Non Profit Report - August 2013
Legal Update and Summary of the New York Nonprofit Revitalization Act of 2013
By: Jefferson C. Glassie, Esq. & Dorothy Deng, Esq.
The New York State Legislature recently passed the Nonprofit Revitalization Act of 2013 (the “New Act”), which contains several amendments to the New York Not-For-Profit Corporation Law. If signed by Governor Cuomo, provisions of the New Act will become effective July 1, 2014 and will apply to nonprofit corporations that are incorporated in New York.1 Below is a summary of some of the key provisions in the New Act:
Re-Categorization of Types of Corporations
The New Act eliminates the old New York categorizations of Type A, B, C, and D corporations, which was fairly unique for state nonprofit corporate laws. For nonprofit corporations formed on or after July 1, 2014, the revised § 201 defines them as either a “Charitable” or a “Non-Charitable” corporation. The statutory definitions of “Charitable Corporation” and “Non-Charitable Corporation” are included in subparagraphs 3-A and 9-A of § 102 of the New Act as codified. For existing corporations, those formerly classified as Type A will be recognized as “Non-Charitable” corporations and corporations formerly classified as Type B or C will be classified as “Charitable” corporations. As to former Type D corporations, those formed for charitable purposes will be deemed “Charitable” and other Type D corporations will be deemed “Non-Charitable.” Corporations bearing the old A through D designations will be “grandfathered” in the respect that additional filings to correct the applicable status will not be required.
Electronic Actions and Communications
Nonprofit corporations have recently been conducting more corporate business electronically. However, state corporate laws, including New York’s, impose limitations on the extent to which notice and voting may be accomplished electronically, particularly for boards of directors. The New Act attempts to remedy this in certain areas and contains several provisions that explicitly establish rules for electronic communication and for conducting certain corporate activities electronically. Nonetheless, member and Board voting electronically by email or fax transmission is still prohibited, except for unanimous written consent or through the use of proxies by members (not by directors) at a meeting, as explained below.
§ 605. Notice of meeting of members: The New Act clearly allows notice of member meetings to be given by "facsimile telecommunication" (i.e., faxes) or email. Such notices are deemed to be given when directed to the member’s fax number or email as it appears on the membership record or to a fax number or other email address that has been filed with the secretary of the corporation. Although a verified electronic delivery confirmation is not required, notice is considered insufficient if the corporation is unable to deliver two consecutive notices, or if the corporation otherwise becomes aware that electronic notice cannot be delivered to the member.
For corporations with more than five hundred members, notice of a member meeting is sufficient by publication in a newspaper, provided that the corporation also posts notice of such meeting on its website continuously from the date of publication through the date of the meeting.
§ 609. Proxies: The New Act explicitly permits members to submit proxies by email, thereby authorizing another person to act for him/her. However, prior law in less direct wording also permitted transmission of proxies electronically, so this is more of a clarification as to email rather than a substantive change. Further, it should be noted that the New Act does not permit member voting directly by electronic ballot and no change was made in this respect, so votes by members are still required to be cast at a meeting of members. However, many corporations currently use electronic proxy ballots to effectively permit e-voting by members on the election of officers and directors, or other actions such as bylaw amendments. As long as a quorum of members submits electronic proxies that are cast at a meeting, voting by members can essentially be conducted electronically.
§ 614. Action by members without a meeting: The New Act explicitly permits member actions without a meeting by unanimous written consent transmitted electronically. Similarly, under new § 708, a board of directors or committee also may take action without a meeting upon unanimous written consent transmitted electronically. This is essentially not a change from reasonable interpretations of current law. Note that the requirement for unanimous written consent for a member vote in most cases will effectively mean that such electronic action without a meeting will not be available.
