John A. Cirando, Esq.
Member of the New York State Law Revision Commission
Senate Committee on Corporations, Authorities and Commissions
May 28, 2013
Rochester, New York
Mr. Chairman, Members of the Committee.
Thank you for inviting me to testify with respect to reform of the Not-for-Profit Corporation Law.
I am a member of the Commission and the views I express are those of the Commission.
Not-for-profit corporations constitute a major segment of the New York State economy. More than 100,000 not-for-profits operate in New York. They generate revenues exceeding $150 billion annually. Many of them also receive funds from the federal and state government for which they are asked to do the work that has been in the government’s purview, particularly social services.
They employ approximately 1.25 million people, about 14% of the state’s workforce, and offer a wide array of services and programs from art, culture and humanities to education, research and human services that touch the lives of New Yorkers every day.
In addition, thousands of New Yorkers volunteer their time and expertise both informally and formally as officers and directors to advance the missions of these organizations.
The law governing the work and financial affairs of these not-for-profits is out of date, however. It is both unduly burdensome and opaque, imposing inefficient, costly and unnecessary regulatory burdens. Moreover, it lacks appropriate guidance for officers and directors of these corporations. Recent very public scandals associated with not-for-profits in New York make clear the need to provide common sensible guidance for directors and officers, all towards recruiting able directors and management, ensuring the public trust, and preventing abuse.
Because the Not-For-Profit Corporation Law (“NPCL”) has not been significantly revised since 1970, its growing obsolescence has also made incorporating in other states, usually Delaware, increasingly routine. This practice undermines respect for New York law and calls into question the viability of regulatory oversight in New York .
It is appropriate therefore that this Committee consider revisions to the NPCL that brings it into the 21st Century.
The Law Revision Commission’s draft bill which you have before you presents a coherent approach to addressing these concerns, while recognizing that the sizes and missions of not-for-profit corporations vary across the state.
The bill reduces the burdens and clarifies the regulatory obligations of not-for-profits, and allows for the use of modern technology. It simplifies corporate “types” by creating only two categories of corporations (“charitable corporations” and “beneficent corporations”) instead of four (A, B, C and D). The amended section “grandfathers” not-for-profits that have already formed as a particular type so that they will not have to file new paperwork or amend contracts.
It reduces the number of situations where consent of a regulator must be obtained to incorporate, merge, consolidate, or dissolve. The intent of these amendments is to streamline the incorporation, merger, consolidation, sale of assets, and dissolution process without hampering oversight by the regulating agencies.
The bill allows for the use of electronic transmission to accomplish notification of and certain actions by boards and members, as well permitting the use of video conference, Skype, and other forms of video communication.
It provides guidance for officers, directors and others who exercise control over a not-for-profit by adding provisions regarding transactions with related parties, audit procedures, executive compensation, and whistleblowing. It also provides protection of a not-for-profit’s assets when a not-for-profit authorizes advance indemnification for a director or officer by clarifying that a board member must provide an undertaking sufficient to ensure repayment of such amount if found not entitled to be indemnified. This last provision is consistent with an identical BCL provision which has been judicially interpreted to require security, a bond, for example, for advances, so that the corporation’s assets are not at risk, if liability is determined. While there have been suggestions that such provisions will discourage board membership, in fact, these changes provide clarity and protection for the not-for-profit and its board members. They provide guidance for board members about how to act regarding a conflict of interest, how to assess the financial integrity of the organization, and how to monitor the activities of the organization without micro-managing it. They ensure the accountability of not-for-profits and increase the public’s trust that the not-for-profit use of private and government funding is consistent with its mission. Finally, they ensure that not-for-profit funds which come from charitable contributions and government funding have the same protections as for-profit funds when litigation occurs.
The bill enhances the role of the office of the Attorney General to ensure that enforcement of the law is effective. It provides authority for the Attorney General to enjoin, void or rescind related party transactions, clarifies the availability of the parens patriae power and other common-law authority of the Attorney General.
The New York State Bar Association, the New York City Bar Association, other prominent bar associations and the New York State Law Revision Commission as well as the Attorney General have sought reform of the NPCL for several years. We believe that this bill reflects a consensus among them with respect to most of the many issues and certainly with respect to the most important ones.