Changes Coming to Governance Provisions of New York Nonprofit Law

Amendments to New York’s Not-For-Profit Corporation Law are set to take effect on May 27.  The amendments impact several provisions of The New York Nonprofit Revitalization Act (“NRA”), which imposed substantial governance requirements on nonprofits when it took effect in 2014.  The amendments build greater flexibility into aspects of the NRA that were viewed as overly broad or prescriptive.  Key elements of the amendments are summarized below.  A redline showing the changes to the statutory language is available here. Nonprofits incorporated in New York, and other nonprofits that may be subject to the Not-For-Profit Corporation Law due to their activities, should take note of the amendments and consider whether changes to their governance practices and documents are appropriate. 1.      Related party transactions.  The NRA provides for enhanced board oversight of related party transactions.  The amendments explicitly permit an authorized committee of the board to review and approve related party transactions, as an alternative to full board approval.  They also codify exceptions to the definition of “related party transaction” that are based on guidance previously issued by the Charities Bureau of the New York Attorney General’s office (available here).  These exceptions mean that immaterial or ordinary course transactions are no longer subject to the board/committee approval procedures under the NRA.  Specifically, the exceptions cover: (a) transactions that are themselves “de minimis” or where the related party’s financial interest is de minimis, with the judgment of what is de minimis to be left to individual nonprofits based on factors such as size and budget; (b) transactions that “would not customarily be reviewed” by the board at “similar organizations in the ordinary course of business” and that are available to others on the same or similar terms; and (c) transactions where a related party receives a benefit as a result of being a member of a class that benefits from the nonprofit’s work, where the benefit is available to all similarly situated members of the class on the same terms.  The amendments also create a defense to actions brought by the New York Attorney General challenging related party transactions.  The defense allows nonprofits to take steps to ratify transactions that were not approved in accordance with the procedures in the NRA, and to enhance their mechanisms for complying with these procedures in the future, in order to limit the possibility of adverse actions against nonprofits for inadvertent or insignificant violations of the related party provisions. 2.      Audit committee independence requirements.  The amendments modify the definition of “independent director,” which applies to directors serving on the audit committee, by amending the standard on business relationships between a nonprofit and entities where directors (or their relatives) have relationships.  Currently, this standard prohibits a director from being independent if the director is an employee of, or has a substantial financial interest in, an entity that does business with the nonprofit, if the amount of business exceeded the lesser of $25K or 2% of the other entity’s consolidated gross revenues in any of the last three fiscal years.  The amendments provide tiered thresholds that are tied to the revenues of the other entity, as follows:

3.    Conflict-of-interest and whistleblower policies.  The amendments eliminate the requirement that the audit committee, another committee of independent directors or the board (with only independent directors participating in deliberations and voting) oversee the conflict-of-interest and whistleblower policies required by the NRA and receive disclosures about conflicts of interest and reports on the whistleblower policy.  Accordingly, a committee that includes non-independent directors, or the full board (with the participation of directors who are not independent), can oversee these policies.  However, in the case of whistleblower policies, a director who is also an employee of a nonprofit may not participate in any board or committee deliberations relating to administration of the whistleblower policy. 4.      Board committees.  The amendments permit the board to create committees, other than an executive committee, by a majority vote (rather than a vote of majority of the “entire board,” which is generally defined as the total number of directors entitled to vote if there were no vacancies).  The creation of an executive committee (or committee with equivalent functions) must be approved by a majority of the entire board, unless the board has at least 30 members, in which case, it can be approved by a 3/4 vote of the directors present at a meeting where there is a quorum.  The amendments also impose additional limits on what can be delegated to board committees.  Specifically, the board cannot delegate to a committee: (a) the election or removal of officers and directors; (b) approval of a merger or plan of dissolution; (c) the sale, lease, exchange or other disposition of all or substantially all of the nonprofit’s assets; or (d) amendments to the certificate of incorporation.  Under New York law, board committees—that is, committees that have authority to act on behalf of the board and are not purely advisory—are limited to directors and may not include individuals who are not members of the board.  Non-directors may serve on what New York law calls “committees of the corporation,” which are committees that do not have authority to bind the board. There are two other changes that are not subject to the May 27 effective date:  1.      Independent board leadership (effective January 1, 2017).  When it was enacted, the NRA included a provision that would have prohibited the chair of a nonprofit board from being an employee of the nonprofit.  After several delays to the effective date of this provision, it took effect on January 1, 2017, with some changes that the New York legislature passed in 2016 as part of the amendments discussed above.  In its current form, this provision permits an employee to chair the board, if the board approves this by a 2/3 vote of the entire board and contemporaneously documents the basis for its approval.  2.      Threshold for compliance with audit oversight provisions (effective July 1, 2017).  The NRA contains certain “audit oversight” requirements that apply to nonprofits over a certain size that are required to register to solicit charitable donations in New York.  These include the requirement to obtain an annual financial statement audit and to have an independent audit committee.  The threshold for nonprofits that are subject to these requirements will increase to $750K in annual revenues (from $500K) effective July 1, 2017, in accordance with phase-in provisions previously included in the NRA.