Nonprofit Revitalization Act of 2013



2016 Updates

In December 2013, Governor Cuomo signed into law the Nonprofit Revitalization Act of 2013 (the NPRA or the Act). The Act contained many welcome changes for nonprofit organizations, and elements of the law eased the burdens relating to certain major corporate transactions, such as mergers. The Act also included changes directed at increasing operational transparency and optimizing fiduciary oversight, duplicating at the state level many of the safeguards that had been in place in federal tax law for decades.

On November 28, 2016, Governor Cuomo signed into law legislation further amending the New York Not-for-Profit Corporation Law (N-PCL) to improve and clarify the Act. The amendments provide relief in some aspects, but New York still imposes extraordinary governance challenges on nonprofit organizations formed in the state. Most of the amendments go into effect on May 27, 2017, with the exception of the provisions relating to an employee serving as chair, which went into effect on January 1, 2017.

In order to comply with the new law, nonprofit organizations will again need to update their bylaws and various policies, including those pertaining to conflicts of interest, whistleblower claims and audit committee functions. Organizations may also want to consider adopting a written contract approval policy to set specific standards for terms not otherwise defined.

Refined fiduciary standards

  • Related party transaction. The NPRA created an entirely new category of “related party transactions” requiring a prior finding by the governing board that each of a list of expanded insider transactions was “fair, reasonable and in the best interests” of the corporation. Under the Act, the failure to identify, assess and address each such transaction could constitute a breach of fiduciary duty.

    The reach of the NPRA was so broad that many fiduciaries found compliance with the new standards practically impossible. In an attempt to make the law workable, the Attorney General’s Charities Bureau published non-binding guidance to carve out certain transactions from its enforcement actions.

    Nonprofits still have an obligation to ensure that insider transactions are fair, reasonable and in the best interests of the nonprofit.  However, failure to make such finding using the specific process required by the NPRA before entering into the transaction will not result in allegations of breach of fiduciary duty, with one notable exception—actions brought by the Charities Bureau. The Charities Bureau may still allege a breach of fiduciary duty unless the nonprofit:
    • identifies the offending related party transaction before receiving any pertinent request from the attorney general,
    • ratifies the transaction in accord with an enhanced approval regime,
    • memorializes the ratification in writing (including the nature of the “violation” and the basis for ratification), and
    • institutes procedures to ensure that the nonprofit will continue to satisfy the prior approval requirement in the future.

Practically speaking, the breadth of the Charities Bureau carve-out will still compel nonprofits to ensure procedures are in place to identify and approve related party transactions with heavy reliance on the new statutory exceptions impacting:

    • de minimis transactions,
    • transactions not customarily reviewed by the board (or boards of similar organizations) in the ordinary course and offered on terms available to the public, and
    • benefits provided to individuals as a member of a charitable class served.

Nonprofits still need to determine thresholds for both the de minimis and “not customarily reviewed by the board” standards, preferably by written policy. It is unclear to what extent the prior guidance from the Charities Bureau still pertains.

  • Independent director. The NPRA created a new standard of “independent directors” for the approval of specified corporate actions, bifurcating the governing board into those who possess full fiduciary oversight and those who do not. The identification of independent directors must be done prospectively, not based on the circumstances of any particular transaction or relationship before the board.

    That standard has been modified with respect to the financial gates that apply. The amendment is an attempt to make the application of the statute more workable, albeit perhaps somewhat more confusing. The new test uses a sliding scale:

    Consolidated Gross Revenue[1] Threshold Amount 
    Less than $500,000 Lesser of $10,000 or 2% of consolidated gross revenue
    $500,000 or more but less than $10 million $25,000
    $10 million or more $100,000

    The amendments maintain a number of the existing carve-outs allowed to independent directors: charitable contributions, expense reimbursement and reasonable director compensation. There is a new exception for payments at fixed or non-negotiable rates for services received, provided that such services by and to the nonprofit are available to individual members of the public on the same terms and are not “available from another source.” How that standard can be satisfied in practice remains unclear.
  • Key persons. This definition replaces the much-maligned “key employee” standard previously imposed by the Act with a “key person” standard. The new standard now focuses on individuals, whether or not employees, who have actual authority or influence over decisions the nonprofit organization makes, including any individual who:
    • has responsibilities, or exercises powers or influence over the nonprofit similar to those exercised by directors and officers;
    • manages the nonprofit or a part of the nonprofit that represents a substantial portion of the activities, assets, income or expenses of the nonprofit; or
    • alone or with others controls or determines a substantial portion of the nonprofit’s capital expenditures or operating budget.  

