Legislature Sends Bill Amending Not-For-Profit Corporation Law To Governor: Part III, Committees and Employee as Chairman

This is the third post in our series looking at the bill, passed by the New York State Assembly and Senate on June 16, 2016, to amend the Not-For-Profit Corporation Law (“NFPCL”)  [updated: the bill was signed into law by Governor Cuomo on November 29, 2016, and has an effective date of May 27, 2017].  This post looks at the provisions related to the creation of committees by the corporation’s Board of Directors (“Board”) and powers those committees may hold.

The current NFPCL provides that the certificate of incorporation, by-laws, or Board by majority vote, may create an executive committee and other committees consisting of three or more directors that, to the extent provided in the documents creating them, act with the power of the Board.  These committees are prohibited, however, from (1) submitting matters requiring member approval, (2) filling vacancies in the Board or committees, (3) fixing compensation for Board/committee members, (4) amending, repealing, or adopting new by-laws, and (5) amending or repealing any resolution of the board that does not allow for such changes.

While the recently passed bill does not change how committees are created or the Board’s power to appoint committee members, it does add significant new restrictions.  For example, executive committee members must now be appointed by majority vote of the Board.  Furthermore, boards with 30 or more members require a quorum and the vote of three-quarters of directors present to make an appointment to an executive or similar committee.  The bill also provides that the by-laws may designate directors holding certain positions (ex: chairman, treasurer, etc.) as ex-officio, nonvoting members of specific committees.

Finally, the bill adds four additional items that no committee “of any kind” shall have authority over: (6) the election or removal of officers and/or directors, (7) the approval of a merger or plan of dissolution, (8) the authorization or adoption of a resolution recommending to the members the sale, lease, exchange or other disposition of all, or substantially all, assets (or if there are no members entitled to vote, the authorization of such transaction), and (9) the approval of amendments to the certificate of incorporation.  As a result, committees are prohibited from bypassing the Board or otherwise appropriating its authority regarding matters that go to the heart of the corporation’s governance and continued existence.

One final provision of note relates to an employee of the corporation serving as chairman of the Board.  The effective date of the provision banning this practice has been subject to a series of one-year extensions in each of the last few years, and the new bill creates a permanent fix.  It allows the Board to approve an employee serving as its chairman by a two-thirds vote of the entire board, and by further providing contemporaneously written documents on the basis for the board’s approval.  However, an employee serving as chairman is disqualified from being an “independent director.”

Our next post will focus on conflict of interest and whistleblower policies.  The full text of the bill is publicly available here: http://legislation.nysenate.gov/pdf/bills/2015/S7913

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