What You Need to Know about the Non-Profit Revitalization Act of 2013

Presented by Hayley M. Kelch, Esq.

Of

Cullen and Dykman LLP

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Overview of the Act

First substantial overhaul of laws governing New York’s nonprofit sector in almost a half-century

Most provisions take effect on July 1, 2014

Amends New York Not- for-Profit Corporation Law and other New York laws, including, but not limited to, Education Law

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The Reform Process

June 2011: New York State Attorney General convenes Leadership Committee on Nonprofit Revitalization February 2012: Leadership Committee issues comprehensive report with recommendations for amending New York law and establishing programs to revitalize nonprofit sector June 2013: New York State Legislature passes Revitalization Act December 2013: Governor Cuomo signs Revitalization Act into law

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Does the Act Apply to Your Organization?

Not-for-profit corporations

Education corporations

Religious corporations

Corporations that solicit charitable contributions in NY

Charitable trusts

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What is the Purpose of the Act and What Changes Are Effected by It?

The many changes effected by the Act fall into two general categories:

Those which reduce regulatory burdens on nonprofits; and

Those which enhance nonprofit governance and accountability

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Reforms Which Enhance Governance and Accountability

Independent Board Oversight over Compensation Required; Compensation Must Be Reasonable

• Although college and university trustees cannot be

compensated for their board service per the Education Law, individuals who may benefit from compensation paid by the corporation may not be present for or participate in board or committee deliberations or voting on their own compensation

• Upon request, such individuals may provide

information to the board or committee or answer questions posed by the board or committee prior to such deliberation or vote

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Reforms Which Enhance Governance and Accountability

Independent Board Leadership Required

• No employee may serve as board chair or hold any other title with similar responsibilities (effective January 1, 2015)

Personal Jurisdiction Expanded • Supreme Court and AG endowed with

personal jurisdiction over “non domiciliary resident” directors, officers, key employees and agents of NY not-for-profit corporations

“Key Employee” Liability Expanded • Like directors and officers, “key

employees” can now be held personally liable for certain misconduct

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Reforms Which Enhance Governance and Accountability

Board Oversight of Financial Processes and Audit Required • All “independent directors” or a designated audit committee

comprised of independent directors must:

• oversee financial processes and audit of financial statements

• annually retain and review independent auditor

• review scope and planning of audit

• review results of audit and any management letter with auditor

• review material risks and weaknesses in internal controls identified by auditor, restrictions on scope of auditor’s activities, and significant disagreements between auditor and management

• oversee conflict of interest and whistleblower policies if such functions are not performed by another committee comprised of independent directors

Reforms Which Enhance Governance and Accountability

Board Oversight of Financial Processes and Audit Required, cont.

• Rules apply to all corporations that file annual

independent CPA audit reports with the Attorney General

• Rules become effective January 1, 2015 if a

corporation had less than $10M in revenue in the fiscal year ending prior to January 1, 2014

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“Independent Director”

Has not been (and has no relative who has been) an employee of the corporation or an affiliate of the corporation;

Has not received (and has no relative who has received) more than $10,000 in compensation from the corporation or an affiliate of the corporation (other than reimbursable expenses or reasonable compensation for director services if such compensation is allowed); and

Is not a current employee of or does not have a substantial financial interest in (and does not have a relative who is a current employee of or has a substantial financial interest in) any entity that has made payments to or received payments from the corporation or an affiliate of the corporation for property or services in an amount which exceeds the lesser of $25,000 or 2% of such entity’s consolidated gross revenues (excluding charitable contributions)

NOTE: 3 year look back

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Reforms Which Enhance Governance and Accountability

Board Oversight of Related Party Transactions Required

• No corporation may enter into a “related party transaction” (“RPT”) unless such transaction is determined by the board to be fair, reasonable and in the corporation’s best interest

• Any director, officer or key

employee who has an interest in an RPT must disclose to the board (or an authorized committee) the material facts of such interest and refrain from participating in deliberations or voting concerning the RPT

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Definitions A “related party transaction” is any transaction, agreement or other arrangement in which a related party has a financial interest and in which the corporation or any affiliate of the corporation is a participant

A “related party” is any:

• director, officer or key employee of the corporation or any affiliate of the corporation

• a relative of any such person

• any entity in which any such person has a 35% or greater ownership or beneficial interest or, in the case of a partnership or professional corporation, a direct or indirect ownership interest in excess of 5%