Once again, the New York rules modify prior standards under federal tax law in use for decades, but do not adopt them completely. Similar to other provisions in the N-PCL, the term “substantial” is not defined, which again places the burden on nonprofits to establish a standard that is reasonably defined and easily implemented.

Committee updates

The Act further clarifies the proper use of committees. Authority under the corporate law is a function of governing board action, either direct or indirect. So when the governing board elects a committee of the board—comprised of individual board members who already have the triune fiduciary duties to the corporation—it has the power to delegate the power of the board, or at least some portion of it not otherwise prohibited by law.

In contrast, a committee of the corporation can be created by mere appointment by, say, a board chairperson and may include non-fiduciaries. The mere appointment of these individuals does not give them the rights, or responsibilities, attendant to full board service. So committees of the corporation can provide sage, measured advice to the board, but cannot act on behalf of the organization.

The amendments adopt some further refinements on committee structure, but largely reinforce the existing committee regime. Specifically, the amendments require election of the Executive Committee by a majority of the entire board unless there are 30 or more directors, in which circumstances a three-quarters vote of directors present may elect. All other committees of the board may now be elected by a majority of a quorum, similar to other board actions.

The amendments also clarify the statutory limitations on the executive and other board committees by collecting those items in N-PCL Section 712.

Still missing, but also applicable, is the requirement for board approval of certain real property transactions under N-PCL Section 509.

 

Employee as chair

The Act originally included a prohibition against an employee serving as chair or officer with similar authority. The effective date of this provision was delayed several times and the amendments include a provision that seems to bring this issue to a final conclusion. An employee may now serve as chair if the board approves service by two-thirds vote of the entire board and contemporaneously documents its approval. The amendments also make it clear that the employee shall not be considered an independent director.

Policies

One NPRA provision that was frequently overlooked by nonprofit organizations was the one that required the conflict of interest and whistleblower policies to be overseen and adopted by only “independent directors.” Thankfully, this provision was removed so that these policies may now be adopted by the board or designated committee of the board, without reference to whether directors are independent.

The limitations with respect to who may actually participate in decisions regarding conflicts of interest, related party transactions and whistleblower complaints remain in effect with two additions. Directors who are employees may not participate in any deliberations or voting relating to administration of the whistleblower policy and any individual who is the subject of a whistleblower complaint cannot be present or participate in deliberations or vote relating to such complaint.

Our approach

The Act affects nonprofit organizations incorporated or doing business in New York State, including both charitable and non-charitable entities. Leaders of these organizations have important decisions to make about the opportunities—and burdens—imposed by the new law.

Our lead exempt organizations attorney, Michael J. Cooney, offers a unique perspective having participated on the Attorney General’s Leadership Committee for Nonprofit Revitalization, which was instrumental in shaping this legislation.

The Act will pose particular challenges to nonprofits as they look to comply with new requirements for related party transactions, audit committees and whistleblower policies. We expect to see a ripple effect throughout the country as other states also look to revamp their nonprofit corporation laws to provide a greater level of transparency and responsibility for these organizations.

We offer a strategic approach to:

  • conflicts of interest, interested parties and whistleblower complaints
  • audit committee practices
  • how this affects your board of directors
  • new rules for electronic communication
  • impact if you’re considering a merger, consolidation, transfer or sale of assets or dissolution

Who we work with

  • Nonprofit organizations, whether charities, trade association, social clubs and the like, their governing boards and administration    

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If you would like to contact a member of Nixon Peabody’s Nonprofit Revitalization team, send us a note at: NPRevitalization@nixonpeabody.com. We are ready to share the steps needed to make sure your organization is compliant with the requirements of the Act.

New York Nonprofit Resources


  1. Consolidated gross revenue refers to the vendor who provides payments to or receives payments from the nonprofit or any affiliate.
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