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What You Need to Know about the Non-Profit Revitalization Act of 2013

January 10, 2014
Hayley Kelch
Garden City

To skip to a summary of the major changes effected by the Act, click here

To skip to suggestions for bringing your organization into compliance with the Act, click here

What is the Non-Profit Revitalization Act of 2013?

On December 18, 2013, Governor Andrew M. Cuomo signed into law the Non-Profit Revitalization Act of 2013 (the “Act”).  The Act signifies the first substantial overhaul of the laws governing New York’s nonprofit sector in almost a half-century.  The Act, which will take effect on July 1, 2014, amends numerous sections of the New York Not-for-Profit Corporation Law and several sections of other New York laws, including, but not limited to, the Executive Law, Education Law, Religious Corporations Law and the Estates, Powers and Trusts Law.[i]  The purpose of the Act is two-fold:  to reduce unnecessary and expensive regulatory burdens on nonprofits and to strengthen nonprofit governance and accountability.  The Act is based on recommendations submitted to the Attorney General (“AG”) by the Leadership Committee on Nonprofit Revitalization. The Leadership Committee, which consists of a diverse array of nonprofit leaders and attorneys, was convened by the AG in 2011 to foster a unique partnership between government and the nonprofit sector and bring about meaningful reform. 

Does the Act Apply to Your Organization?

Generally, the Act applies to New York not-for-profit corporations, other not-for-profit organizations to which the Not-for-Profit Corporation Law applies (e.g., education corporations, religious corporations) and organizations that operate or solicit charitable contributions in New York, including charitable trusts.[ii] 

What Changes Are Effected by the Act?

The many changes effected by the Act fall into two general categories: 1) those which reduce regulatory burdens on nonprofits; and 2) those which enhance nonprofit governance and accountability.  A summary of some of the major changes effected by the Act follows below.

Reforms Which Reduce Regulatory Burdens

Charitable organizations which solicit contributions from New Yorkers or receive government grants must register with the AG and annually file financial reports.  Currently, organizations that receive in any fiscal year $100,000 or less in gross revenue and support must file an unaudited financial report (on forms prescribed by the AG).  Organizations that receive in any fiscal year more than $100,000 but not more than $250,000 in gross revenue and support must file an annual financial report accompanied by an annual financial statement which includes an independent CPA review report.  Organizations that receive in any fiscal year more than $250,000 in gross revenue and support must file with the AG an annual written financial report accompanied by an annual financial statement which includes an independent CPA audit report. The Act increases the revenue thresholds for reporting as shown in the below chart.  In addition, the Act requires the payment of a $25 filing fee with each filing and authorizes the AG to create rules for electronically filing such reports. Currently, all filings must be submitted in paper form.  

Effective Date

Unaudited Financial

Report

CPA Review Report[iii]

CPA Audit Report

July 1, 2014

$250,000 or less

More than $250,000 but not more than $500,000

More than $500,000

July 1, 2017

$250,000 or less

More than $250,000 but not more than $750,000

More than $750,000

July 1, 2021

$250,000 or less

More than $250,000 but not more than $1,000,000

More than $1,000,000



Abandonment of the “Type” System:  The Act amends several cumbersome procedural requirements which created unnecessary and expensive hurdles for nonprofits seeking to incorporate and modify incorporation documents.  First, it is no longer necessary to designate an entity as a Type A, B, C or D corporation before submitting a proposed certificate of incorporation.  The Act replaces the four types of not-for-profit corporations with two simple categories: charitable corporations and non-charitable corporations.  A charitable corporation is one formed for charitable, educational, religious, scientific, literary, or cultural purposes or formed for the prevention of cruelty to children or animals.  Any other type of not-for-profit corporation is deemed non-charitable.  The Act provides that all existing Type B and C corporations shall be deemed charitable corporations.  All existing Type A corporations shall be deemed non-charitable corporations.  All existing Type D corporations with charitable purposes shall be deemed charitable, while other Type D corporations will be considered non-charitable.  Existing education corporations and religious corporations are expressly declared charitable corporations by the Act.  As a result of this change, there is no longer a need for any not-for-profit corporation to file a “certificate of type.” 

