DISCUSSION MEMORANDUM
December 22, 2014
TO: Honorable Michael H. Ranzenhofer and Honorable James F. Brennan
FROM: Commission Staff
CC: Members of the Commission; Michael Hettler; Fong Chang; Roundtable Guests
RE: Not-For-Profit Corporations Law Proposal for Discussion
Now that implementation of The Non-Profit Revitalization Act (Act) is underway, it has become apparent that certain provisions of the Act, an amalgam of several different bills, should be refined to ensure the Act’s desired goal, namely, compliance with both federal and state law to achieve transparency and accountability without undue burden.
This discussion memorandum sets out provisions of a proposed bill amending the Not-for-Profit Corporation Law (NPCL) based on suggestions from attendees at the Commission’s October 24, 2014 Roundtable. It also includes changes to certain provisions suggested at the 2013 Senate hearings on the Act. The memorandum provides a brief description of the purpose behind each amendment and the amendment’s language. Additions to the statute are shown in UPPER CASE; deletions are shown by brackets.
The memorandum’s purpose is to generate discussion and build consensus around amendments to the NPCL consistent with the Act’s goal.
The proposals address consistency with the Internal Revenue Code, the scope of related party transactions, the applicability of the audit requirements, the applicability of sections 114 (Visitation of supreme court) and 513 (Administration of assets received for a specific purpose) to non-charitable corporations, simplification of indemnification provisions, the applicability of certain provisions to small NPCs and private foundations, the repeal section 8-1. 9 of the Estates, Powers and Trusts as unworkable, and certain technical corrections to provisions affected by the Act. The memorandum also identifies the issues of repeal of a portion of section 132 (the effective date) of the Act and special counsel for competing charities.
Article 1 — Short title; definitions; application; certificates; miscellaneous
1. Section 1 of the bill amends NPCL § 102(a) (Definitions) to redefine certain terms. The amendments to the definitions “Charitable corporation” and “Non-charitable corporation” align them with the definitions in the Internal Revenue Code. The definition of charitable purposes” is repealed because it is no longer necessary.
NPCL § 102(a)(3-a). “Charitable corporation” means [any corporation formed, or for the purposes of this chapter, deemed to be formed, for charitable purposes.] CORPORATIONS WHOSE PURPOSES AS CONTAINED IN THE CERTIFICATE OF INCORPORATION OR SPECIAL LAW ARE EXCLUSIVELY CHARITABLE, EDUCATIONAL, RELIGIOUS, SCIENTIFIC, TO TEST FOR PUBLIC SAFETY, TO FOSTER NATIONAL OR INTERNATIONAL AMATEUR SPORTS COMPETITION, OR FOR THE PREVENTION OF CRUELTY TO CHILDREN OR ANIMALS, INCLUDING WITHOUT LIMITATION, ARTS, CULTURAL, ENVIRONMENTAL, HEALTH, HUMAN SERVICES, LITERARY, PUBLIC BENEFIT, SOCIETY BENEFIT CORPORATIONS AND OTHER PUBLICLY SUPPORTED OR PRIVATE FOUNDATIONS RECOGNIZED BY THE UNITED STATES INTERNAL REVENUE SERVICE AS EXEMPT FROM FEDERAL INCOME TAXATION UNDER SECTION FIVE HUNDRED ONE (C)(3) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, OR ANY SUCCESSOR LAW.
NPCL § 102(a)(9-a). “Non-charitable corporation” means [any corporation formed under this chapter, other than a charitable corporation, including but not limited to one formed for any one or more of the following non-pecuniary purposes: civic, patriotic, political, social, fraternal, athletic, agricultural, horticultural, or animal husbandry, or for the purpose of operating a professional, commercial, industrial, trade or service association.] LAWFUL NON-BUSINESS CORPORATIONS, INCLUDING CIVIC LEAGUES, SOCIAL WELFARE ORGANIZATIONS, FRATERNAL BENEFIT SOCIETIES, BUSINESS LEAGUES, CHAMBERS OF COMMERCE, LABOR, AGRICULTURAL AND HORTICULTURAL ORGANIZATIONS, SOCIAL AND RECREATIONAL CLUBS, CEMETERY CORPORATIONS, CERTAIN CREDIT UNIONS, WAR VETERANS POSTS AND ORGANIZATIONS, PATRIOTIC AND POLITICAL ORGANIZATIONS, CERTAIN INSURANCE ORGANIZATIONS, AND CERTAIN EMPLOYEE BENEFIT ORGANIZATIONS, RECOGNIZED BY THE INTERNAL REVENUE SERVICE AS FEDERAL INCOME TAX EXEMPT UNDER OTHER SUBSECTIONS OF SECTION FIVE HUNDRED ONE OR UNDER SECTION FIVE HUNDRED TWENTY SEVEN OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, OR ANY SUCCESSOR LAW, OTHER THAN THOSE ORGANIZATIONS EXEMPT UNDER SECTION FIVE HUNDRED AND ONE (C)(3) THEREOF.
2. The definition of “Entire board” is amended to address a potential inconsistency with NPCL § 702(a) (the number of directors fixed by the board and the number as of the most recent election of directors may be different). The change gives preference to the number fixed by the board to ensure that there is no conflict with § 702(a). The new definition also includes references to appointed as well as elected directors, consistent with the wording of NPCL § 703, and to board members who have retained their office.
NPCL § 102(a)(6-a). “Entire board” means the total number of directors entitled to vote which the corporation would have if there were no vacancies. If the by-laws of the corporation provide that the board shall consist of a fixed number of directors, then the “entire board” shall consist of that number of directors. If the by-laws of any corporation provide that the board may consist of a range between a minimum and maximum number of directors AND THE NUMBER WITHIN THAT RANGE HAS NOT BEEN ESTABLISHED IN ACCORDANCE WITH SUBSECTION (A) OF SECTION 702, then the “entire board” shall consist of the number of directors within such range [that] WHO were elected OR APPOINTED OR WHO RETAINED OFFICE AS A DIRECTOR as of the most recently held election of directors.
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3. The definition of “Independent auditor” as currently defined relates only to audits required by Executive Law Article 7-A, registration of professional fundraisers. Other NPCL and EPTL sections refer to “audits” or other “financial reports.” The issue of required audits is extremely confused. A subsequent note will try to clarify. (See discussion at pp. 14-15.) In any event, the definition in section 102(a)(20) should be expanded to New York State licensed certified public accountants.
NPCL 120(a)(20). “Independent auditor” means any certified public accountant performing an audit of the financial statements of a corporation required by subdivision one of section one hundred seventy-two-b of the executive law OR ENVISIONED BY SECTION FIVE HUNDRED NINETEEN OF THIS CHAPTER.
4. The definition of “Independent director” is amended to add the term “key employee” to achieve internal consistency in the definition, to add language allowing a director to maintain independent director status in situations when the director works for a company that purchases routine services from, or pays dues to, the NPC, and to add language defining “substantial interest” heretofore undefined. The definition relies on that used by the Internal Revenue Service in the instructions to Form 990 Schedule L for “interested persons,” and on the definition that N-PCL § 102(a)(23) uses for “related party.”
NPCL § 102(a)(21). “Independent director” means a director who: (i) is not, and has not been within the last three years, an employee of the corporation or OF an affiliate of the corporation, and does not have a relative who is, or has been within the last three years, a key employee of the corporation or OF an affiliate of the corporation; (ii) has not received, and does not have a relative who has received, in any of the last three fiscal years, more than ten thousand dollars in direct compensation from the corporation or an affiliate of the corporation (other than reimbursement for expenses reasonably incurred as a director or reasonable compensation for service as a director as permitted by paragraph (a) of section 202 (General and special powers)); and (iii) 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 [officer ] KEY 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, in any of the last three fiscal years, exceeds the lesser of twenty-five thousand dollars or two percent of such entity’s consolidated gross revenues. For purposes of this [sub]paragraph, “payment” does not include charitable contributions, OR DUES OR FEES PAID TO THE CORPORATION FOR SERVICES WHICH THE CORPORATION PERFORMS AS PART OF ITS CORPORATE PURPOSES, AND A DIRECTOR’S FINANCIAL INTEREST IN AN ENTITY SHALL BE DEEMED “SUBSTANTIAL” IF IT CONSTITUTES A THIRTY-FIVE PERCENT OR GREATER DIRECT OR INDIRECT OWNERSHIP OR BENEFICIAL INTEREST OR, IN THE CASE OF A PARTNERSHIP OR PROFESSIONAL CORPORATION, A DIRECT OR INDIRECT OWNERSHIP INTEREST IN EXCESS OF FIVE PERCENT.
5. The definition of “Relative” is amended to add spouses and domestic partners of ancestors, descendants, children, grandchildren and great-grandchildren. It should be noted that the current inclusion of brothers and sisters in the definition of a relative under this section of the NPCL makes the definition broader for New York corporations that are private foundations than the definition applicable to private foundations under section 4946 of the Internal Revenue Code (Code).
NPCL § 102(a)(22). “Relative” of an individual means his or her (i) spouse, DOMESTIC PARTNER, ancestors, DESCENDANTS, brothers and sisters (whether whole or half-blood), children (whether natural or adopted), grandchildren (WHETHER NATURAL OR ADOPTED), great-grandchildren (WHETHER NATURAL OR ADOPTED), and spouses AND DOMESTIC PARTNERS of ANCESTORS, DESCENDANTS, brothers, sisters, children, grandchildren, and great-grandchildren; [or (ii)]FOR PURPOSES OF THIS SECTION “domestic partner” SHALL HAVE THE SAME DEFINITION as THAT [defined] in section twenty-nine hundred ninety-four-a of the public health law.
6. “Related party” is defined in section 102(a)(23) as (i) any director, officer or key employee of the corporation or of any affiliate of the corporation; (ii) any relative of any director, officer or key employee of the corporation or any affiliate of the corporation; or (iii) any entity in which any individual described in clauses (i) and (ii) of this subparagraph has a thirty-five percent 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 five percent.
7. The definition of “Related party transaction” is amended to create exceptions for recurring transactions below a monetary cap carried out by the NPC in the ordinary course of business, benefits provided to a person solely as a member of a charitable class that the NPC intends to benefit as part of its mission (consistent with IRS rule regarding excess benefit transactions 26 C.F.R. § 53.4958-4(a)(4)(v)), and reasonable compensation.