Conflict of Interest
The New Act contains provisions relating to the handling of conflicts of interest. The key provision is the new § 715-A, which requires every New York incorporated nonprofit corporation to adopt a conflict of interest policy to ensure that its directors, officers, and key employees act in the corporation’s best interest. The provision further sets forth the basic requirements for such a conflict of interest policy, including: (1) a definition of situations that constitutes conflicts of interests, (2) the procedure for disclosure to the Board or audit committee, (3) a requirement that the person with a conflict of interest not be present or participate in deliberation or vote on the matter, (4) prohibition against any attempt by the person with the conflict of interest to improperly influence the deliberation, (5) a requirement to document the existence and resolution of the conflict in the corporation’s records, and (6) the procedure for disclosing, addressing, and documenting such actions. A corporation that has adopted a conflict of interest policy pursuant to federal or state law that is substantially consistent with this section will be deemed in compliance.
In addition, the New Act enhances other provisions that relate to the handling of conflicts of interest. For example, the revised § 715 now prohibits corporations from entering into any “related party” transaction (not just transactions with “interested directors/officers”) unless the transaction is determined by the board to be fair, reasonable, and in the corporation’s best interest at the time of such determination. Another provision relates to compensation paid to directors/officers under the amended § 515 -- while directors and officer may be compensated in a reasonable amount for services rendered, the provision prohibits the person being present at the deliberation or vote concerning such person’s compensation. Under the new §713(f), an employee of the corporation is now also prohibited from serving as chair of the board or holding other title with similar responsibilities. This could mean that the CEO of a New York nonprofit corporation could not also serve as chair of the board (although that is not typical in the nonprofit context generally).
Whistleblower Policy
The New Act also added a new §715-B, which requires the adoption of a whistleblower policy for nonprofit corporations that have twenty or more employees and in the prior fiscal year had annual revenue in excess of one million dollars. Specific provisions required in the whistleblower policy include the following: (1) procedures for reporting violations and preserving confidentiality, (2) designation of an employee, officer, or director to administer the policy and report to the committee or board, 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 corporation. Similar to the conflict of interest policy requirement, a corporation that has adopted a whistleblower policy pursuant to federal or state laws that is substantially consistent with the New Act will be deemed in compliance.
Audit
The New Act also added a new §712-A regarding audit oversight, which is applicable to any corporation required to file an independent certified public accountant’s audit report with the New York Attorney General. Under the new § 712-A, the board of such a corporation, or the designated audit committee of a Board composed solely of independent directors, is required to oversee the accounting and financial reporting process and the audit of the corporation’s financial statements, and to review the results of the audit and any related management letter with the independent auditor.
Personal Jurisdiction Over Officers, Directors, Key Employees, and Agents
New § 309 subjects any director, officer, key employee, or agent of a New York nonprofit corporation to the personal jurisdiction of the Supreme Court of New York and allows for service of process on such persons in an action or proceeding by the Attorney General. This provision is somewhat unique among state nonprofit corporation statutes, and it seems unreasonable for officers, directors, or staff not located in New York to be subject to personal jurisdiction in the state. In addition, it could discourage volunteers from serving on the board of New York nonprofits. However, as this provision is essentially just a “long-arm statute,” in the event personal jurisdiction of a non-resident director, officer, or employee is sought, the effect may be limited in that a Constitutional analysis regarding “minimum contacts” with New York should still be required for the New York courts to actually obtain personal jurisdiction over a non-resident director, officer, or employee.
Role of Attorney General
Under the new §907-A, a corporation required to obtain approval for a merger is permitted to make an application to the New York Supreme Court for an order approving the plan of merger. As an alternative, under the new §907-B, in lieu of obtaining an order approving the plan of merger from the court, such a corporation may also make an application to the Attorney General for approval of the plan of merger. Similarly, under the new § 511-A , a corporation otherwise required to obtain approval from a court may alternatively seek approval of the Attorney General to sell, lease, exchange, or otherwise dispose of all or substantially all of its assets.
Conclusion
The New Act includes a number of provisions intended to modernize the law applicable to New York incorporated not-for-profit corporations. This article provides general information, but does not constitute legal advice or opinion. Affected corporations should consult with their legal counsel to determine specific implications for them.
