New Changes to the Nonprofit Revitalization Act

The Nonprofit Revitalization Act is a New York State law that was passed in 2013. It was the first attempt at revising the New York State Not-for-Profit Corporation Law (NPCL), which had been untouched for over 40 years. The Act had a significant impact on governance policies and practices for nonprofits. The new law didn’t work as well for smaller nonprofits in upstate New York as it did for larger cities downstate. In 2016, the state passed amendments that fine-tuned the original Act. The most notable changes pertained to related party transactions. The intent of the changes was to make it easier for nonprofit organizations of all sizes to conduct business.

Amendments to the Nonprofit Revitalization Act

Governor Andrew Cuomo signed the amendments into law in November 2016. The amendments improve and clarify some of the provisions in the original law so that it works more efficiently for all nonprofits. In addition to changes pertaining to related party provisions, the amendments address the matter of employees serving in the role of chairman of the board of a corporation.

The amendments change some of the provisions of the Not-for-Profit Corporation Law and similar provisions of the Estates, Powers and Trusts Law.

Most of the changes went into effect on May 27, 2017, except for the amendment about the chair of the board, which went into effect on January 1, 2017.

Amendments Related to Party Transaction Provisions

Related party transactions refer to any transaction, agreement or any other arrangement whereby a related party has a financial interest and the corporation or any affiliate is a participant, unless a board or authorized committee has determined that the transaction was fair, reasonable and in the corporation’s best interest. The original version of the Nonprofit Revitalization Act disallowed related party transactions.

The amendments ease the related party transaction rules. First, the amendments change the definition of related party transactions to exclude transactions where the transaction or the related party’s financial interest is minimal. It also excludes transactions that wouldn’t ordinarily be reviewed by the board or similar organizations under similar terms, or those that would offer a benefit to a related party only as a class of beneficiaries that the corporation offers as part of their mission, as long as the benefit extends to members of the same class and on the same terms.

The amendments allow boards to authorize a committee to approve related party transactions. Previously, only the board held that power.

The amendments also revise the original law to provide a limited statutory defense where a related party transaction wasn’t authorized from the start. If the Attorney General brings an action against a nonprofit, the corporation has a defense if the board ratifies the transaction as fair, reasonable and in the corporation’s best interest at the time of the approval. If the transaction involves a charitable corporation where the related party has a substantial financial interest, the board must consider available alternative transactions and approve the transaction with at least a majority vote of the directors or committee members present. In this situation, they must also document the nature of the violation in writing, as well as the basis for approving the transaction. In addition, they must put procedures into place to ensure that similar violations don’t reoccur in the future.

Amendments Related to Key Person

The amendments also replace the term “key employee” with a broader term, “key person.” This term clarifies the definition by including individuals who aren’t employees. A key person is a person who has powers or responsibilities that influence the corporation, has responsibility to manage the corporation, or who influence directors and officers. The amendments also define a key person as someone who controls or determines a substantial part of the finances or operating budget.

Amendments Related to Independent Directors

The amendments revise the definition of independent directors by providing a sliding scale that can disqualify directors in certain limited situations.

Directors who have a financial interest in a nonprofit corporation are still considered independent as long as the amount they receive or pay during each of the past three fiscal years is less than $10,000, or 2% of the entity’s consolidated gross revenues with the amount being less than $500,000.

Other stipulations for director independence include nonprofits that have gross revenues of between $500,000 and $10 million; they may not pay or receive more than $25,000. Also, nonprofits with consolidated gross revenues of $10 million or more may not pay or receive amounts over $100,000.

The law states that these amounts don’t include reimbursement for reasonable expenses they would normally have as a director. The amendments allow independent directors to receive payments from the corporation at fixed or non-negotiable rates as long as the same rates are made available to the public at the same terms.

Amendments Related to the Chair of the Board

In its original state, the law prohibited an employee of a corporation from serving as board chair of the corporation. The amendments now allow employees to serve as chair of the board as long as the board approves the election by a two-thirds vote of the entire board and documents the board’s reasons in writing.

Amendments Related to Conflict-of-Interest and Whistleblower Provisions

The amendments disallow individuals who are employees and directors from participating in board or committee deliberations that involve conflict-of-interest or whistleblower issues. The amendment also states that subjects of whistleblower complaints may not participate in voting or deliberations related to their complaint.

Committee Formation and Operational Provisions

The original law required boards to have a majority vote of the entire board to form a committee other than the executive committee. The amendments change the provision to a majority of the directors present at a board meeting where there is a quorum.

The new law still requires a majority vote of the entire board to form an executive committee. There is an exception for boards of 30 or more members, where such boards must have at least three-fourths of those present as long as they have a quorum. The change also allows directors who hold certain positions in the corporation to be ex-officio members of certain committees.

Another important provision in the law is that it disallows boards from delegating powers to committees to elect or remove officers or directors, approve mergers or dissolutions, or adopt resolutions that recommend major sales of corporate assets. Boards with no members may not authorize such transactions or approve amendments to the certificate of incorporation.

The amendment doesn’t require nonprofit organizations to amend their bylaws; however, most nonprofits will need to amend their bylaws or adopt new policies to remain in compliance with the amendments. A board portal management system, as provided by BoardEffect, can help nonprofits track these important laws and help them review their bylaws and practices to ensure they remain in compliance.