NPCL § 102(a)(24). “Related party transaction” means any transaction, agreement or any 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 OTHER THAN TRANSACTIONS IN THE ORDINARY COURSE OF BUSINESS IN WHICH THE CORPORATION OR ITS AFFILIATES HAVE AN INTEREST WHICH ANNUALLY DOES NOT EXCEED THE LESSER OF TWENTY-FIVE THOUSAND DOLLARS OR TWO PERCENT OF THE CORPORATION’S OR ITS AFFILIATES’ GROSS REVENUES, BENEFITS PROVIDED SOLELY TO A MEMBER OF A CLASS THAT THE CORPORATION OR ITS AFFILIATES INTEND TO BENEFIT AS PART OF THE ACCOMPLISHMENT OF THEIR MISSION, AND PAYMENT OF REASONABLE COMPENSATION OR BENEFITS TO EMPLOYEES, OFFICERS, TRUSTEES OR DIRECTORS OR THE REIMBURSEMENT OF REASONABLE EXPENSES INCURRED BY THEM ON BEHALF OF THE CORPORATION OR ITS AFFILIATES.
8. The definition of “Key employee” is amended to make its language consistent with the applicable sections of the Code and to correct the citations to the Code and regulations.
NPCL § 102(a)(25) “Key employee” means any [person who is in a position to exercise substantial influence over the affairs of the corporation, as referenced in 26 U.S.C. § 4958(f)(1)(a) and further specified in 26 CFR 53.4958-3 (c), (d) and (e), or succeeding provisions] INDIVIDUAL HAVING POWERS OR RESPONSIBILITIES SIMILAR TO THOSE OF OFFICERS, DIRECTORS, OR TRUSTEES, INCLUDING, WITH RESPECT TO AN ANY ACT OR FAILURE TO ACT, ANY EMPLOYEE HAVING AUTHORITY OR RESPONSIBILITY WITH RESPECT TO SUCH ACT OR FAILURE TO ACT, AS DEFINED IN EITHER SECTION FORTY-NINE HUNDRED FORTY-SIX (B)(1) AND (2) OR SECTION FORTY-NINE HUNDRED FIFTY-SIX OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, AND THE REGULATIONS THEREUNDER, AND ANY SUCCESSOR LAW OR REGULATION, WHICHEVER IS APPLICABLE TO THE CORPORATION.
9. Section 2 of the bill amends section 112(10) (Actions of special proceedings by attorney-general) to make grammatical changes to the subdivision to clarify that the Attorney General’s remedies are complementary and not alternative, an interpretation that could be applied to the current language of this subdivision.
NPCL §112(10). To enjoin, void or rescind any related party transaction, [or] seek [additional] damages [or] AND OTHER APPROPRIATE remedies, IN LAW OR EQUITY, INCLUDING pursuant to section 715 (related party transactions) of this chapter.
10. Section 3 of the bill amends section 112 (Actions of special proceedings by attorney-general) to add a new subdivision (11) , in view of the decision of the Court of Appeals in People v. Richard A. Grasso, to clarify that the parens patriae and other common-law and equitable authorities of the Attorney General (and by the same logic the common-law and equitable causes of action available to members, directors, officers, creditors and others) against NPCs and their members, directors and officers are not interpreted to be preempted by the NPCL, if those common law causes of action are independent of the NPCL’s statutory causes of action.
NPCL § 112(11).TO ENFORCE THE PARENS PATRIAE AUTHORITY AND ANY OTHER COMMON LAW OR EQUITABLE AUTHORITY OF THE ATTORNEY GENERAL AND ANY COMMON LAW OR EQUITABLE CAUSES OF ACTION AVAILABLE TO MEMBERS, DIRECTORS, TRUSTEES, KEY EMPLOYEES, OFFICERS, CREDITORS AND OTHERS AGAINST A CORPORATION AND ITS MEMBERS, DIRECTORS, TRUSTEES, KEY EMPLOYEES, AND OFFICERS NOT PREEMPTED BY THIS CHAPTER.
11. Section 4 of the bill amends section 112 (Actions of special proceedings by attorney-general) to limit the right to trial by jury in those cases guaranteed by article I, section 2 of the New York State Constitution and provided by section 4101 of the Civil Practice Law and Rules because from time to time Attorney General adversaries have asserted that section 112(b)(1) confers a right to a jury in all such actions, even if equitable relief is sought.
NPCL § 112(b)(1). If an action, it is triable by jury as a matter of right TO THE EXTENT GUARANTEED BY ARTICLE I, SECTION 2 OF THE CONSTITUTION AND PROVIDED BY SECTION FORTY-ONE HUNDRED ONE OF THE CIVIL PRACTICE LAW AND RULES.
12. Section 5 of the bill amends section 114 to expand the authority to invoke visitation of the supreme court with respect to any NPC, not just charitable corporations. The Attorney General’s enforcement rights under the Act would otherwise be limited to charitable corporations. The Attorney General has on many occasions confronted issues involving non-charitable corporations, social clubs (e.g., National Arts Club), trade associations (e.g., Racing Association, New York Stock Exchange before it converted to for profit), veterans organizations (too many to mention), cemetery corporations, political organizations, and so forth. Chapter 549’s amendment to section 115 regarding the power to solicit contributions is consistent with this recommendation because the regulation of solicitations therein is not limited to charitable corporations.
NPCL § 114. Visitation of supreme court. [Charitable corporations] Corporations, whether formed under general or special laws, with their books and vouchers, shall be subject to the visitation and inspection of a justice of the supreme court, or of any person appointed by the court for that purpose. If it appears by the verified petition of a member, DIRECTOR, TRUSTEE, KEY EMPLOYEE, OFFICER, or creditor of any such corporation, that it, or its directors, trustees, officers, MEMBERS, KEY EMPLOYEES, or agents, have misappropriated any of the funds or property of the corporation, or diverted them from the purpose of its incorporation, or that the corporation has acquired property in excess of the amount which it is authorized by law to hold, or has engaged in any business other than that stated in its certificate of incorporation, the court may order that notice of at least eight days, with a copy of the petition, be served on the corporation, THE ATTORNEY GENERAL, and the persons charged with misconduct, requiring them to show cause at a time and place specified, why they should not be required to make and file an inventory and account of the property, effects and liabilities of such corporation with a detailed statement of its transactions during the twelve months next preceding the granting of such order. On the hearing of such application, the court may make an order requiring such inventory, account and statement to be filed, and proceed to take and state an account of the property and liabilities of the corporation, or may appoint a referee for that purpose. When such account is taken and stated, after hearing all the parties to the application, the court may enter a final order determining the amount of property so held by the corporation, its annual income, whether any of the property or funds of the corporation have been misappropriated or diverted to any other purpose than that for which such corporation was incorporated, and whether such corporation has been engaged in any activity not covered by its certificate of incorporation. An appeal may be taken from the order by any party aggrieved to the appellate division of the supreme court, and to the court of appeals, as in a civil action. No corporation shall be required to make and file more than one inventory and account in any one year, nor to make a second account and inventory, while proceedings are pending for the statement of an account under this section.
Article 2 — Corporate Purposes and Powers
1. Section 6 of the bill amends section 201 (Purposes) to clarify procedures for the charitable or non-charitable status of Type B and C corporations which the current law presumes to be charitable. The amendment offers such corporations the option to file with the Secretary of State a notification of the NPC’s intention to operate as a Non-charitable corporation. This procedure is analogous to the procedure under section 113 allowing a NPC formed prior to the 1970 enactment of the NPCL to file a certificate of Type with the Secretary of State
NPCL § 201(c). A type B or C not-for-profit corporation formed prior to July first, two thousand fourteen shall be deemed a charitable corporation for all purposes under this chapter. Any submission or filing by such corporation to any person or entity shall be deemed to have been submitted or filed by a charitable corporation, and any reference in any such filing or submission referring to the status of such corporation as a type B or type C corporation shall be deemed to refer to a charitable corporation. IF A TYPE B OR C CORPORATION FORMED PRIOR TO JULY FIRST, TWO THOUSAND FOURTEEN WISHES TO BE CONSIDERED A NON-CHARITABLE CORPORATION IT SHALL DELIVER TO THE DEPARTMENT OF STATE A SIGNED CERTIFICATE WHICH SHALL BE ENTITLED A CERTIFICATE OF INTENT OF . . . . . . . (NAME OF CORPORATION) TO BE A NON-CHARITABLE CORPORATION PURSUANT TO SECTION 201 OF THE NOT-FOR-PROFIT CORPORATION LAW”, AND SHALL SET FORTH:
(1) THE NAME OF THE CORPORATION AND, IF IT HAS BEEN CHANGED, THE NAME UNDER WHICH IT WAS FORMED.
(2) THE DATE OF THE FILING OF ITS CERTIFICATE OF INCORPORATION BY THE DEPARTMENT OF STATE.
(3) THE LAW UNDER WHICH IT WAS FORMED.
(5) THAT IT ELECTS TO BE A NON-CHARITABLE CORPORATION.
Article 3 — Corporate Name and Service of Process
1. Section 7 of the bill amends subdivision (d) of section 304 (Statutory designation of secretary of state as agent of domestic corporation formed under article four of this chapter and authorized foreign corporations for service of process) to make it gender neutral.
NPCL § 304(d). Any designated post-office address to which the secretary of state shall mail a copy of process served upon him OR HER as agent of a domestic corporation formed under article four of this chapter or foreign corporation, shall continue until the filing of a certificate under this chapter directing the mailing to a different post-office address.
Article 4 — Formation of Corporations
1. Section 8 of the bill re-letters the subdivisions of section 404 (Approvals, notices and consents) to account for a repealed subdivision, substitutes the word “mail” for “provide” for clarity, and sets the time for sending notice to an agency after receipt of confirmation of filing with the secretary of state, also for clarity. This same time frame of sending notice to an agency after receipt of confirmation of filing with the secretary of state is also established in sections 909 (Consent to filing) and 1304 (Application for authority; contents).
NPCL § 404 (b)(2). A corporation whose statement of purposes specifically includes the establishment or operation of a child day care center, as that term is defined in section three hundred ninety of the social services law, shall [provide] MAIL a certified copy of the certificate of incorporation, each amendment thereto, and any certificate of merger, consolidation or dissolution involving such corporation to the office of children and family services within thirty days after RECEIPT OF THE CONFIRMATION OF the filing of such certificate, amendment, merger, consolidation or dissolution with the department of state. This requirement shall also apply to any foreign corporation filing an application for authority under section thirteen hundred four of this chapter, any amendments thereto, and any surrender of authority or termination of authority in this state of such corporation.