An "affiliate" is any entity controlled by, in control of, or under common control with the corporation

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Related Party Transactions

Additional RPT rule • When an RPT involves a related party with a

substantial financial interest, the board or authorized committee must:

• consider available alternatives;

• approve the transaction by not less than a majority vote of all directors or committee members present at the meeting; and

• contemporaneously document in writing the basis for board or committee approval

• Note: “Financial interest” and “Substantial financial interest” are not defined terms

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Enhanced Power of the Attorney General

The Attorney General may bring a judicial action to:

• enjoin, void or rescind an RPT

• remove directors and/or officers

• require any person or entity to: • return profits made from an RPT

• pay to the corporation the value of property or other assets used in an RPT

• return or replace any property or assets lost as a result of an RPT or any proceeds of sale of property

• in the case of willful and intentional conduct, pay to the corporation an amount up to double the amount of any benefit improperly obtained

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Reforms Which Enhance Governance and Accountability

Conflict of Interest Policy Required • Must include:

• definition of conflict of interest (“COI”)

• procedures for disclosing all COIs to board or audit committee

• requirement that person with COI not be present at or participate in deliberations or votes on COI

• prohibition against any attempt by the person with COI to improperly influence the deliberation or voting on COI

• requirement that the existence and resolution of COI be documented in the corporation’s records

• procedures for compliance with RPT requirements

• requirement that prior to the initial election of a director, and annually thereafter, all directors must disclose any entity with which they and the corporation are involved and a director must disclose any transaction involving the corporation in which he or she might have a COI

Reforms Which Enhance Governance and Accountability

• No one who reports any actual or

suspected action taken by or within the corporation that is illegal, fraudulent or in violation of policy shall suffer intimidation, harassment, discrimination, retaliation or adverse employment consequence

• Must have reporting and distribution of policy procedures

• Person responsible for administration of policy must report to audit committee, other committee of independent directors, or board

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Whistleblower Policy Required

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Reforms Which Reduce Regulatory Burdens

Procedural Hurdles for Certain Transactions Reduced

• Education corporations and religious corporations can merge, in addition to consolidate, with Board of Regents approval

• Certain transactions which currently require court approval and notice to the Attorney General (e.g., certain mergers, consolidations, dissolutions, substantial asset sales) may be effectuated with Attorney General approval only

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Reforms Which Reduce Regulatory Burdens

Board Procedures and Voting Requirements Modernized

• Electronic transmission of certain notices, waivers, proxies and consents permissible

• Participation in board meetings via video conference acceptable

• Committee categories simplified; only “committees of the board” may bind the board

• Amendment of by-laws not required to fix number of directors

Reforms Which Reduce Regulatory Burdens

Barriers to Incorporation Eliminated • Abandonment of “Type” system

• List of activities in Certificate of Incorporation no longer required

• Notice to, instead of approval of, Commissioner of Education required for certain newly formed corporations with educational purposes (does not affect colleges and universities chartered by the Board of Regents)

• Department of State can correct minor errors in submissions prior to filing

• Attorney General may approve a modification of the purposes included in a corporation’s Certificate of Incorporation

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Other Miscellaneous Provisions

Doctrines of Cy Pres and Deviation

Preserved

Analogous Provisions Relating to Charitable Trusts and Trustees Enacted

• Act includes analogous provisions for charitable trusts and their trustees requiring audit oversight and conflict of interest and whistleblower policies, and placing new restrictions on related party transactions

• Such provisions do not apply to corporations that are not required to report to the Attorney General

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What Should Your Organization Do Now?

Determine which provisions of the Act apply

Determine the relevant effective dates of the Act

Determine how by-laws, committee charters, policies and procedures must or should be modified

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Q&A

Additional questions?

Contact:

Hayley M. Kelch, Esq. Partner

hkelch@cullenanddykman.com 212-510-2230

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• Slide #16, “Whistleblower,” http://www.w-t-w.org/en/wp-content/uploads/2013/04/whistleblower-cartoon.jpg

• Slide #17, “Hurdles,” http://splitpease.files.wordpress.com/2010/09/hurdles_runner.gif

• Slide #19, “Board of Directors Conference Call,” http://www.cartoonstock.com/newscartoons/cartoonists/mba/lowres/telecommunications-stuck_in_traffic-traffic_jams-conference-meeting-conference_call-mban3314l.jpg

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