Legislature Sends Bill Amending Not-For-Profit Corporation Law To Governor: Part 1, Introduction and Definitions

On June 16, 2016, the New York State Assembly and Senate passed a bill 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 bill removes inconsistences resulting from the Nonprofit Revitalization Act of 2013, while making focused changes to the law itself.  These changes include: (1) amending definitions, (2) clarifying the powers of committees created by the Board of Directors (“Board”), (3) shifting responsibility for overseeing conflict of interest and whistleblower policies to the Board, and the content of the policies themselves, (4) clarifying how not-for-profits handle related party transactions, and (5) miscellaneous changes to several minor provisions.  These subjects will each be the topic of a post in this series, beginning with definitional changes in the first two posts.

One of the most important changes in the bill is replacing the term “key employee” with “key person.”  A key person is defined as any person, not a director or officer, whether employed by the corporation or not, who:

(i) has responsibilities, or exercises powers or influence over the corporation as a whole similar to the responsibilities, powers, or influence of directors and officers;

(ii)  manages the corporation, or a segment of the corporation that represents a substantial portion of the activities, assets, income or expenses of the corporation; or

(iii) alone or with others controls or determines a substantial portion of the corporation’s capital expenditures or operating budget.

This encompasses any non-employee who plays a significant role in the corporation’s activities, such as informal advisors, family members of directors, employees who have retired, etc.  The impact of this definition is significant, as the “key person” term is used repeatedly throughout the NFPCL in a variety of contexts. It is also referenced in several other important definitions, most notably “independent director,” “related party,” and “related party transaction,” each of which impact how corporations handle conflicts of interest.

The main source of potential conflicts of interest are related party transactions.  A “related party” is defined as (i) a director, officer, or key person of the corporation or an affiliate thereof, (ii) a relative of such a person, or (iii) an entity in which any of the above people has a 35% of greater ownership or interest.  Due to this relationship, when a related party engages in a transaction or agreement with the corporation, there is an inherent risk of a conflict of interest.  These “related party transactions” will be discussed in more detail in our fifth post, however the definition itself lists three new exceptions: (i) transactions that are de minimis, or the related party’s financial interest is de minimis (ii) transactions that would not customarily be reviewed in the ordinary course of business and are available to others on similar terms, or (iii) transactions that benefit a related party solely as class member meant to be the beneficiary of the corporation’s charitable mission, and that the benefit is available to other similarly situated class members on same terms.  Under these circumstances, the transaction is not a “related party transaction.”

Our next post will focus on the definition for independent directors.  The full text of the bill is publicly available here: http://legislation.nysenate.gov/pdf/bills/2015/S7913

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