(d) Every corporation whose certificate of incorporation includes among its purposes the operation of a school; a college, university or other entity providing post-secondary education; a library; or a museum or historical society shall have endorsed thereon or annexed thereto the approval of the commissioner of education, or in the case of a college or a university, the written authorization of the [Regents] REGENTS OF THE UNIVERSITY OF THE STATE OF NEW YORK. Any other corporation the certificate of incorporation of which includes a purpose for which a corporation might be chartered by the regents of the university of the State of New York shall [provide] MAIL a certified copy of the certificate of incorporation to the commissioner of education within thirty [business] days after [the corporation receives confirmation from the department of state that the certificate has been accepted for] RECEIPT OF CONFIRMATION OF filing.
[(t)] (s) Every certificate of incorporation which includes among its purposes and powers the establishment or maintenance of a hospital or facility providing health related services, as those terms are defined in article twenty-eight of the public health law, or the solicitation of contributions for any such purpose or two or more of such purposes, shall have endorsed thereon the approval of the public health and health planning council.
[(u)] (t) Every certificate of incorporation which includes among the purposes of the corporation, the establishment or operation of a substance abuse, substance dependence, alcohol abuse, alcoholism, or chemical abuse or dependence program, or the solicitation of contributions for any such purpose, shall have endorsed thereon or annexed thereto the consent of the commissioner of the office of alcoholism and substance abuse services to its filing by the department of state.
[(v)] (u) Every certificate of incorporation which includes among the purposes of the corporation, the establishment, maintenance and operation of a nonprofit property/casualty insurance company, pursuant to article sixty-seven of the insurance law, shall have endorsed thereon or annexed thereto the approval of the superintendent of financial services.
[(w)] (v) Every certificate of incorporation in which the name of the proposed corporation includes the terms: “school,” “education,” “elementary,” “secondary,” “kindergarten,” “prekindergarten,” “preschool,” “nursery school,” “museum,” “history,” “historical,” “historical society,” “arboretum,” “library,” “college,” “university,” “PUBLIC TELEVISION,” “PUBLIC RADIO STATION,” or other term restricted by section two hundred twenty-four of the education law; “conservatory,” “academy,” or “institute,” or any abbreviation or derivative of such terms, shall have endorsed thereon or annexed thereto the consent of the commissioner of education.
2. Section 9 of the bill amends section 404 (Approvals, notices and consents) to address the practical problem of identifying who in the Department of Education (DOE) should actually receive notification of the filing of the certificate of incorporation of an NPC when notice to the DOE in lieu of DOE approval is allowed. Thus, the bill adds a new subdivision (w).
NPCL § 404(W). EACH AGENCY, PUBLIC OFFICER, ORGANIZATION OR PERSON TO WHOM A NOTICE OF INCORPORATION IS TO BE SENT OR FROM WHOM A CONSENT TO INCORPORATION MUST BE OBTAINED, AS PROVIDED IN THIS SECTION, SHALL PUBLISH THE NAME AND ADDRESS OF THE REPRESENTATIVE IT HAS DESIGNATED TO RECEIVE SUCH NOTICE OR REQUEST FOR CONSENT. ANY AGENCY, PUBLIC OFFICER, ORGANIZATION OR PERSON TO WHOM A REQUEST FOR CONSENT HAS BEEN SENT MUST CONSENT OR OBJECT, SETTING FORTH THE REASONS FOR SUCH OBJECTION, WITHIN FORTY-FIVE DAYS AFTER THE RECEIPT OF SUCH REQUEST. IF NO CONSENT IS RECEIVED, THE PERSON REQUESTING THE CONSENT SHALL MAKE AND FILE WITH THE SECRETARY OF STATE AN AFFIDAVIT TO THAT EFFECT. THE CONSENT SHALL BE CONCLUSIVELY PRESUMED TO HAVE BEEN GIVEN, AND THE SECRETARY OF STATE SHALL FILE THE CERTIFICATE OF INCORPORATION.
3. Section 10 of the bill amends section 406 (Private foundation, as defined in the United States internal revenue code of 1954: provisions included in the certificate of incorporation) to address the issue of excess compensation and to update the reference to the Internal Revenue Code. The section heading and subdivisions (a) and (d) of section 406 of the not-for-profit corporation law are amended.
NPCL § 406. Private foundations and PUBLICLY SUPPORTED CHARITABLE corporations, as defined in the United States internal revenue code of [1954] 1986, AS AMENDED; provisions included in the certificate of incorporation
(a)(i) The following provisions are hereby included in the certificate of incorporation of every domestic corporation, heretofore or hereafter formed, [to which this chapter applies in whole or in part,] and which is “private foundation” as defined in section 509 of the United States internal revenue code of [1954] 1986, AS AMENDED (“code”):
(1) The corporation shall distribute such amounts for each taxable year at such time and in such manner as not to subject the corporation to tax on undistributed income under section 4942 of the code.
(2) The corporation shall not engage in any act or self-dealing which is subject to tax under section 4941 of the code.
(3) The corporation shall not retain any excess business holdings which are subject to tax under section 4943 of the code.
(4) The corporation shall not make any investments in such manner as to subject the corporation to tax under section 4944 of the code.
(5) The corporation shall not make any taxable expenditures which are subject to tax under section 4945 of the code.
(ii) THE FOLLOWING PROVISION IS INCLUDED IN THE CERTIFICATE OF INCORPORATION OF EVERY DOMESTIC CORPORATION, HERETOFORE OR HEREAFTER FORMED, AND WHICH WOULD BE DESCRIBED IN PARAGRAPHS (3), (4) OR (29) OF SECTION 501(C) OF THE CODE AND WHICH IS NOT A PRIVATE FOUNDATION.
THE CORPORATION SHALL NOT ENGAGE IN ANY ACT WHICH IS SUBJECT TO TAX UNDER SECTION 4958 OF THE CODE.
Except as provided in paragraph (b), this paragraph applies notwithstanding any other provision of the certificate of incorporation or any direction in a gift instrument.
(d) Nothing in this section shall impair the rights and powers of the courts or the attorney-general of this state INCLUDING THOSE TO ENFORCE THE PROVISIONS INCLUDED IN CERTIFICATES OF INCORPORATION AS PROVIDED IN THIS SECTION.
Article 5 — Corporate Finance
1. Section 11 of the bill amends subdivisions (a) and (b) of section 509 (Purchase, sale, mortgage and lease of real property) to clarify that the term “board” means directors then in office.
NPCL § 509. (a) No corporation shall purchase real property unless such purchase is authorized by the vote of a majority of directors of the board THEN IN OFFICE or of a majority of a committee authorized by the board, provided, that if such property would, upon purchase thereof, constitute all, or substantially all, of the assets of the corporation, then the vote of two-thirds of the entire board shall be required, or, if there are twenty-one or more directors, the vote of a majority of the entire board shall be sufficient.
(b) No corporation shall sell, mortgage, lease, exchange or otherwise dispose of its real property unless authorized by the vote of a majority of directors of the board THEN IN OFFICE or of a majority of a committee authorized by the board; provided, that if such property constitutes all, or substantially all, of the assets of the corporation, then the vote of two-thirds of the entire board shall be required, or, if there are twenty-one or more directors, the vote of a majority of the entire board shall be sufficient.
2. Section 12 of the bill amends subdivision (a) of section 513 (Administration of assets received for a specific purpose) to extend protection to endowments held by non-charitable corporations because many non-charitable non-profits receive and hold endowments, e.g., social clubs.
NPCL § 513(a). A corporation [which is, or would be if formed under this chapter, a charitable corporation] shall hold full ownership rights in any assets consisting of funds or other real or personal property of any kind, that may be given, granted, bequeathed or devised to or otherwise vested in such corporation in trust for, or with a direction to apply the same to, any purpose specified in its certificate of incorporation, and shall not be deemed a trustee of an express trust of such assets. [Any other corporation subject to this chapter may similarly hold assets so received, unless otherwise provided by law or in the certificate of incorporation.]
3. Section 13 of the bill amends subdivision (b) of section 515 (Dividends prohibited; certain distributions of cash or property authorized) to clarify that the NPC permits reasonable compensation to private foundation managers, consistent with section 4942 of the Code.
NPCL § 515(b). A corporation may pay compensation in a reasonable amount to members, directors, or officers for services rendered , and may make distributions of cash or property to members upon dissolution or final liquidation as permitted by this chapter; No person who may benefit from such compensation may be present at or otherwise participate in any board or committee deliberation or vote concerning such person’s compensation; provided that nothing in this section shall prohibit the board or authorized committee from requesting that a person who may benefit from such compensation present information as background or answer questions at a committee or board meeting prior to the commencement of deliberations or voting relating thereto: PROVIDED, HOWEVER, THAT THIS SUBDIVISION SHALL NOT APPLY TO A CHARITABLE CORPORATION (1) THAT IS A PRIVATE FOUNDATION FOR PURPOSES OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED, OR SIMILAR PROVISION OF ANY SUCCESSOR LAW AND (2) A MAJORITY OR MORE OF WHOSE DIRECTORS ARE NOT INDEPENDENT: PROVIDED FURTHER THAT SUCH COMPENSATION AND BENEFITS ARE REASONABLE AND FOR SERVICES ACTUALLY PROVIDED UNDER THE APPLICABLE STANDARDS OF THE CODE AND THE TREASURY REGULATIONS THEREUNDER.
4. Section 14 of the bill amends subdivision (a) of section 519 (Annual report of directors) to add a new subsection (6) which requires certain corporations to present at the annual meeting an independent audit.
By way of background to this amendment, Chapter 549 added an audit requirement to the NPCL but very few NPCs will be required to comply. Article 7-A of the Executive Law requires only NPCs who employ professional fundraisers to raise money from New Yorkers to register with the Attorney General and file reports. Depending on the amount of gross annual revenue of the NPC established by section 172-b of the Executive Law, the NPC may be required to file an independent certified public accountant’s audit report (subdivision (1)), an annual financial report (subdivision (2)), or an unaudited financial report (subdivision (2-a)). Chapter 549=s audit requirement is further limited to Article 7-A filers with certain levels of gross annual revenue and support. The Act amends section 172-b of the Executive Law so that these levels increase in stages from $500,000, to $750,000 to $1,000,000 over the seven year period following the Act=s effective date.
