Time to Update Your Corporate Bylaws?

New York Gov. Andrew Cuomo signed the New York Non-Profit Revitalization Act of 2013 (Act), into law in December 2013, thereby adopting important changes to the governance of nonprofit entities that will go into effect on July 1, 2014. The Act attempts to modernize the existing New York Not-for-Profit Corporation Law (NPCL) by removing some of the burdens imposed on the nonprofit sector, while simultaneously improving oversight and governance. The Act affects not-for-profit organizations incorporated or doing business in New York State, including both charitable and non-charitable entities, both of which are required to make changes necessary to comply with the new NPCL.

Significant Changes to the NPCL

The Act sets forth numerous changes to the NPCL, the most significant of which are:

  • Categorization of Organizations: The Act replaces the four current types of nonprofit corporations (A, B, C, and D) with two classes of entities: charitable corporations and non-charitable corporations. A “charitable corporation” is any corporation formed for charitable purposes, defined as “charitable, educational, religious, scientific, literary, cultural or for the prevention of cruelty to children or animals.” Former Type A corporations will now be considered non-charitable, while all others will be characterized as charitable. It is important to note that organizations already categorized as a certain “type” will not be required to refile certificates of incorporation based on the Act’s new categories.
  • Real Property Transactions: A majority vote of the board or a board committee, rather than a two-thirds vote of the entire board, is now required for the approval of non-substantial real estate transactions. If a real property transfer constitutes all or substantially all of the corporation’s assets, the action then requires the approval of two-thirds of the directors, unless there are more than 21 directors, in which case only a majority vote is required.
  • Approval of Major Corporate Actions: In lieu of obtaining court approval to sell, lease, exchange or otherwise dispose of all or substantially all of the corporation’s assets, the corporation may now alternatively seek approval of the Attorney General by verified petition. Previously, the NPCL required organizations to obtain court approval after receiving the Attorney General’s consent for major corporate actions. The Act now permits the corporation to rely on the Attorney General’s approval alone. If the Attorney General does not provide approval, the organization may seek court approval.
  • Definition of Entire Board: An area of ambiguity determining whether the majority vote or 2/3 vote requirements have been met is addressed in the new law. The term “entire board” is now defined as the total number of directors entitled to vote if there were no vacancies. If the by-laws of the corporation set forth a fixed number of directors, then the entire board shall consist of that number of directors. If the by-laws provide for a range of directors, the number of board members within such range who were actually elected at the last election of directors constitutes the entire board.
  • Electronic Communications: Organizations and their boards may now use electronic communication and videoconferencing. Participation by such means shall constitute presence in person at a meeting as long as all persons participating in the meeting can hear each other at the same time.
  • Related-Party Transactions: The Act focuses on corporate integrity by prohibiting an organization from entering into a related-party transaction in which an officer, director, or key employee has a financial interest unless it has been found to be fair, reasonable, and in the corporation’s best interest at the time of the determination. The interested individual must give notice of his/her interest and not participate in the approval of the transaction.
  • Mandated Policies: The Act requires organizations to adopt a conflict of interest policy and a whistleblower policy. The conflict of interest policy must include specific procedures for disclosing, addressing, and documenting related-party transactions. Those organizations with existing conflict of interest and whistleblower policies that are “substantially consistent” with the Act’s requirements will be deemed to be in compliance.

The changes described above are the major aspects of the reforms made to the NPCL. Careful review of the full Act is recommended and revisions to corporate by-laws and other policies and procedures of a New York not-for-profit corporation may be necessary. The Act is the first major overhaul of the NPCL in approximately 40 years and will hopefully improve the provisions of the NPCL that are thought to be outdated and burdensome.