On July 1, 2014, the New York Nonprofit Revitalization Act (the “Act”) takes effect.  The Act is the most significant modification of New York’s Not-for-Profit Corporation Law (the “NPCL”) in approximately 40 years.

New York not-for-profit corporations that have not already fully considered actions that are necessary to comply with or to take advantage of the Act should do so now. 

The Act imposes numerous changes, but set forth below are 5 of the most important actions which may be warranted.

5 Key Potential Action Steps

1.  Make sure that your organization has adopted a Conflict of Interest Policy that satisfies the new requirements; be aware of the new “Related Party Transaction” requirements.

• Conflict of Interest Policy – The Act imposes a new requirement for all not-for-profit corporations to adopt a Conflict of Interest Policy that contains certain elements, including procedures for disclosing conflicts and a requirement that board members make annual conflicts disclosures.

• Related Party Transactions – The Act requires a corporation’s Conflict of Interest Policy to address “related party transactions”, a new concept in the NPCL.  Related party transactions include transactions by the corporation or its affiliated entities in which a “related party” (i.e., board members, officers and key employees of the corporation or its affiliated entities, their relatives and entities in which such persons certain have interests) has a financial interest.

• General rule: The Act prohibits corporations from entering into a related party transaction unless the corporation’s board determines that the transaction is fair, reasonable and in the corporation’s best interests.   “Charitable” corporations have additional requirements, including the obligation to consider alternatives to the related party transaction.

2.  Adopt or revise your Whistleblower Policy, if required for your organization.

• Whistleblower Policy – Corporations with 20 or more employees that received over $1 million in revenue in the prior fiscal year are now required to adopt a Whistleblower Policy to protect individuals who report potential improprieties from retaliation.

3.  Modify your financial statement audit process, if your current process is not compliant with the new requirements.

• Audit oversight requirements: Certain charitable organizations that solicit contributions or grants in New York face new requirements for their board or audit committee to oversee the corporation’s financial statement audit, including to annually retain (or renew the retention) of an independent auditor and to review the results of the audit with the auditor.

• “Independent Director requirement: Only “independent directors” may perform the required audit oversight.  Board members are not “independent” if they or their relatives received certain compensation from the corporation or its affiliates or have a substantial financial interest in entities doing business with the corporation or its affiliates.  The definition of “independent directors” is complex and the application of the independent director requirement is proving challenging for some organizations.^[1]

• Additional requirements for large corporations: Corporations with over $1 million in revenue have additional requirements, such as to annually assess the auditor’s performance and independence.

4.  Consider whether changes are needed to your board or committee composition.

• Independent Director Requirement for Audit Oversight & Governance Policies – The Act requires that only “independent directors” (see #3 above) on a corporation’s board, audit committee or other committee oversee: (i) the adoption and implementation of a Conflict of Interest Policy or Whistleblower Policy for applicable corporations (see #1 and #2 above); and (ii) the audit oversight process required for certain corporations (see #3 above).

• Composition of Board Committees – The Act makes it explicit that committees that have non-director members may not act on behalf of the board.  To the extent that it is desired to have non-directors participate in Board committees, the non-directors may participate only in an advisory capacity.

5.  Consider whether Bylaw amendments are necessary or desirable.

• Depending on the language of your current Bylaws, amendments may be needed, such as to take advantage of the Act’s greater flexibility for using electronic communications or the Act’s reduction in burdens on approving certain real estate transactions.

_{^[1] “Independent Director” is defined in Section 29 of the Act, in paragraph (21) of Section 102 of the NPCL, as amended by the Act.  A link to the Act is included above.}