It is not clear whether the Legislature intended that the audit requirements in the NPCL be limited to filers under Article 7-A of the Executive Law and understood how few charities would be affected. Although approximately 65,000 charities are registered with the New York State Law Department=s Charities Bureau, only approximately 589 charities (more than half of which are out-of-state) registered their professional fundraising contracts with the Bureau in 2012 as required by Executive Law Article 7-A, because they were raising money from New Yorkers. Adding to the confusion, section 132 of Chapter 549, which governs the Act’s effective date, provides that the audit oversight requirements of new section 712-a for Article 7-A filers and for charitable trusts under section 8-1.9(b) of the Estates, Powers and Trusts Law do not take effect until January 1, 2015, and apply only to NPCs and trusts with revenues, not assets, of $10,000,000 or more. Of them, few if any, are Article 7-A filers.
As a consequence, we are not sure what the Legislature intended by the audit requirement. Its intention is complicated by the strange provision in section 132 of Chapter 549 which we propose be repealed. The purpose of the proposed amendment to section 519 is to begin a dialogue about what audit requirements should apply to NPCs which do not employ fundraisers, solicitors or counsellors for purposes of Executive Law. We propose standards applicable to all corporations that are consistent with those in Executive Law Article 7-A but would apply the audit requirement regardless of gross revenues if they receive federal or state monies. The Commission believes that the annual audit requirement should be applicable to any corporation that receives any federal or state funds.
§ 14. [Effective until June 30, 2017] NPCL § 519(a)(6). IN PLACE OF THE VERIFIED REPORT OF ITS PRESIDENT AND TREASURER, AN AUDIT REPORT PREPARED BY AN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT MUST BE PRESENTED TO THE ANNUAL MEETING OF ITS MEMBERS, OR IF IT HAS NO MEMBERS, TO THE ANNUAL MEETING OF ITS BOARD IF THE CORPORATION HAS RECEIVED DURING THE YEAR IN QUESTION ANY FEDERAL OR STATE MONIES OR IF THE CORPORATION SHALL RECEIVE IN ANY FISCAL YEAR GROSS REVENUE AND SUPPORT IN EXCESS OF FIVE HUNDRED THOUSAND DOLLARS.
§ 14-a. [Eff. July 1, 2017 until June 30, 2021] NPCL § 519(a)(6). IN PLACE OF THE VERIFIED REPORT OF ITS PRESIDENT AND TREASURER, AN AUDIT REPORT PREPARED BY AN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT MUST BE PRESENTED TO THE ANNUAL MEETING OF ITS MEMBERS, OR IF IT HAS NO MEMBERS, TO THE ANNUAL MEETING OF ITS BOARD IF THE CORPORATION HAS RECEIVED DURING THE YEAR IN QUESTION ANY FEDERAL OR STATE MONIES OR IF THE CORPORATION SHALL RECEIVE IN ANY FISCAL YEAR GROSS REVENUE AND SUPPORT IN EXCESS OF SEVEN HUNDRED – FIFTY THOUSAND DOLLARS.
§ 14-b. [Eff. July 1, 2021] IN PLACE OF THE VERIFIED REPORT OF ITS PRESIDENT AND TREASURER, AN AUDIT REPORT PREPARED BY AN INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT MUST BE PRESENTED TO THE ANNUAL MEETING OF ITS MEMBERS, OR IF IT HAS NO MEMBERS, TO THE ANNUAL MEETING OF ITS BOARD IF THE CORPORATION HAS RECEIVED DURING THE YEAR IN QUESTION ANY FEDERAL OR STATE MONIES OR IF THE CORPORATION SHALL RECEIVE IN ANY FISCAL YEAR GROSS REVENUE AND SUPPORT IN EXCESS OF ONE MILLION DOLLARS.
Article 6 — Members
1. Section 15 of the bill amends section 606 (Waivers of notice) to make it gender neutral.
NPCL § 606. Notice of meeting need not be given to any member who submits a waiver of notice, in person or by proxy, whether before or after the meeting. Waiver of notice may be written or electronic. If written, the waiver must be executed by the member or the member’s authorized officer, director, employee, or agent by signing such waiver or causing his OR HER signature to be affixed to such waiver by any reasonable means, including, but not limited to facsimile signature. If electronic, the transmission of the waiver must be sent by electronic mail and set forth, or be submitted with, information from which it can reasonably be determined that the transmission was authorized by the member. The attendance of any member at a meeting, in person or by proxy, without protesting prior to the conclusion of the meeting the lack of notice of such meeting, shall constitute a waiver of notice by him OR HER.
2. Section 16 of the bill amends section 614 (Action of members without a meeting) to substitute the word “consent” for the word “waiver,” making a technical correction.
NPCL § 614. (a) Whenever, under this chapter, members are required or permitted to take any action by vote, such action may be taken without a meeting upon the consent of all of the members entitled to vote thereon, which consent shall set forth the action so taken. Such consent may be written or electronic. If written, the consent must be executed by the member or the member’s authorized officer, director, employee or agent by signing such consent or causing his OR HER signature to be affixed to such [waiver] CONSENT by any reasonable means including but not limited to facsimile signature. If electronic, the transmission of the consent must be sent by electronic mail and set forth, or be submitted with, information from which it can reasonably be determined that the transmission was authorized by the member. This paragraph shall not be construed to alter or modify any provision in a certificate of incorporation not inconsistent with this chapter under which the written consent of less than all of the members is sufficient for corporate action.
(b) Written or electronic consent thus given by all members entitled to vote shall have the same effect as a unanimous vote of members and any certificate with respect to the authorization or taking of any such action which is delivered to the department of state shall recite that the authorization was by unanimous written consent.
(c) When there are no members of record, such action may be taken on the written consent signed by a majority in interest of the subscribers for capital certificates whose subscriptions have been accepted or their successors in interest or, if no subscription has been accepted, on the written consent signed by the incorporator or a majority of the incorporators. When there are two or more incorporators, if any dies or is for any reason unable to act, the other or others may act. If there is no incorporator able to act, any person for whom an incorporator was acting as agent may act in his OR HER stead, or if such other person also dies or is for any reason unable to act, his OR HER legal representative may act.
3. Section 17 of the bill amends subdivision (e) of section 621 (Books and records; right of inspection; prima facie evidence) to align its requirements with the proposed amendment to section 519 regarding audits and to make the subdivision gender neutral.
NPCL § 621(e). Upon the written request of any person who shall have been a member of record for at least six months immediately preceding HER OR his request, or of any person holding, or thereunto authorized in writing by the holders of, at least five percent of any class of the outstanding capital certificates, the corporation shall provide to such member an annual balance sheet and profit and loss statement or a financial statement performing a similar function for the preceding fiscal year THAT COMPLIES WITH THE APPLICABLE REQUIREMENTS OF SECTION 519 OF THIS CHAPTER and, if any interim balance sheet or profit and loss or similar financial statement has SUBSEQUENTLY been distributed to its members or otherwise made available to the public, the most recent such interim balance sheet or profit and loss or similar financial statement. The corporation shall be allowed a reasonable time to prepare such annual balance sheet and profit and loss or similar financial statement.
Article 7 — Directors and Officers
1. Section 18 of the bill amends section 702 (Number of directors) to address a grammar problem and to delete the reference to by-laws adopted by members because section 702 already allows boards without members to have by-laws setting the size of the board.
NPCL § 702(a). The number of directors constituting the entire board shall be not less than three. Subject to such limitation, such number may be fixed by the by-laws or by action of the members or of the board under the specific provisions of a by-law allowing such action, or IF NOT SO FIXED, BE [by] any number within a range set forth in the by-laws. If not otherwise fixed under this paragraph, the number shall be three.
(b) The number of directors may be increased or decreased by amendment of the by-laws or, in the case of a corporation having members, by action of the members, or of the board under the specific provisions of a by-law [adopted by the members], subject to the following limitations:
(1) If the board is authorized by the by-laws to change the number of directors, whether by amending the by-laws or by taking action under the specific provisions of a by-law [adopted by the members], such amendment or action shall require the vote of a majority of the entire board.
(2) No decrease shall shorten the term of any incumbent director.
2. Section 19 of the bill amends subsection (c) of section 711 (Notice of meetings of the board) to substitute the word “waiver” for the word “consent” making a technical correction.
NPCL § 711(c). Notice of a meeting need not be given to any alternate director, nor to any director who submits a waiver of notice whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him. Such waiver of notice may be written or electronic. If written, the waiver must be executed by the director signing such waiver or causing his or her signature to be affixed to such waiver by any reasonable means including but not limited to facsimile signature. If electronic, the transmission of the [consent] WAIVER must be sent by electronic mail and set forth, or be submitted with, information from which it can reasonably be determined that the transmission was authorized by the director.
3. Section 20 of the bill amends section 712 (Executive committees and other committees) to make the creation of committees other than the executive committee, audit committee, and other standing committees.
NPCL § 712(a). [If the certificate of incorporation or the by-laws so provide, the] THE board, by resolution adopted by a majority of the entire board, may designate from among its members an executive committee, AN AUDIT COMMITTEE AND OTHER STANDING committees, each consisting of three or more directors. THE EXECUTIVE COMMITTEE [each of which], to the extent provided in the resolution or in the certificate of incorporation or by-laws, shall have all the authority of the board, except that no such committee shall have authority as to the following matters:
(1) The submission to members of any action requiring members’ approval under this chapter.
(2) The filling of vacancies in the board of directors or in any committee.
(3) The fixing of compensation of the directors for serving on the board or on any committee.
(4) The amendment or repeal of the by-laws or the adoption of new by-laws.
(5) The amendment or repeal of any resolution of the board which by its terms shall not be so amendable or repealable.
(b) ANY AUDIT COMMITTEE SHALL HAVE THE POWERS AND DUTIES SPECIFIED IN SECTIONS 519 AND 712-a AND ANY OTHER APPLICABLE PROVISIONS OF THIS CHAPTER AND ANY ADDITIONAL POWERS AND DUTIES AS MAY BE SPECIFIED IN RESOLUTIONS OF THE BOARD, THE CERTIFICATE OF INCORPORATION OR THE BY-LAWS OF THE CORPORATION.