1. As of this writing, the New Act has not been signed by the Governor.
Brittany Moore, summer intern at Whiteford, Taylor & Preston and law student at Howard University, also contributed to this article.
"Old Act" DC Corporations Under the New Act
By: Eileen Morgan Johnson, Esq.
Takeaway: DC nonprofit corporations formed prior to 1963 have a choice to remain under DC's old nonprofit corporation act or to come under the new act. If the entity wants clearer guidance on structure, then electing to come under the new act would be an appropriate decision. But if it prefers to stay under the old act, it must be careful to follow some new regulations or it will end up coming under the New Act.
Discussion: The DC Nonprofit Corporation Act of 2010 (“New Act”) went into effect on January 1, 2012. Under the New Act, so called “Old Act” corporations (those incorporated in DC prior to January 1, 1963 that have not previously elected to come under the new law) have until January 1, 2014, to decide whether they will elect to come under the New Act or remain under the Old Act.
DC’s Department of Consumer and Regulatory Affairs (“DCRA”) published proposed regulations for the second time on August 9 with the intent that they go into effect within 30 days of publication. The regulations describe the actions that must be taken by Old Act corporations to make this election. Whether they decide to remain under the Old Act or go under the New Act, for the first time Old Act corporations have to file a biennial report by April 1, 2014.
If an Old Act corporation elects not to come under the New Act, it must be careful as certain action (or inaction) will cause it to come under the New Act regardless. To keep its Old Act status a corporation must:
- Follow the proposed regulations precisely;
- Make its election to stay under the Old Act by January 1, 2014; and
- File its biennial report and apply for reinstatement after an administrative dissolution of the corporation.
The process for declaring its intention to remain under the Old Act or come under the New Act is similar. In both cases the corporation:
- Adopts a resolution (suggested language is provided in the proposed regulations) in accordance with its articles and bylaws, expressly electing or not electing to become subject to the New Act; and
- Files a copy of the resolution and a copy of its articles of incorporation with the DCRA.
If the corporation is electing to remain under the Old Act, it must also file with the DCRA a list of the names and address of all current officers and directors of the corporation and a designation of a registered agent (someone to receive notices from the DC Government and court filings).
If the corporation is electing to come under the New Act and it has members, unless members are already mentioned in its articles of incorporation, the articles must be amended to state that the corporation has members.
DC was the first jurisdiction to adopt the latest version of the Model Nonprofit Corporation Act. It includes some up to date features such as allowing members to hold a virtual meeting via a chat room or similar technology.
It also provides greater flexibility in governance structures than the prior Act such as:
- Not requiring specific titles and duties of officers;
- Allowing for a voting delegate assembly;
- Allowing electronic voting by members; and
- Allowing an organization to be run by its members, as opposed to a board.
The New Act has faced many tests in the 19 months since it went into effect as its provisions have been applied to real world situations. The proposed regulations are intended to clarify some of the vague or missing terms in the New Act that were identified during the first year it was in effect.
The major benefit of electing to come under the New Act is that the organization will have guidance in terms of its governance. The Old Act provides little guidance on corporate governance as the chapter on charitable, educational and religious associations is only three pages long. In contrast, in the New Act, the Nonprofit Corporation Act is 139 pages. On the other hand, under the Old Act, nonprofit corporations had wide discretion in terms of their governance, and some organizations might very well want to keep it that way.
Under the Old Act, nonprofit corporations were created and then they had no further interaction with the DCRA unless they wanted to file articles of amendment to their articles of incorporation. They were not required to file reports or maintain a registered agent. The New Act has taken away that benefit, since even Old Act corporations must file biennial reports and maintain a registered agent in DC beginning in 2014.
As noted above, if an entity desires more guidance on structure, then electing to come under the New Act would be appropriate, but if not, you must be careful to follow the new regulations outlined above or you will end up coming under the New Act.