List of Activities in Certificate of Formation No Longer Required:  A not-for-profit corporation may, but is no longer required to, list in its certificate of incorporation the activities which it intends to carry out in furtherance of its purposes. 

Notice to, instead of Approval of, Commissioner of Education Now Required for Certain Newly Formed Not-for-Profit Corporations:  Under the Act, the prior approval of the Commissioner of Education is no longer required for the incorporation of not-for-profit corporations with educational purposes that are not schools, colleges, universities, libraries, museums or historical societies.  Instead, such a corporation must simply file a certified copy of its certificate of incorporation with the Commissioner of Education following formation.  Prior approval of the Commissioner of Education is still required for schools, libraries, museums and historical societies.  Colleges and universities must obtain the prior written authorization of the Board of Regents.  

Department of State Can Correct Minor Errors in Submissions Prior to Filing:  The Act authorizes the Department of State to correct typographical and other minor errors in certificates and other documents submitted to the Department of State for filing prior to the filing of such documents upon the written or electronically submitted request of the individual who has submitted the documents for filing.  

Attorney General May Now Approve a Modification of the Purposes Included in a Corporation’s Certificate of Incorporation: The Act allows a corporation to seek the approval of the AG to a certificate of amendment which adds, changes or eliminates a stated purpose of the organization in the organization’s certificate of incorporation, in lieu of Supreme Court approval.  While most corporations will benefit from this change, the Act leaves open the option for seeking court approval of such amendments, even after a rejection of such an amendment by the AG. 

Education Corporations and Religious Corporations Can Now Merge in Addition to Consolidate:  Current law allows education corporations and religious corporations to “consolidate” with other education corporations and religious corporations, respectively, but does not allow such entities to “merge” so that one corporation remains as the surviving entity.   The Act authorizes such mergers.   

Attorney General Approval of Mergers, Dissolutions and Substantial Asset Sales Now Sufficient:   The Act provides charitable organizations with the option of seeking only AG approval of significant transactions that currently require court approval and notice to the AG.  Such significant transactions include mergers, consolidations, dissolutions[iv]and the sale, lease, exchange or other disposition of all or substantially all of a corporation’s assets.  Under the Act, a not-for-profit corporation which objects to the AG’s determination may still seek Supreme Court review. 

Routine Transactions May Be Authorized by Majority Vote of Board or Committee: The Act allows not-for-profit corporations to enter into routine real estate transactions (i.e., to purchase, sell, mortgage, lease, exchange or otherwise dispose of real estate) when authorized by a majority of the corporation’s directors or a majority of a committee authorized by the board.  Currently, such transactions must be authorized by two-thirds of a corporation’s entire board or, for a board with 21 or more directors, a majority vote of the entire board.  The Act retains this more stringent voting requirement only for transactions involving all or substantially all of a corporation’s assets.  

Electronic Transmission of Notices, Waivers and Votes and Meeting Participation through Video Conference Acceptable: The Act sanctions the electronic transmission of notices of member meetings, waivers of notice of meetings of members and directors, votes requiring the unanimous consent of members and directors and member proxy authorizations.  In addition, the Act provides that directors and committee members may participate in meetings via video conference.

Committee Categories Simplified: The Act eliminates the distinction between standing and special committees and, instead, provides two simple committee categories: committees of the board, consisting of only directors, and committees of the corporation, consisting of directors and non-directors.  The Act clarifies that committees of the corporation cannot bind the board and, unless the by-laws of a corporation provide otherwise, will be elected in the same manner as officers.   

Amendment of By-Laws Not Required to Fix Number of Directors: The Act authorizes a not-for-profit corporation without members to fix the number of directors by action of the board under a specific provision of the by-laws or with a range set forth in the by-laws.  Under current law, such a corporation is required to amend its by-laws in order to change the number of directors. 

Reforms Which Enhance Governance and Accountability

What Should Your Organization Do Now?

Considering that the Act does not become effective until July 1, 2014, your organization should now take some time to review and digest the relevant provisions of the Act and determine how its by-laws, committee charters, policies and procedures must be modified to comply with the Act and should be modified to take advantage of the reduced burdens on and streamlined procedures for nonprofits. 