(c) ANY OTHER STANDING COMMITTEE SHALL HAVE SUCH POWERS AND DUTIES AS MAY BE SPECIFIED IN RESOLUTIONS OF THE BOARD, THE CERTIFICATE OF INCORPORATION OR THE BY-LAWS OF THE CORPORATION.
(d) IN LIEU OF DESIGNATION BY THE BOARD, THE MEMBERS OF COMMITTEES MAY BE NAMED IN THE BY-LAWS AS DIRECTORS WHO ARE THE HOLDERS OF CERTAIN OFFICES.
[(b)] (e) The board may designate one or more directors as alternate members of any [standing] committee, who may replace any absent member or members at any meeting of such committee.
(f) THE BY-LAWS MAY PROVIDE FOR SPECIAL COMMITTEES OF THE BOARD, OR MAY AUTHORIZE THE BOARD TO CREATE SUCH SPECIAL COMMITTEES AS MAY BE DEEMED DESIRABLE. UNLESS OTHERWISE PROVIDED IN THE BY-LAWS, THE MEMBERS OF SUCH COMMITTEES SHALL BE APPOINTED BY THE CHAIR OF THE BOARD OR BY THE PRESIDENT OF THE CORPORATION IF THERE IS NO CHAIR OF THE BOARD. SPECIAL COMMITTEES SHALL HAVE ONLY THE POWERS SPECIFICALLY DELEGATED TO THEM BY THE BOARD AND IN NO CASE SHALL HAVE POWERS WHICH ARE NOT AUTHORIZED FOR OTHER COMMITTEES UNDER THIS SECTION.
(g) Each committee of the board shall serve at the pleasure of the board. The designation of any such committee and the delegation thereto of authority shall not alone relieve any director of his duty to the corporation under section 717 (Duty of directors and officers).
(h) Committees, other than standing or special committees of the board, whether created by the board or by the members, shall be committees of the corporation. Such committees of the corporation may be elected or appointed [in the same manner as officers of the corporation] AS SET FORTH IN THE BY-LAWS, but no such committee shall have the authority to bind the board. Provisions of this chapter applicable to officers generally shall apply to members of such committees. [Such committees of the corporation shall be elected or appointed in the manner set forth in the by-laws, or if not set forth in the by-laws, in the same manner as officers of the corporation.]
4. Section 21 of the bill amends the introductory paragraph of section 712-a (b) (Audit oversight) to make its provision consistent with the proposed amendment to section 519 regarding required independent audits for NPCs which receive federal or state monies or otherwise meet the revenue standards in section 519. Please refer to the discussion of the proposed amendment to NPCL § 519 at pp. 14-15.
NPCL § 712-a (b). The board, or a designated audit committee of the board comprised solely of independent directors, of any corporation required to file an independent certified public accountant’s audit report with the attorney general pursuant to subdivision one of section one hundred seventy-two-b of the executive law OR TO PRESENT TO ITS MEMBERS OR DIRECTORS, OR BOTH, AN AUDIT REPORT PURSUANT TO SECTION 519 OF THIS CHAPTER [and that in the prior fiscal year had or in the current fiscal year reasonably expects to have annual gross revenue in excess of one million dollars] shall, in addition to those duties set forth in [paragraph] SUBDIVISION (a) of this section:
5. Section 22 of the bill repeals subdivision (c) of section 712-a (Audit oversight)(The board or designated audit committee of the board shall oversee the adoption, implementation of, and compliance with any conflict of interest policy or whistleblower policy adopted by the corporation if this function is not otherwise performed by another committee of the board comprised solely of independent directors.).
It has been suggested that the requirement in section 712-a(c) that either the entire board or the audit committee or other committee of independent directors must oversee a conflict or whistleblower policy is unnecessary. While the exclusion of non-independent directors makes sense for audit matters, it does not make sense in the context of related party transactions, other conflict matters and whistleblower matters. The more important protection is the one provided by N-PCL §§ 715(g) and 715-a(b)(3): that the persons considering the related party transaction or conflict of interest are not conflicted.”
NPCL § 712-a(c) is REPEALED.
6. Section 23 of the bill amends subdivision (e) of section 712-a (Audit oversight) to allow related parties to present information about related party transactions before deliberations and voting. It also excuses private foundations lacking the requisite number of independent directors from complying with this subdivision.
NPCL§ 712-a(e). Only independent directors may participate in any board or committee deliberations or voting relating to matters set forth in this section[,]: PROVIDED , HOWEVER, THAT NOTHING IN THIS SECTION SHALL PROHIBIT THE BOARD OR AUDIT COMMITTEE FROM REQUESTING THAT A PERSON PRESENT INFORMATION OR ANSWER QUESTIONS AT A COMMITTEE OR BOARD MEETING PRIOR TO THE COMMENCEMENT OF DELIBERATIONS OR VOTING RELATING THEREON: PROVIDED FURTHER THAT A CORPORATION THAT IS A PRIVATE FOUNDATION FOR PURPOSES OF SECTION 406 OF THIS CHAPTER AND THAT DOES NOT HAVE A QUORUM OF INDEPENDENT DIRECTORS IS EXCUSED FROM COMPLIANCE WITH THIS SUBDIVISION.
7. Section 24 of the bill amends subdivision (a) of section 713 (Officers) to limit the offices that can be held by the same person on the board. Corporate governance best practices provide that no person should be both chair and president. Similarly, no person who is chair should be also secretary, and no person who is chair or president should also be treasurer.
NPCL § 713(a). The board may elect or appoint a chair OF THE BOARD or president, or both, one or more vice-presidents, a secretary and a treasurer, and such other officers as it may determine, or as may be provided in the by-laws. These officers may be designated by such alternate titles as may be provided in the certificate of incorporation or the by-laws. Any two or more offices may be held by the same person, except the offices of president OR CHAIR and secretary, AND PRESIDENT OR CHAIR AND TREASURER or the offices corresponding thereto.
8. Section 25 amends subdivision (f) of section 713 (Officers) to limit the prohibition on an employee serving as president, lead director or other office with similar responsibilities to NPCs with annual revenue in excess of one million dollars. The prohibition thus will not adversely impact small private foundations and start-up NPCs where it is likely that people serve as both employees and officers.
NPCL § 713(f). No employee of [the]A corporation THAT IN THE PRIOR FISCAL YEAR HAD ANNUAL REVENUE IN EXCESS OF ONE MILLION DOLLARS ALSO shall serve as chair of the board, A LEAD DIRECTOR, or hold any other [title] OFFICE with similar responsibilities.
9. Section 26 of the bill amends subdivision (a) of section 715 (Interested directors and officers) regarding several aspects of related party transactions: 1) they can be ratified if the required procedures are not followed initially, 2) the Board or committee, rather than the NPC is the approving or ratifying body.
NPCL § 715 (a). [No corporation shall enter into any] NEITHER THE BOARD NOR AN AUTHORIZED COMMITTEE OF THE BOARD MAY APPROVE OR RATIFY A related party transaction unless the transaction is determined by the board to be fair, reasonable and in the corporation’s best interest at the time of such determination. Any director, officer or key employee who has an interest in a related party transaction shall disclose in good faith to the board, or TO an authorized committee thereof, the material facts concerning such interest.
10. Section 27 of the bill amends subdivision (b) of section 715 (Interested directors and officers) to require additional procedures for all NPCs ( not just charitable NPCs) and where the corporation and its affiliates have a financial interest and the transaction exceeds the lesser of twenty-five thousand dollars or two percent of the corporation’s gross revenues.
NPCL § 715(b). With respect to any related party transaction [involving a charitable corporation and] in which [a related party] THE CORPORATION OR ITS AFFILIATES [has] HAVE a [substantial] financial interest AND WHICH EXCEEDS THE LESSER OF TWENTY-FIVE THOUSAND DOLLARS OR TWO PERCENT OF THE CORPORATION’S OR ITS AFFILIATES’ GROSS REVENUES, the board of such corporation, or an authorized committee thereof, shall:
(1) Prior to entering into the transaction, consider alternative transactions to the extent available;
(2) approve the transaction by not less than a majority vote of the directors or committee members present at the meeting; and
(3) contemporaneously document in writing the basis for the board or authorized committee’s approval, including its consideration of any alternative transactions.
11. Section 28 of the bill amends subdivision (f) of section 715 (Interested officers and directors) to make it consistent with the requirement of section 406 and replaces the term “salaries” with “compensation and benefits.”
NPCL § 715(f). The fixing of [salaries] THE COMPENSATION AND BENEFITS of officers, DIRECTORS, KEY MEN AND EMPLOYEES, if not done in or pursuant to the by-laws, shall require the affirmative vote of a majority of the entire board unless a higher proportion is set by the certificate of incorporation or by-laws AND SHALL BE CONSISTENT WITH THE APPLICABLE STANDARDS SET FORTH IN SECTION 406 OF THIS CHAPTER.
12. Section 29 of the bill amends subdivision (g) of section 715 (Interested directors and officers) to address the problem of maintaining a quorum when interested directors must be excused from participating in discussions and voting on a related party transaction.
NPCL § 715(g). No related party may participate in deliberations or voting relating to [matters set forth in this section] A RELATED PARTY TRANSACTION IN WHICH HE OR SHE HAS AN INTEREST; provided that nothing in this section shall prohibit the board or authorized committee from requesting that a related party present information concerning a related party transaction at a board or committee meeting prior to the commencement of deliberations or voting relating thereto. DIRECTORS WHO HAVE BEEN PRESENT AT A MEETING BUT MAY NOT PRESENT AT THE TIME OF A VOTE ON A RELATED PARTY TRANSACTION SHALL NEVERTHELESS BE CONSIDERED AS PRESENT AT THE TIME OF THE VOTE IF NECESSARY TO ENSURE THAT A QUORUM EXISTS UNDER PARAGRAPH (D) OF SECTION 708.
13. Section 30 of the bill amends paragraph (3) of subdivision (b) of section 715-a (Conflict of Interest Policy) to allow the related party to answer questions and provide information to the members of the board prior to deliberations and voting on a related party transaction.
NPCL § 715-a(b)(3). a requirement that the person with the conflict of interest not be present at or participate in board or committee deliberation or vote on the matter giving rise to such conflict: PROVIDED THAT NOTHING IN THIS SECTION SHALL PROHIBIT THE BOARD OR COMMITTEE FROM REQUESTING THAT A PERSON WITH A CONFLICT OF INTEREST PRESENT INFORMATION OR ANSWER QUESTIONS AT A COMMITTEE OR BOARD MEETING PRIOR TO THE COMMENCEMENT OF DELIBERATIONS OR VOTING THEREON.
