Background
On November 28, 2016, Governor Andrew Cuomo signed legislation that makes major needed revisions to the Non-Profit Revitalization Act of 2013 (NPRA) for New York-formed nonprofits.1 These changes address some of the irksome problems created by the NPRA, especially the provisions dealing with related party transactions, conflicts of interest and board committee composition, making nonprofit operations more manageable.
The newly-approved bill will bring the law into conformity with guidance previously issued by the Attorney General regarding related party transactions. The 2016 changes follow modest "tweaks" to the NPRA enacted in 2015.2 These changes should be applauded by all members of the New York nonprofit community.
Most of the 2016 changes become effective May 27, 2017. As a result of these reforms, New York-formed nonprofits will need to review and revise their by-laws, conflict policies and any required whistleblower policies to reflect the 2015 and 2016 changes.
This is also a good opportunity for New York-formed nonprofits to generally review their governance documents to make sure they conform to other provisions of the Not-for-Profit Corporation Law (N-PCL), including requirements in the NPRA that were not affected by the 2015 or 2016 changes.
The NPRA,3 which became effective July 1, 2014, amended the N-PCL, Estates, Powers and Trusts Law (EPTL) and Executive Law, among other laws. While it made many changes aimed at making these laws more manageable, especially in the area of formation of nonprofit corporations, the NPRA imposed significant and often onerous burdens on nonprofits with respect to certain governance matters, especially related-party transactions and other conflicts, whistleblower procedures and related matters. The 2013 law also created certain unintended complications, as is often the case with new legislation, including matters related to how board committees are formed and function.
The New York nonprofit bar, including the New York State Bar Association, the New York City Bar Association, the New York Law Revision Commission (LRC), the Lawyers Alliance of New York (LANY) and the Nonprofit Coordinating Committee (NPCC), among other groups, generally supported the 2013 changes but pushed for refinement of certain provisions. Certain minor technical corrections and a few refinements were enacted in 2015 and, after extensive coordination with the New York Attorney General's office, major corrections were enacted late in 2016.
The 2013 law and the 2015 and 2016 changes represent the culmination of a process to revise New York's N-PCL, which had not been substantially changed since it was adopted in 1969. This process was started by the State Bar when it proposed a top-to-bottom rewrite of the N-PCL and further promoted by the City Bar in commenting on the State Bar's proposal and suggesting that it might be easier to address specific problematic provisions of the N-PCL instead of rewriting the entire law. The Charities Bureau of the New York Attorney General's office commissioned a blue ribbon panel to study possible reforms to the N-PCL and other nonprofit practices, circulated a "study bill" in 2012 and then proposed the bill which became the NPRA in 2013. Under the leadership of LANY, the LRC and NPCC assumed significant roles, along with the New York State and New York City bar associations, in generally supporting the Attorney General's bill and promoting the 2015 and 2016 modifications.
These 2013-2016 reforms do not obviate all of the problems with the N-PCL, but they eliminate many of the ambiguities and unintended procedural problems.4 The 2015 and 2016 revisions were intended solely to rectify problems arising under the 2013 legislation; there are other provisions of the N-PCL that are also ripe for reform.5
Footnotes
1 A10365-B, available at https://www.nysenate.gov/legislation/bills/2015/A10365/amendment/B . Note that the NPRA provisions do not apply to nonprofits formed outside of New York, even if they are qualified to conduct activity in New York or solicit contributions in New York.
2 S5868-A, available at https://www.nysenate.gov/legislation/bills/2015/S5868/amendment/A ; S5870, available at https://www.nysenate.gov/legislation/bills/2015/S5870 , and A7641, available at https://www.nysenate.gov/legislation/bills/2015/A7641 . The 2015 changes extended the effective date of a requirement that an employee could not be a chair of the board or hold any other office with similar authority, tweaked the definitions of independent director, related party and key employee (among other terms), and rectified certain problems regarding board member compensation, board quorums and board committees. These changes, where still relevant, are discussed in this Stroock Special Bulletin, to alert nonprofits that did not reflect them in new by-laws that had been previously changed to reflect the adoption of the NPRA.
3 A8072, available at https://www.nysenate.gov/legislation/bills/2013/A8 072.
4 It remains to be seen whether these changes are sufficient to encourage new nonprofits to form in New York, or whether new nonprofits will instead look to Delaware and other states to avoid complications stemming from the New York law that can be avoided by incorporating in other states. That question is something that will continue to be monitored by the New York nonprofit bar. It appears likely that smaller New York nonprofits, which might want to avoid dealing with the inconveniences of out-of-state incorporation – however minor that might be – as well as other nonprofits that rely on New York State or New York City funding, will incorporate in New York state. However, many larger or more sophisticated nonprofits will continue to incorporate in other states with more welcoming statutory and regulatory environments.
5 These include oft-ignored requirements that (a) nonprofit members (or, if there are no members, the directors) receive at the annual meeting a written annual report that includes certain financial information that is no older than six months, notwithstanding the fact that the annual meeting may be held later than six months after year-end (note: distribution of the Form 990 does not technically satisfy this requirement), (b) notification be given to members regarding obtaining directors and officers insurance policies and any claims under such policies, (c) changes to the size of the board of directors must be approved by action of a majority of the entire board if the by-laws state that the size of the board shall be fixed by the board, (d) provisions regarding classification of the board (e.g., having three classes of directors with one-third of the directors elected each year) must appear in the certificate of corporation instead of the by-laws unless the corporation has members who have approved this provision in the by-laws, and (e) newly elected directors must submit a conflicts questionnaire prior to election instead of promptly after election (the Attorney General recommends that the by-laws state that such newly-elected director cannot take office until such questionnaire has been submitted).
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