Unforeseen consequences—changes to New York’s law on powers of attorney affect business and securities transactions
All powers of attorney executed by individuals in New York on or after September 1, 2009, are subject to new requirements as to form, manner of execution, and effect on previously granted powers of attorney. The full text of New York’s revised power of attorney law is found in Title 15 of Article 5 of New York’s General Obligations Law.
Powers of attorney are used regularly in connection with securities law filings, particularly for registration statements filed under the Securities Act of 1933; periodic reports filed under the Securities Exchange Act of 1934; statements of beneficial ownership on Schedules 13D and 13G; and on Forms 3, 4, and 5 filed under Sections 13 and 16 of the Securities Exchange Act of 1934.
A power of attorney (POA) is a written document by which a principal designates an agent to act on his or her behalf. As discussed in greater detail below, the new law prescribes new requirements for the form of POAs and covers both statutory short form POAs (the focus of the prior statute) and non-statutory POAs. POAs executed by individuals in New York after September 1 must include certain cautionary language, be signed by the agent or attorney-in-fact, and revoke all prior POAs executed by that individual unless expressly provided otherwise. These changes could have far-reaching, and potentially undesired, effects on commercial, corporate, and securities transactions.
POAs executed by individuals before September 1, 2009, are still valid under the new law. Pre-September 1 POAs, however, are revoked by an individual’s execution of a new POA unless the new POA expressly states otherwise. There are certain important exceptions to the application of the new law. First, the new law only applies to individuals and does not apply to POAs executed by entities. Second, the new POA law only applies to POAs executed in New York. A POA executed outside of New York will be valid in New York as long as it complies with the laws of the state of execution or New York, even if the principal is a New York resident. The law applies to both business/commercial POAs and statutory short form or other personal planning or investment POAs.
Business and securities issues
POAs are a common tool in the estate and financial planning world, but the extent to which POAs are used within commercial, corporate, and securities contexts cannot be understated. POAs are standard provisions in most limited liability company operating agreements and limited partnership agreements. General partners and company managers are customarily granted POAs to sign documents and prepare filings on behalf of limited partners or members; make routine amendments to the governing documents of the entity; approve certain transactions; and admit additional limited partners or members. As noted above, POAs are also used in securities law filings for the execution of registration statements and periodic reports, and the execution and filing of Forms 3 and 4 on behalf of public companies’ Section 16 directors, officers, and principal stockholders.
New York’s new POA law calls these POAs into question. The form of POAs used for business and securities matters will need to change drastically unless the statute is amended to exempt commercial transactions from its scope. It will be difficult for agents and their counter-parties to know whether a particular POA has been revoked by a subsequently executed POA, which may be completely unrelated to the business matter. Consequently, issues may arise as to the validity of securities law filings.
The balance of this Securities Law Alert describes the changes to POAs for business and securities matters required under the law currently in effect and recommends steps to be implemented pending an amendment to New York’s new statute.
The new law revised the statutory short form POA and introduced requirements for all POAs executed by individuals in New York, regardless of whether the POA executed is based on the statutory short form or is individually drafted and prepared. The requirements are as follows:
- Print size—Every POA must be typed or printed using letters that are legible or of clear type no less than 12 point in size, or, if in writing, a reasonable equivalent thereof.
- Acknowledgment—The POA must be signed, dated, and notarized by both the principal and the agent. The notarial acknowledgement must be in the form required for a conveyance of real estate in New York. A lapse of time between the acknowledgment of the principal’s and the agent’s signature will not invalidate an otherwise properly executed POA.
- Required language—Every POA, whether in the financial/estate planning context or for business or securities purposes, must contain the exact, unedited wording of two required disclosures entitled “Caution to the Principal” and “Important Information for the Agent.” The two lengthy disclosures address the extent of the powers granted to the agent by the principal, the agent’s duties to the principal, and the consequences for the agent of violating those duties. Some of the language in the disclosures addresses issues in the financial/estate planning context and is inapplicable in the commercial, corporate, and securities contexts. The new law, however, requires the exact wording of the disclosure be included and does not include any exceptions to this requirement.
Even though the new format for POAs seems cumbersome and, to some degree, strange or unsophisticated, POAs used in connection with securities law filings will need to satisfy these requirements.
Revocation of prior POAs
Of significant concern is the provision in the new law that potentially revokes all prior POAs of the individual principal. Unless the individual expressly provides otherwise, the execution of a POA revokes any and all prior POAs executed by that same individual. In June 2009, the New York State Assembly passed Bill No. A8392, which would make some “technical corrections” to the new POA law. Importantly, the bill reverses the presumption of revocation and provides that the execution of a POA does not automatically revoke all prior POAs unless the principal gives written notice to the previously appointed agent. The New York State Senate companion bill to the Assembly’s technical corrections bill was referred to the Senate’s Rules Committee and has, unfortunately, stalled there. As a result, the technical correction has not made its way into law.
Fiduciary duty of agent
The new POA law also expressly provides that an agent acting under a POA has a fiduciary duty to the principal and is required to “observe the standard of care that would be observed by a prudent person dealing with [the] property of another.” An agent’s obligations include, among other things: (i) acting in accordance with any instructions from the principal or, where there are no instructions, in the best interest of the principal; (ii) avoiding conflicts of interest; and (iii) keeping a record of all receipts, disbursements, and transactions entered into by the agent on behalf of the principal, and making such records and the POA available at the request of the principal. The new law also provides that an agent may be subject to liability for conduct or omissions that violate the agent’s fiduciary duty to the principal.
Until the new POA law is amended, all POAs executed by individuals in New York after September 1, 2009, must meet the requirements outlined above. Even though the provisions are lengthy and contain certain disclosures and notices inapplicable in the commercial, corporate, and securities contexts, each new POA must include the “Caution to the Principal” and “Important Information for the Agent” statutory language to comply with the law. In addition, to avoid the possibly unintended and unwanted consequences that could result from revoking all POAs previously executed by an individual, every POA should expressly provide that the POA does not revoke any prior POAs.
Public company officers and counsel should review carefully the history of all POAs signed after September 1, 2009, by a corporate officer, director, or controlling person in connection with securities law filings to assure that all subsequently filed registration statements, reports, or other filings made in respect of such officer, director, or controlling person do not contain a signature relating to a POA that would be revoked under the new law. This Securities Law Alert has focused primarily on how New York’s new POA law will affect individuals and entities in the commercial, corporate, and securities contexts. The new law, however, includes a number of other new provisions that will affect financial and estate planning. For instance, individuals who wish to give an agent the power to make gifts pursuant to the statutory short form POA must also execute a “Statutory Major Gifts Rider.” Please consult attorneys in tax, estate planning, and other private client matters for more details.
We will keep you posted on developments in this area in future Securities Law Alerts.