By Edward Karan, Esq.
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May 25, 2017

Important new amendments (“Amendments”) to the New York Not-For-Profit Corporation Law will go into effect on May 27, 2017.  The Amendments aim to mend inconsistencies in the law since the Nonprofit Revitalization Act, which went into effect in 2013.  New York Not-For-Profit Corporations should review their bylaws and conflict of interest policies to make sure they are up to date with these most recent changes.

One of the major changes is to the definition of a “Related Party.”  The term was revised to include directors, officers, Key Persons (discussed below), any of their relatives, and any entity in which the directors, officers, Key Persons (or their relatives) have more than 35% interest. If the entity is a partnership, the threshold is a 5% interest.

For the purposes of defining who is a related party, the Amendment replaces “key employee” with “Key Person.”  A Key Person is not a director or officer (but may or may not be an employee) but has substantial influence over the corporation, manages a substantial portion of the corporation, or controls a substantial portion of the corporation’s finances. A Key Person is now subject to the Conflict of Interest Policy.

Perhaps the most significant change concerns related party transactions.  Generally, a related party transaction is one from which a person within the nonprofit, or a relative, will receive a financial benefit.  Previously, the law prohibited this type of transaction unless the Board determined that it was in the nonprofit’s best interest.  The Amendments provide some exceptions to what is considered a related party transaction, such as (1) if the related party’s interest in the transaction is “de minimis,” (2) if the type of transaction is not customarily reviewed by similar boards of similar organizations, and (3) if the related party is the type of person that the non-profit is organized to benefit as part of its mission.  These exceptions align with previously published guidance from the New York Attorney General’s Office.

The Amendment now permits the nonprofit’s Board of Directors to appoint a committee to approve a related party transaction.  Additionally, the nonprofit will now have a limited defense to an action brought by the Attorney General’s office related to improperly authorized related party transactions if the nonprofit can prove it took certain actions.

Generally, directors who have an interest in a transaction are not permitted to be present during deliberations of the Board, or a committee of the Board, on whether to enter into the transaction. However, the recent change clarifies that the interested director may be asked by the Board to present information or answers to the Board’s questions regarding the transaction.

The Amendment modifies the definition of “independent director” to now provide a sliding scale for disqualification in making certain decisions for the nonprofit.  For example, now a director may still be considered independent even if the director, or her relative, has received a benefit of $10,000 or less in the three preceding years if the nonprofit’s gross revenues are less than $500,000 per year.

Generally, Executive Committees are committees of the Board and have the authority to bind the corporation in certain circumstances.  Previously, a majority vote of all members of the Board of Directors was required to designate an Executive Committee.  The recent change now allows a majority of a quorum present at the Board meeting to designate an Executive Committee.

Another change is that certain duties of the Board cannot be delegated to the Executive Committee. Non-delegable duties include (1) the election or removal of officers and directors, (2) the approval of a merger or plan of dissolution, (3) the adoption of a resolution authorizing the sale, lease, exchange or other disposition of all or substantially all the assets of the corporation, and (4) the approval of amendments to the certificate of incorporation.

Previously, employees of a non-profit could not serve as Chairperson of the Board of Directors.  However, the changes now permit an employee to serve as Chairperson so long as the Board approves the appointment by a 2/3 vote and memorializes the basis for the Board’s approval.  This change went into effect on January 1, 2017.

If you have any questions about the Amendments or would like your bylaws and conflict of interest policy to be reviewed, please do not hesitate to give us a call.