The New York State Assembly and Senate have passed a bill that, if signed by the Governor, would amend the Not-for-Profit Corporation Law (the “NPCL”) and the Estates, Powers and Trusts Law (the “EPTL”) to clarify and refine some of the changes to both laws effected as part of the 2013 New York Non-Profit Revitalization Act (the “NPRA”).  Bill No. A. 10365B/S. 7913 was introduced on May 24, 2016.  It passed the Assembly on June 15 and the Senate on June 16, just before the end of the legislative session, and should be delivered to the Governor sometime in the next several months.

The bill would amend the definitions of “independent director,” “related party transaction,” and “key employee,” and revise certain provisions relating to committees, related party transactions, conflict of interest policies, and whistleblower policies, among other items.  Below are summaries of the bill’s proposed changes to the NPCL.  (Corresponding changes would also be made to the EPTL.)

Related Party Transaction Rules

•  The bill would exclude the following transactions from the definition of “related party transaction:”

○  A transaction where the transaction itself or the related party’s financial interest in the transaction is de minimis;

○  A transaction that would not customarily be reviewed by the board or boards of similar organizations in the ordinary course of business and that is available to others on the same or similar terms; and

○  A transaction that “constitutes” a benefit provided to a related party solely as a member of a class of beneficiaries that the corporation intends to benefit as part of the accomplishment of its mission, which benefit is available to all similarly situated members of the same class on the same terms. (Section 102(a)(24))

•  The bill would modify the term “related party” by replacing the concept of a “key employee” with the more expansive concept of a “key person.”

○  A “key person” would be defined as any person, other than a director or officer, whether or not an employee of the corporation, who:

○  Has responsibilities or exercises powers or influence over the corporation as a whole similar to the responsibilities, powers, or influence of directors and officers;

○  Manages the corporation, or a segment of the corporation that represents a substantial portion of the activities, assets, income, or expenses of the corporation; or

○  Alone or with others controls or determines a substantial portion of the corporation’s capital expenditures or operating budget. (Section 102(a)(25))

•  The bill would clarify that, in addition to the board itself, an authorized committee of the board may approve related party transactions. (Section 715(a))

•  With respect to violations of the related party transaction rules, the bill would add a new subsection to Section 715, which would provide that, in an action by the Attorney General claiming that a related party transaction that was not approved in accordance with statutory requirements, it would be a defense that:

○  The transaction was fair, reasonable, and in the corporation’s best interest at the time it was approved, and

○  Prior to receipt of any request for information from the Attorney General about the transaction, the board:

○  Ratified the transaction by finding in good faith that it was fair, reasonable and in the corporation’s best interest at the time it was approved (and, for a transaction involving a charitable corporation in which a related party has a substantial financial interest, considered alternative transactions to the extent available, approving the transaction by not less than a majority vote of the directors present at the meeting);

○  Documented in writing the nature of the violation and the basis for ratification; and

○  Put into place procedures to ensure that the corporation complies with the related party transaction approval requirements in the future.

This provision evidently also would apply to ratifications by a committee of the board.  (Section 715(j))

•  Additionally, in an action by anyone other than the Attorney General claiming that a corporation violated any provision of Section 715 with respect to a particular related party transaction, it would be a defense that the transaction was fair, reasonable, and in the corporation’s best interest at the time it was approved. (Section 715(i))

Formation, Population, and Powers of Committees

•  The bill would make it easier to create committees of the board. Currently, the NPCL requires the vote of a majority of the entire board to create a committee of the board.  Under the proposed new law, this may be done by action of “the board,” rather than “the entire board.”  As a result of this change, board committees could be established by a majority of directors present at a meeting at which a quorum is present.  (Section 712(a))

•  However, the bill would change the standard required to appoint members of the executive committee (or any similar committee, however denominated). To appoint members of the executive committee, the bill would require a majority of the entire board, except if the board has 30 or more members, in which case the bill would require at least three-quarters of the directors present at the time of the vote, if a quorum is present at that time.  (Section 712(a))

•  The bill would clarify that a corporation’s bylaws may provide that directors who hold certain positions in the corporation are ex-officio members of specific committees. (Section 712(a))

•  The bill would clarify and expand restrictions on the powers of committees:

○  The NPCL currently contains a list of 5 powers that committees of the board may not exercise, including fixing directors’ compensation for serving on the board, amending the bylaws, and filling director or committee vacancies.