14. Section 31 of the bill amends subdivision (c) of section 715-a (Conflict of interest policy) to identify NPCs which must require Board members to sign a conflict of interest policy.
NPCL § 715-a(c). The conflict of interest policy shall require THAT CORPORATIONS REQUIRED TO FILE WITH THE INTERNAL REVENUE SERVICE A FORM 990 OR 990PF (AND NOT A FORM 990 EZ, 990-N OR OTHER SHORT FORM) OR REQUIRED TO HAVE AN AUDIT COMMITTEE PURSUANT TO SECTION 712-A, prior to the initial election of any director OR PROMPTLY AFTER, and annually thereafter, SHALL REQUIRE [such] EACH director [shall] TO complete, sign and submit to the secretary of the corporation a written statement identifying, to the best of the director’s knowledge, any entity, of which such director OR A RELATED PARTY is an officer, director, trustee, member, [owner (either as a sole proprietor or a partner), HOLDER OR BENEFICIARY OF A SUBSTANTIAL FINANCIAL INTEREST or employee [and] with which the corporation has a relationship, and any transaction in which the corporation OR AN ENTITY CONTROLLED BY THE CORPORATION is a participant and in which the director might have a conflict[ing] of interest.
[The policy shall require that each director annually resubmit such written statement.] The secretary of the corporation shall PROMPTLY provide a copy of all completed statements to the chair of the audit committee or, if there is no audit committee, to the chair of the board, OR IF THERE IS NO CHAIR, TO THE PRESIDENT OF THE CORPORATION. A CORPORATION THAT MAY FILE AN INTERNAL REVENUE SERVICE FORM 990EZ OR FORM 990N OR OTHER SHORT FORM IN LIEU OF A FORM 990 OR FORM 990PF NEED NOT COMPLY WITH THIS SUBDIVISION.
15. Section 32 of the bill amends paragraph (3) of subsection (b) of section 715-b (Conflict of interest policy) to describe how the policy must be made know to employees and volunteers of the NPC.
NPCL § 715-a(b)(3). a requirement that a copy of the policy be distributed to all directors, officers, AND employees and to volunteers who provide substantial services to the corporation WHO SHALL SIGN A COPY AND RETURN IT TO THE SECRETARY OF THE CORPORATION. THE POLICY SHALL ALSO BE POSTED ON THE CORPORATION’S WEBSITE AND AT EACH OF CORPORATION’S OFFICES IN A CONSPICUOUS LOCATION ACCESSIBLE TO ALL EMPLOYEES AND VOLUNTEERS.
16. Section 33 of the bill amends section 716 (Loans to directors and officers) to add key employees to those subject to the prohibition of loans under this section.
NPCL § 716. No loans, other than through the purchase of bonds, debentures, or similar obligations of the type customarily sold in public offerings, or through ordinary deposit of funds in a bank, shall be made by a corporation to its directors or officers, OR KEY EMPLOYEES, or to any other [corporation, firm, association or other] entity in which one or more of [its] THE CORPORATION’S directors or officers are directors or officers OR KEY EMPLOYEES or hold OR ARE THE BENEFICIARY OF a substantial financial interest, except a loan by one charitable corporation to another charitable corporation. A loan made in violation of this section shall be a violation of the duty to the corporation of the directors or officers authorizing it or participating in it, but the obligation of the borrower with respect to the loan shall not be affected thereby.
17. Sections 34, 35 and 36 of the bill address the indemnification provisions of the NPCL. Testimony at the Senate hearings supported consolidation and simplification of the NPCL’s unduly long and complex indemnification provisions. The NPCL contains six provisions governing indemnification: sections 721 (Nonexclusivity of statutory provisions for indemnification), 722 (Authorization for indemnification), 723 (Payment of indemnification other than by court award), 724 (Indemnification of officers and directors by a court), 725 (Other provisions affecting indemnification of directors and court officers, and 726 (Indemnification insurance).These various indemnification provisions are prolix. In addition, indemnification insurance which is governed by section 726 is now commonplace, making detailed regulation no longer necessary. The bill proposes a consolidation which incorporates the indemnification requirements of sections 721, 722, 723, and 726 into a new section 722, slightly modifies court ordered indemnification of section724, and retains section 725.
§ 34. NPCL § §721 (Nonexclusivity of statutory provisions for indemnification), 723 (Payment of indemnification other than by court award), and 726 (Indemnification insurance), are hereby REPEALED.
§ 35. NPCL § 722 (Authorization for indemnification), is REPEALED and a new section 722 is added to read as follows:
NPCL § 722. AUTHORIZATION FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS, EMPLOYEES, AND AGENTS; INSURANCE
(A) A CORPORATION MAY INDEMNIFY AGAINST EXPENSES, INCLUDING JUDGMENTS, FINES, EXCISE TAXES, AMOUNTS PAID IN SETTLEMENT, ATTORNEYS’ FEES, COURT COSTS AND DISBURSEMENTS ACTUALLY AND NECESSARILY INCURRED AS A RESULT OF SUCH ACTION OR PROCEEDING, OR ANY APPEAL THEREOF, ANY PERSON,
(I) WHO WAS OR IS A PARTY OR IS THREATENED TO BE MADE A PARTY TO ANY THREATENED, PENDING OR COMPLETED ACTION, SUIT OR PROCEEDING, OR ANY APPEAL THEREOF, WHETHER CIVIL, CRIMINAL, ADMINISTRATIVE OR INVESTIGATIVE (INCLUDING AN ACTION BY OR IN THE RIGHT OF THE CORPORATION); AND
(II) WHO HAS ACTED IN GOOD FAITH AND IN A MANNER THE PERSON REASONABLY BELIEVED TO BE IN OR NOT OPPOSED TO THE BEST INTERESTS OF THE CORPORATION, AND WITH RESPECT TO ANY CRIMINAL ACTION OR PROCEEDING, THAT PERSON HAD NO REASONABLE CAUSE TO BELIEVE THAT ITS CONDUCT WAS UNLAWFUL.
A PERSON WHO MAY BE INDEMNIFIED UNDER THIS SECTION SHALL INCLUDE A PERSON (I) WHOSE TESTATOR OR INTESTATE IS OR WAS A DIRECTOR, OFFICER, EMPLOYEE OR AGENT OF THE CORPORATION, OR, (II) WHO IS OR WAS SERVING IN ANY CAPACITY AT THE REQUEST OF THE CORPORATION AS A DIRECTOR, OFFICER, EMPLOYEE OR AGENT OF ANOTHER CORPORATION, PARTNERSHIP, JOINT VENTURE, TRUST, ESTATE, EMPLOYEE BENEFIT PLAN OR OTHER ENTERPRISE;
(B)THE TERMINATION OF ANY ACTION, SUIT OR PROCEEDING BY JUDGMENT, ORDER, SETTLEMENT, CONVICTION, OR UPON A PLEA OF NOLO CONTENDERE OR ITS EQUIVALENT, SHALL NOT, OF ITSELF, CREATE A PRESUMPTION THAT THE PERSON DID NOT ACT IN GOOD FAITH AND IN A MANNER WHICH THE PERSON REASONABLY BELIEVED TO BE IN OR NOT OPPOSED TO THE BEST INTERESTS OF THE CORPORATION, AND WITH RESPECT TO ANY CRIMINAL ACTION OR PROCEEDING, HAD REASONABLE CAUSE TO BELIEVE THAT THE PERSON’S CONDUCT WAS UNLAWFUL.
(C) NO INDEMNIFICATION SHALL BE MADE IN RESPECT OF ANY CLAIM, ISSUE OR MATTER AS TO WHICH SUCH PERSON SHALL HAVE BEEN ADJUDGED TO BE LIABLE, INCLUDING LIABILITY TO THE CORPORATION, UNLESS AND ONLY TO THE EXTENT THAT THE COURT, IN WHICH SUCH ACTION OR SUIT WAS BROUGHT, SHALL DETERMINE, UPON APPLICATION, THAT, DESPITE THE ADJUDICATION OF LIABILITY BUT IN VIEW OF ALL THE CIRCUMSTANCES OF THE CASE, SUCH PERSON IS FAIRLY AND REASONABLY ENTITLED TO INDEMNIFICATION FOR SUCH EXPENSES (INCLUDING ATTORNEY’S FEES, COURT COSTS AND DISBURSEMENTS), JUDGMENTS, FINES, EXCISE TAXES, AND AMOUNTS PAID IN SETTLEMENT THAT THE COURT SHALL DEEM NECESSARY AND PROPER.
(D) EXPENSES (INCLUDING ATTORNEYS’ FEES, COURT COSTS AND DISBURSEMENTS) INCURRED BY AN OFFICER, DIRECTOR, EMPLOYEE OR AGENT OF THE CORPORATION IN DEFENDING ANY CIVIL, CRIMINAL, ADMINISTRATIVE OR INVESTIGATIVE ACTION, SUIT OR PROCEEDING MAY BE PAID BY THE BOARD OF DIRECTORS OF THE CORPORATION IN ADVANCE OF THE FINAL DISPOSITION OF SUCH ACTION, SUIT OR PROCEEDING UPON RECEIPT OF AN UNDERTAKING IN ACCORDANCE WITH CIVIL PRACTICE LAW AND RULES ARTICLE 25 BY OR ON BEHALF OF SUCH DIRECTOR, OFFICER, EMPLOYEE OR AGENT TO REPAY SUCH AMOUNT IF IT SHALL ULTIMATELY BE DETERMINED THAT SUCH PERSON IS NOT ENTITLED TO BE INDEMNIFIED AS AUTHORIZED IN THIS SECTION. SUCH EXPENSES (INCLUDING ATTORNEYS’ FEES, COURT COSTS AND DISBURSEMENTS) INCURRED BY FORMER DIRECTORS, OFFICERS EMPLOYEES OR AGENTS OF THE CORPORATION OR BY PERSONS, SERVING AT THE REQUEST OF THE CORPORATION AS DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS OF ANOTHER CORPORATION, PARTNERSHIP, JOINT VENTURE, TRUST OR OTHER ENTERPRISE, MAY BE SO PAID UPON SUCH FURTHER TERMS AND CONDITIONS, IF ANY, AS THE BOARD OF DIRECTORS OF THE CORPORATION DEEMS APPROPRIATE.
