directors, officers, and key employees, under which the board will actively evaluate any proposed transactions between the nonprofit and an interested insider. Interested insiders may not be present at, or participate in, the review and vote on a conflicted transaction. A conflicted transaction can only be approved upon a finding that the transaction is fair, reasonable, and in the nonprofit’s best interests. Directors must complete annual disclosure statements regarding their known conflicts of interest. Boards of charitable corporations also must consider alternative transactions prior to voting; approve the conflicted transaction by a majority vote of those present at the meeting; and document in writing their consideration of the alternatives and the basis for their approval. The Attorney General may review or enjoin improper interested party transactions and seek reimbursement from the beneficiaries of any such transaction.
• Whistleblower Policies. Nonprofit corporations with 20 or more employees and over $1 million in annual gross revenue must have a whistleblower policy to protect individuals who report wrongdoing within the organization.
• Approvals for the Sale, Purchase or Leasing or Real Estate. The Act permits a majority vote of the board or a committee of the board to approve ordinary real estate transactions, such as a commercial lease. However, the previous two-thirds approval requirement remains for transactions in which the real property constitutes all or substantially all of the nonprofit’s assets. Employee as Board Chair. While employees may be elected to a nonprofit corporation’s board of directors, no employee may serve as board chair/president. (This provision is not effective until January 1, 2015.)

Forming and Changing Nonprofits in New York

• Certificate of Incorporation Contents. Previously, many nonprofits forming in New York were required to list their planned activities as well as their purposes in their certificates of incorporation. This often necessitated multiple certificate amendments as a nonprofit’s activities changed over time. The Act makes it clear that a certificate need only state a nonprofit’s purposes, not its activities. Typographical errors in certificates also may be corrected by the Department of State with the organization’s written authorization, eliminating the need to resubmit an entire filing.
• Corporate Types. Prior law categorized all New York nonprofit corporations into one of four corporate types (A, B, C or D), with certain types required to have a voting membership. The Act eliminates the types in favor of two categories of nonprofit corporations: charitable and non-charitable. Nonprofits formed as Types A, B, C or D do not have to amend their certificates of incorporation; Type B and C corporations are automatically reclassified as charitable corporations and Type A and D corporations are automatically reclassified as either charitable or non-charitable, depending on their corporate purposes. Charitable corporations are not required to have voting members.
• Department of Education Consent. Many nonprofit corporations with educational purposes now need only notify the New York State Department of Education after filing a certificate of incorporation, amendment, merger or dissolution. Prior law and practice often required obtaining Dept. of Education consent before such filings.
• Regulatory Approvals for Significant Transactions. Under prior law, nonprofits undertaking significant transactions, such as merger, dissolution, or sale of all or substantially of all their assets, were required to obtain judicial approval with notice to the Attorney General. In practice, this created a two-step approval process. With passage of the Act, the Attorney General’s approval alone is sufficient for these significant transactions. Judicial approval can be obtained in the alternative, or if the Attorney General withholds consent. The Attorney General also can refer merger or sale petitions for judicial review.

Recommendations

Nonprofits have until July 1, 2014 to prepare for the first changes the Act will bring.

• Have your bylaws reviewed and revised by legal counsel to address the changes described above (e.g., electronic delivery of notices and consents, lesser approval thresholds for routine real estate transactions). Charitable corporations that are no longer required to have members may wish to revise their bylaws and, if necessary, their certificates of incorporation to become non-membership organizations.
• If your organization hasn’t done so already, adopt a conflict of interest policy. Existing conflict of interest policies should be reviewed for compliance with the new statutory requirements.
• If your organization has more than 20 employees and $1 million in annual revenue, it must adopt a whistleblower policy. Existing whistleblower policies should be reviewed for compliance with the new statutory requirements.