Specifically, your organization should review its financial reporting obligations and whether it will benefit from the raised revenue thresholds for reporting to the AG. 

To take advantage of the Act’s modernized board procedures and voting requirements, your organization should review its by-laws and, if necessary, amend its current committee designations and existing procedures and requirements for providing notice of member meetings, waivers of notice of meetings by members and directors and member proxy authorizations, member and director voting by unanimous consent, participating in meetings of directors and committees, voting on routine real property transactions, and fixing the number of directors. 

To comply with the Act’s new audit oversight requirements, your organization should review and, if necessary, amend its audit committee charter or, if no audit committee currently exists, determine whether compliance with audit oversight requirements will be performed by an audit committee or by the full board (minus interested directors).  A new audit committee will require a charter that complies with the Act.

Compliance with the Act’s new requirements for oversight of related party transactions and other conflicts of interest will require your organization to review its current conflict of interest policy and, if no current policy exists, create a comprehensive conflict of interest policy that complies with all relevant legal requirements.  In addition, your organization must review the charter of the committee responsible for oversight of related party transactions and other conflicts of interest (audit committee or other committee) to determine whether it complies with the new requirements under the Act.  If your organization does not currently use a committee for this purpose, it should determine whether the use of a committee will be beneficial and, if so, amend the charter of a currently existing committee to include such duties or create a new committee and committee charter.  

Your organization should also review whether it is required by the Act to adopt a whistleblower policy.  If it is, and your organization currently has a whistleblower policy in place, the policy should be reviewed and amended if necessary to ensure compliance with the Act.  If your organization does not currently have a whistleblower policy but is required by the Act to adopt one, a new whistleblower policy should be drafted and adopted in accordance with the requirements of the Act.    In addition, your organization must review and amend, if necessary, the charter of the committee responsible for implementation of the whistleblower policy (audit committee or other committee) to determine whether it complies with the new requirements under the Act.  If your organization does not currently use a committee for this purpose, it should determine whether the use of a committee will be beneficial and, if so, amend the charter of a currently existing committee to include such duties or create a new committee and committee charter.  

Conclusion

This advisory is intended to provide a comprehensive overview of the major changes effected by the Non-Profit Revitalization Act of 2013, but does not address every component of the Act and should not be construed as specific legal advice.   For specific advice or if you have any questions about the Act or its effect on your particular organization, please contact Hayley M. Kelch at (212) 510-2230 or hkelch@cullenanddykman.com, or Dina L. Vespia at (212) 510-2245 or dvespia@cullenanddykman.com.



[i] This advisory focuses on the amendments to the Not-for-Profit Corporation Law, Education Law and Religious Corporations Law. 

[ii] This advisory focuses on the effect of the Act on not-for-profit corporations, education corporations and religious corporations.  The Act’s effect on charitable trusts is not specifically addressed. 

[iii] The Act allows the AG to require an organization to file a CPA audit report in the event the AG determines that that such filing is necessary following its review of the organization’s CPA review report. 

[iv] The AG may also approve plans of dissolution for non-charitable not-for-profit corporations holding assets legally required to be used for a particular purpose. 

[v] An independent director is defined in the Act as a director who: 1) has not been an employee of the corporation or an affiliate of the corporation in the last 3 years and has no relative who has been an employee of the corporation or an affiliate of the corporation in the last 3 years; 2) has not received (and has no relatives who have received) in the last 3 years more than $10,000 in compensation from the corporation or an affiliate of the corporation (other than reimbursable expenses or reasonable compensation for director services); and 3) 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 employee of or has a substantial financial interest in) any entity that has made payments (not including charitable contributions) to or received payments (not including charitable contributions) from the corporation or an affiliation of the corporation for property or services in an amount which, in any of the last 3 fiscal years, exceeds the lesser of $25,000 or 2% of such entity’s consolidated gross revenues. 

[vi] The Act defines “related party transaction” as any transaction, agreement or 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.  “Related party” is defined as 1) any director, officer or key employee of the corporation or any affiliate of the corporation; 2) any relative of any such person; or 3) any entity in which any such person has a 35% 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 5%.