(E) ANY INDEMNIFICATION OR ADVANCEMENT UNDER THIS SECTION (UNLESS ORDERED BY A COURT) SHALL BE MADE BY THE BOARD OF DIRECTORS OF THE CORPORATION ONLY AS AUTHORIZED IN THE SPECIFIC CASE UPON A DETERMINATION THAT INDEMNIFICATION OF THE PRESENT OR FORMER DIRECTOR, OFFICER, EMPLOYEE OR AGENT IS PROPER IN THE CIRCUMSTANCES BECAUSE THE PERSON HAS MET OR IN THE CASE OF AN ADVANCE CAN BE REASONABLY EXPECTED TO MEET THE APPLICABLE STANDARD OF CONDUCT SET FORTH IN SUBDIVISION (A) OF THIS SECTION:
(I) BY A MAJORITY VOTE OF THE DIRECTORS WHO ARE NOT PARTIES TO SUCH ACTION, SUIT OR PROCEEDING, EVEN THOUGH LESS THAN A QUORUM; OR
(II) BY A COMMITTEE OF SUCH DIRECTORS DESIGNATED BY MAJORITY VOTE OF SUCH DIRECTORS, EVEN THOUGH LESS THAN A QUORUM; OR
(III) IF THERE ARE NO SUCH DIRECTORS, OR IF SUCH DIRECTORS SO DIRECT, BY INDEPENDENT LEGAL COUNSEL IN A WRITTEN OPINION; OR
(IV) BY THE MEMBERS, IF ANY.
(F) THE INDEMNIFICATION AND ADVANCEMENT PROVIDED BY, OR GRANTED PURSUANT TO, THE OTHER SUBSECTIONS OF THIS SECTION SHALL NOT BE DEEMED EXCLUSIVE OF ANY OTHER RIGHTS TO WHICH THOSE SEEKING INDEMNIFICATION OR ADVANCEMENT OF EXPENSES MAY BE ENTITLED UNDER ANY CERTIFICATE OF INCORPORATION, BYLAW, AGREEMENT, VOTE OF MEMBERS OR OF DISINTERESTED DIRECTORS OR OTHERWISE, BOTH AS TO ACTION IN SUCH PERSON’S OFFICIAL CAPACITY AND AS TO ACTION IN ANOTHER CAPACITY WHILE HOLDING SUCH OFFICE. A RIGHT TO INDEMNIFICATION OR TO ADVANCEMENT OF EXPENSES ARISING UNDER A PROVISION OF THE CERTIFICATE OF INCORPORATION OR A BYLAW SHALL NOT BE ELIMINATED OR IMPAIRED BY AN AMENDMENT TO THE CERTIFICATE OF INCORPORATION OR THE BYLAWS AFTER THE OCCURRENCE OF THE ACT OR OMISSION THAT IS THE SUBJECT OF THE CIVIL, CRIMINAL, ADMINISTRATIVE OR INVESTIGATIVE ACTION, SUIT OR PROCEEDING FOR WHICH INDEMNIFICATION OR ADVANCEMENT OF EXPENSES IS SOUGHT, UNLESS THE PROVISION IN EFFECT AT THE TIME OF SUCH ACT OR OMISSION EXPLICITLY AUTHORIZES SUCH ELIMINATION OR IMPAIRMENT AFTER SUCH ACTION OR OMISSION HAS OCCURRED.
(G) A CORPORATION MAY PURCHASE AND MAINTAIN INSURANCE ON BEHALF OF ANY PERSON WHO IS OR WAS A DIRECTOR, OFFICER, EMPLOYEE OR AGENT OF THE CORPORATION, OR IS OR WAS SERVING AT THE REQUEST OF THE CORPORATION AS A DIRECTOR, OFFICER, EMPLOYEE OR AGENT OF ANOTHER CORPORATION, PARTNERSHIP, JOINT VENTURE, TRUST, ESTATE, EMPLOYEE BENEFIT OR OTHER ENTERPRISE, AGAINST ANY LIABILITY ASSERTED AGAINST SUCH PERSON AND INCURRED BY SUCH PERSON IN ANY SUCH CAPACITY, OR ARISING OUT OF SUCH PERSON’S STATUS AS SUCH, WHETHER OR NOT THE CORPORATION WOULD HAVE THE POWER TO INDEMNIFY SUCH PERSON AGAINST SUCH LIABILITY UNDER THIS SECTION.
(H) FOR PURPOSES OF THIS SECTION, REFERENCES TO “THE CORPORATION” SHALL INCLUDE, IN ADDITION TO THE RESULTING CORPORATION, ANY CONSTITUENT CORPORATION (INCLUDING ANY CONSTITUENT OF A CONSTITUENT) ABSORBED IN A CONSOLIDATION OR MERGER WHICH, IF ITS SEPARATE EXISTENCE HAD CONTINUED, WOULD HAVE HAD POWER AND AUTHORITY TO INDEMNIFY ITS DIRECTORS, OFFICERS, EMPLOYEES OR AGENTS, SO THAT ANY PERSON WHO IS OR WAS A DIRECTOR, OFFICER, EMPLOYEE OR AGENT OF SUCH CONSTITUENT CORPORATION, OR IS OR WAS SERVING AT THE REQUEST OF SUCH CONSTITUENT CORPORATION AS A DIRECTOR, OFFICER, EMPLOYEE OR AGENT OF ANOTHER CORPORATION, PARTNERSHIP, JOINT VENTURE, TRUST, ESTATE, EMPLOYEE BENEFIT PLAN OR OTHER ENTERPRISE, SHALL STAND IN THE SAME POSITION UNDER THIS SECTION WITH RESPECT TO THE RESULTING OR SURVIVING CORPORATION AS SUCH PERSON WOULD HAVE WITH RESPECT TO SUCH CONSTITUENT CORPORATION IF ITS SEPARATE EXISTENCE HAD CONTINUED.
(I) THE INDEMNIFICATION AND ADVANCEMENT OF EXPENSES PROVIDED BY, OR GRANTED PURSUANT TO, THIS SECTION SHALL, UNLESS OTHERWISE PROVIDED WHEN AUTHORIZED OR RATIFIED, CONTINUE AS TO A PERSON WHO HAS CEASED TO BE A DIRECTOR, OFFICER, EMPLOYEE OR AGENT AND SHALL INURE TO THE BENEFIT OF THE HEIRS, EXECUTORS AND ADMINISTRATORS OF SUCH A PERSON.
§ 36. NPCL 724(a). Notwithstanding the failure of a corporation to provide indemnification, and despite any contrary resolution of the board, OF A COMMITTEE or of the members in the specific case under section [723] 722 [(Payment of indemnification other than by court award)] (AUTHORIZATION FOR INDEMNIFICATION OF DIRECTORS AND OFFICERS, EMPLOYEES, AND AGENTS; INSURANCE), indemnification [shall] MAY be awarded by a court to the extent authorized under section 722 [, and paragraph (a) of section 723]. Application therefor on notice to the attorney general and may be made, in every case, either:
Article 9 — Merger and Consolidation
1. Section 37 of the bill amends subdivision (a) of section 909 (Consent to filing) to set the time for sending notice to an agency after receipt of confirmation of filing with the secretary of state, also for clarity. This same time frame of sending notice to an agency after receipt of confirmation of filing with the secretary of state is also established in sections 404 (Approval, notice and consent) and 1304 (Application for authority [of a foreign corporation]).
NPCL § 909(a) If the purposes of any constituent or consolidated corporation would require the approval or consent of any governmental body or officer or any other person or body under section 404 (Approvals, notices and consents) of this chapter no certificate of merger or consolidation shall be filed pursuant to this article unless such approval or consent is endorsed thereon or annexed thereto. A corporation whose statement of purposes specifically includes the establishment or operation of a child day care center, as that term is defined in section three hundred ninety of the social services law, shall [provide] MAIL a certified copy of any certificate of merger or consolidation involving such corporation to the office of children and family services within thirty days after RECEIPT OF CONFIRMATION OF the filing of such merger or consolidation with the department of state.
Article 10 — Non-judicial dissolution
1. Section 38 of the bill amends paragraph (8) of subdivision (a) of section 1003 (Certificate of dissolution; contents; approval) to correct an omission regarding the alternative of the attorney general.
NPCL § 1003(a)(8). A statement that prior to delivery of such certificate of dissolution to the department of state for filing, the plan of dissolution and distribution of assets has been approved by the attorney general or by a justice of the supreme court, if such approval is required pursuant to section 1002 (Authorization of plan) of this article. A copy of the APPROVAL OF THE ATTORNEY GENERAL OR OF THE COURT order shall be attached to the certificate of dissolution. In the case of a corporation, other than a corporation incorporated pursuant to article 15 (Public cemetery corporations), having no assets to distribute, or having no assets to distribute other than a reserve not to exceed twenty-five thousand dollars for the purpose of paying ordinary and necessary expenses of winding up its affairs including attorney and accountant fees, and liabilities not in excess of ten thousand dollars at the time of dissolution, a statement that a copy of the plan of dissolution which contains the statement prescribed by paragraph (b) of section 1001 (Plan of dissolution and distribution of assets) has been duly filed with the attorney general, if required.
Article 13 — Foreign Corporations
1. Section 39 of the bill amends section 1304 (Application for authority; contents) to set the time for sending notice to an agency after receipt of confirmation of filing with the secretary of state, also for clarity. This same time frame of sending notice to an agency after receipt of confirmation of filing with the secretary of state is also established in sections 404 (Approval, notice and consent) and 909 (Consent to filing).
NPCL § 1304(a). A foreign corporation may apply for authority to conduct activities in this state by filing an application entitled “Application for authority of ….. (name of corporation) under section 1304 of the Not-for-Profit Corporation Law.” The application shall be signed and delivered to the department of state. It shall set forth:
(1) The name of the foreign corporation.
(2) The fictitious name the corporation agrees to use in this state pursuant to section 1301 of this chapter, if applicable.
(3) The jurisdiction and date of its incorporation.
(4) That the corporation is a foreign corporation as defined in subparagraph (7) of paragraph (a) of section 102 (Definitions) of this chapter, whether it would be a charitable corporation or non-charitable corporation if formed in this state; a statement of its purposes to be pursued in this state and of the activities which it proposes to conduct in this state; and a statement that it is authorized to conduct those activities in the jurisdiction of its incorporation.