○  The proposed amendments clarify that these restrictions apply to both committees of the board and committees of the corporation, and would add the following 4 prohibited powers to the list:

○  The election or removal of officers and directors;

○  The approval of a merger or a plan of dissolution;

○  The adoption of a resolution recommending to the members action on the sale, lease, exchange, or other disposition of all or substantially all the assets of a corporation or, if there are no members entitled to vote, the authorization of such transaction; and

○  The approval of amendments to the certificate of incorporation. (Section 712(a))

•  Finally, the bill would delete the statement that provisions of the NPCL that apply to officers generally shall apply to committee members. (Section 712(e))

Audit Committee Composition and Duties

•  Under the NPCL, any charitable corporation required to register to conduct charitable solicitations in New York with annual revenue in excess of $500,000 must have an audit committee composed solely of independent directors. The bill would make significant changes to the definition of “independent director,” (mostly) making it easier to find individuals who qualify as independent directors.

○  The NPCL currently provides that employees of a corporation or its affiliates do not qualify as independent directors. The bill would expand that prohibition to include “key persons” of a corporation or its affiliates.

○  The NPCL also currently states that an employee of, or an individual who has a substantial financial interest in, an entity that has made payments to or received payments from the corporation or an affiliate cannot qualify as an independent director of the corporation if the payments exceeded the lesser of $25,000 or 2% of the entity’s consolidated gross revenues. This prohibition has been criticized for overbreadth, because in many cases, a payment of $25,000 would be insignificant to the entity in question, and therefore would be unlikely to actually compromise the independence of the entity’s employees or substantially financial interested individuals.  The bill would change this provision by using a sliding scale to determine whether payments exchanged between the corporation and the entity are significant enough to prevent employees or substantially financially interested individuals from serving as independent directors.

○  In the case of an entity with consolidated gross revenues of less than $500,000, employees and substantially financially interested individuals would be prohibited from qualifying as independent directors only if the amount paid by the corporation or received by the corporation in any of the last three fiscal years exceeded the lesser of $10,000 or 2% of the entity’s consolidated gross revenues.

○  If the entity had revenues of at least $500,000 but less than $10,000,000, the dollar threshold would be raised to $25,000.

○  Finally, if the entity had revenues of over $10,000,000, the dollar threshold would be raised to $100,000.

○  Additionally, the bill would clarify several terms used in the independent director definition.

○  The term “payment” would be defined to exclude “payments made by the corporation at fixed or non-negotiable rates or amounts for services received, provided that such services by and to the corporation are available to individual members of the public on the same terms, and such services received by the corporation are not available from another source.”

○  The term “compensation” would be defined to exclude “reimbursement for expenses reasonably incurred as a director or reasonable compensation for service as a director,” as permitted by Section 202(a). (Section 102(a)(21))

•  Finally, the bill would clarify, through the repeal of Section 712-a(c) and the addition of new language in the conflict of interest and whistleblower policy provisions, that disinterested directors, rather than independent directors, are responsible for overseeing the implementation of and compliance with a corporation’s conflict of interest and whistleblower policies. Currently, Section 712-a(c), when read together with Section 712-a(e), requires this function to be performed by independent directors.  (Sections 712-a(c), 712-a(e), 715-a, 715-b)

Employees as Board Chairs

•  The NPCL currently contains a provision prohibiting any employee of a not-for-profit corporation from serving as the chair of the board of that corporation or in any other position with similar responsibilities. (The effective date of this provision has been delayed several times. Under current law, the provision will become effective as of January 1, 2017.)

•  The bill would relax this prohibition by allowing an employee to serve as board chair if the board approves the appointment by a two-thirds vote of the entire board and contemporaneously documents in writing the basis for its approval.

Conflict of Interest and Whistleblower Policies

•  The bill would require that any conflict policy adopted by the board must include procedures for disclosing a conflict of interest or possible conflict of interest to the board or a committee of the board, rather than restricting disclosure to the audit committee or the board, and must include procedures for the board or committee to determine whether a conflict exists. (Section 715-a(b))

•  The bill would also make several changes to the provisions that are required to be included in whistleblower policies.

○  The employee, officer, or director designated to administer the whistleblower policy would be required to report on such administration to the board or an authorized committee of the board (rather than to the board, the audit committee, or another committee composed only of independent directors).

○  Directors who are employees would not be allowed to participate in board or committee deliberations or voting relating to administration of the whistleblower policy.

○  Any person who is the subject of a whistleblower complaint would not be permitted to be present at or participate in board or committee deliberations or votes on the matter relating to the complaint, though the board or committee would be allowed to request that person present background information or answer questions at a meeting prior to the commencement of deliberations or voting. (Section 715-b(b))

Overall, if enacted, these changes should generally be helpful to nonprofits working to comply with the NPRA, though the potential impact of some of the changes is unclear (for example, the implications of the changes to Section 712(e) are not immediately apparent).  If and when the bill is signed into law, we will post an update, as well as a revised version of our summary of the NPRA.  Stay tuned as this legislation makes its way to the Governor’s desk.