(5) The county within this state in which its office is to be located.
(6) A designation of the secretary of state as its agent upon whom process against it may be served and the post office address within or without this state to which the secretary of state shall mail a copy of any process against it served upon him.
(7) If it is to have a registered agent, [his] THE name and address OF THE AGENT within this state and a statement that the registered agent is to be its agent upon whom process against it may be served.
(8) A statement that the foreign corporation has not, since its incorporation or since the date its authority to conduct activities in this state was last surrendered, done any act in this state, except as set forth in paragraph (b) of section 1301 (Authorization of foreign corporations); or in lieu of such statement the consent of the state tax commission to the filing of the application shall be attached thereto.
(9) Any provision required by any governmental body or officer or other person or body as a condition for giving the consent or approval required for the filing of such application for authority, provided such provision is not inconsistent with this chapter or any other statute of this state. A corporation whose statement of purposes to be conducted in this state specifically includes the establishment or operation of a child day care center, as that term is defined in section three hundred ninety of the social services law, shall provide a certified copy of any application for authority and any amendment thereto involving such corporation to the office of children and family services within thirty days after RECEIPT OF CONFRIMATION OF the filing of such application or amendment with the department of state.
(b) Attached to the application for authority shall be a certificate by an authorized officer of the jurisdiction of its incorporation that the foreign corporation is an existing corporation. If such certificate is in a foreign language, a translation thereof under oath of the translator shall be attached thereto.
(c) If the application for authority sets forth any purpose or activity for which a domestic corporation could be formed only with the consent or approval of any governmental body or officer, or other person or body under section 404 (Approvals, notices and consents) of this chapter, such consent or approval shall be endorsed thereon or annexed thereto.
(d) If the application for authority sets forth any purpose or activity requiring a domestic corporation to provide notice of the filing of a certificate of incorporation to any person or entity under section 404 (Approvals, notices and consents) of this chapter, then the corporation shall send by certified mail, return receipt requested, a certified copy of the certificate of authority to such person or entity within [ten business] THIRTY days after [the corporation receives confirmation from the department of state that the certificate has been accepted for filing] RECEIPT OF CONFRIMATION OF THE FILING.
Article 14 — Special Not-For-Profit Corporations
1. Section 40 of the bill amends subdivision (b) of section 1407 (Alumni corporations) to clarify that an alumni corporation is a charitable corporation based on the powers set out in subdivision (c).
NPCL § 1407 (b) An alumni corporation is a [non-charitable] CHARITABLE corporation.
Education Law
1. Section 41 of the bill amends paragraph (c) of subdivision (4) of section 216-a of the education law (Applicability of the not-for-profit corporation law) to eliminate a reference to a repealed statute.
Education Law §216-a(4)(c). The following provisions of the not-for-profit corporation law shall not apply to education corporations: section one hundred five, section one hundred fourteen, paragraph (a) of section two hundred one, paragraphs (b) and (c) of section two hundred two, section two hundred five, section three hundred one, section three hundred two, section three hundred three, article four except paragraphs (b) through (p) of section four hundred four and section four hundred five, section five hundred nine, [section five hundred twenty-one to the extent that it refers to paragraph (d) of section seven hundred six,] article eight except section eight hundred four, section nine hundred seven, section one thousand twelve and article fourteen.
Estates, Powers and Trusts Law
1. Section 42 of the bill repeals section 8.1-9 of the estates, powers and trusts law (Trust governance), as added by Chapter 549 of the laws of 2013. Section 8-1.9 makes the governance provisions of NPCL which Chapter 549 added to increase board oversight and accountability, also applicable to trusts. These new provisions include rules involving related party transactions, interested directors, key employees, conflicts of interest, and independent audit reports to be filed under Article 7-A of the Executive Law.
The provisions are impractical and unrealistic as they relate to charitable trusts.
Most charitable trusts are created by private agreement between the settlor and one or more, but relatively few, individual trustees who are often family, although sometimes, the trustee maybe a bank or trust company. The trustees of many of these trusts are thus unlikely to be “independent” to satisfy the requirements governing related party transactions, interested directors and conflicts of interest under the new section 8-1.9.
As to the applicability of the independent audit requirements of Article 7-A for charities using professional fundraisers, experience shows that most charitable trusts, whether inter vivos or testamentary, do not raise money, let alone from New Yorkers, using professional fundraisers. Hence, they do not file under Article 7-A, only as charities under EPTL§ 8-1.4. This conclusion is borne out by a review of Table 5 of the Attorney General’s publication Pennies for Charity (2013) which lists all of the charities that filed under Article 7-A of the Executive Law in 2012. One can say, with almost complete confidence, that none of them are trusts. The only one with trust in its name, the National Trust for Historic Preservation, is a United States statutory corporation.
One argument offered in favor of adding section 8-1.9 is to prevent NPCs from escaping from the NPCL into trusts. That argument does not withstand scrutiny. If any existing NPC wanted to transfer substantial assets to a trust, Attorney General or Court approval or both would be required. If a new charity did not want to form under the NPCL, because of its new governance provisions, it would not likely elect the trust form, because trust law is less protective of trust trustees, for example, no business judgment rule and no statutory indemnification. It would incorporate in Delaware or elsewhere.
Section 8.1-9 of the estates, powers and trusts law, as added by chapter 549 of the laws of 2013, is REPEALED.
Mental Hygiene Law
1. Sections 43 and 44 of the bill amend sections 16.32 (Improper expenditure of moneys) and 31.31 (Improper expenditure of moneys) of the mental hygiene law to eliminate reference to Type B corporations.
Mental Hygiene Law § 16.32 (b). No loans, other than through the purchase of bonds, debentures, or similar obligations of the type customarily sold in public offerings, or through ordinary deposit of funds in a bank, shall be made by a not-for-profit corporation which is certified as a provider of services pursuant to this article to its employee who receives an annual salary in excess of thirty thousand dollars, or to any other corporation, firm, association or other entity in which such employee is a director or officer or employee or holds a direct or indirect substantial financial interest, except a loan by one corporation incorporated as a charitable corporation as defined in paragraph (a) of section one hundred two (Definitions) of the not-for-profit corporation law to another [type B] CHARITABLE corporation, or a loan for a temporary or emergency purpose which will further the health and welfare of the employee so long as the purpose and amount of such loan are disclosed to and approved by the board of directors of such agency. Such disclosure shall be filed with the secretary of the corporation and entered in the minutes of the meeting, and, if approved by such board, such disclosure shall also be forwarded in writing to the commissioner and to the director of community services of each local governmental unit that has, at the time of such disclosure, a contract with such corporation for the rendition of services pursuant to article forty-one of this chapter. A loan made in violation of this section shall be a violation of the duty to the not-for-profit corporation of the directors or officers authorizing it or participating in it, but the obligation of the borrower with respect to the loan shall not be affected thereby.
Mental Hygiene Law § 31.31(b). No loans, other than through the purchase of bonds, debentures, or similar obligations of the type customarily sold in public offerings, or through ordinary deposit of funds in a bank, shall be made by a not-for-profit corporation which is licensed as a provider of services pursuant to this article to its employee who receives an annual salary in excess of thirty thousand dollars, or to any other corporation, firm, association or other entity in which such employee is a director or officer or employee or holds a direct or indirect substantial financial interest, except a loan by one corporation incorporated as a charitable corporation as defined in paragraph (a) of section one hundred two (Definitions) of the not-for-profit corporation law to another [type B]CHARITABLE corporation, or a loan for a temporary or emergency purpose which will further the health and welfare of the employee so long as the purpose and amount of such loan are disclosed to and approved by the board of directors of such agency. Such disclosure shall be filed with the secretary of the corporation and entered in the minutes of the meeting, and, if approved by such board, such disclosure shall also be forwarded in writing to the commissioner and to the director of community services of each local governmental unit that has, at the time of such disclosure, a contract with such corporation for the rendition of services pursuant to article forty-one of this chapter. A loan made in violation of this section shall be a violation of the duty to the not-for-profit corporation of the directors or officers authorizing it or participating in it, but the obligation of the borrower with respect to the loan shall not be affected thereby.
Effective Date
1. Section 45 of the bill adds the effective date of the bill, aligning it with the effective date of chapter 549 of the laws of 2013.
This act shall take effect immediately and shall be deemed to have been in full force and effect on and after on the same date and in the same manner as chapter 549 of the laws of 2013, takes effect: provided however, that the amendments to section 519 of the not-for-profit corporation law made by section fourteen of this act shall expire and be deemed repealed June 30, 2017; provided further that the amendments to section 519 of the not-for-profit corporation law made by section fourteen-a of this act shall take effect July 1, 2017 and shall expire and be deemed repealed June 30, 2021; provided further that the amendments to 519 of the not-for-profit corporation law made by section fourteen-b of this act shall take effect July 1, 2021.
Other Matters
1. Chapter Amendment to Chapter 459
As noted in the discussion at pp. 14-15 regarding the audit requirements of Chapter 549, we proposed to repeal the language in section 132 of Chapter 549 in light of the proposed amendment to NPCL 519 (Annual reports of directors).
Section 132 of Chapter 549 of the laws of 2013, constituting the Non-Profit Revitalization Act, is amended to read as follows:
§ 132. This act shall take effect July 1, 2014, provided, however, that the amendments to section 172–b of the executive law made by section three of this act shall expire and be deemed repealed June 30, 2017; provided further that the amendments to section 172–b of the executive law made by section three-a of this act shall take effect July 1, 2017 and shall expire and be deemed repealed June 30, 2021; provided further that the amendments to section 172–b of the executive law made by section three-b of this act shall take effect July 1, 2021; provided further that section seventy-three of this act shall take effect January 1, 2015 [; provided further that section seventy-two of this act and paragraph (b) of section 8–1.9 of the estates, powers and trusts law as added by section one hundred thirty of this act shall not be applicable until January 1, 2015 for any corporation or trust that had annual revenues of less than 10,000,000 dollars in the last fiscal year ending prior to January 1, 2014].
2. Special Counsel and Competing Charitable Interests
One area that the bill will also consider is how to address the situation where the Attorney General has adopted a position adverse to one or more competing charities. One possible solution could the service of notice on the charities and the ability of charities adversely affected by the Attorney General’s position to petition the court for the appointment of special counsel who would be compensated from the estate.
New York State Law Revision Commission 