Enactment of the New York Non-Profit
Revitalization Act of 2013
December 30, 2013

Memorandum – December 30, 2013

TABLE OF CONTENTS
Page
I.

Introduction ..........................................................................................................................1

II.

Enhancing Governance and Oversight.................................................................................1
Audit Oversight ....................................................................................................................1
Definition of Independent Director or Independent Trustee................................................3
Related Party Transactions ..................................................................................................3
Conflict-of-Interest Policies .................................................................................................4
Whistleblower Policies ........................................................................................................5
Executive Compensation .....................................................................................................5
Board Governance ...............................................................................................................6

III.

Reducing Unnecessary and Outdated Burdens ....................................................................6
Elimination of Types............................................................................................................6
Notice to the State Education Department in Lieu of Consent ............................................6
Streamlining the Incorporation Process ...............................................................................7
Procedural Governance Matters ...........................................................................................7
Definition of the Entire Board .............................................................................................7
Financial Reporting..............................................................................................................7
Authorizations of Real Property Transactions .....................................................................8
Approvals of Substantial Transactions ................................................................................8IV.

Applicability of the Act to Foreign Corporations. ...............................................................9

Memorandum – December 30, 2013

I.

INTRODUCTIONOn December 18, 2013, New York Governor Andrew M. Cuomo enacted into law the NonProfit Revitalization Act of 2013 (the “Act”). The Act was sponsored by New York State Senator
Michael H. Ranzenhofer and New York State Assemblyman James Brennan at the request of
New York State Attorney General Eric T. Schneiderman. Both the New York State Senate andthe New York State Assembly unanimously passed the Act on June 21, 2013. The Act addresses
certain recommendations included in the report drafted by the Leadership Committee for
Nonprofit Revitalization and released on February 16, 2012 by Attorney General Schneiderman(the “Report”). 1
The Act will generally take effect as of July 1, 2014. 2 The Act applies to New York non-profit
corporations and, in certain cases, to New York charitable trusts, New York education
corporations, and New York religious corporations. As discussed below, certain provisions of
the Act apply to corporations and trusts registered with the attorney general to solicit
contributions in the State of New York. The following is a summary of certain key amendments
to New York law included in the Act. 3

II.

ENHANCING GOVERNANCE AND OVERSIGHT•

Audit Oversight. The Act requires every charitable corporation 4 and charitable trustthat is registered with the attorney general to solicit contributions and required to file anindependent certified public accountant’s audit report with the attorney general 5 todesignate an audit committee of the board to perform certain oversight responsibilities. 6

1

For more information regarding the Report, please see our Memorandum “Report on Nonprofit
Revitalization Released by Attorney General Eric T. Schneiderman,” dated February 16, 2012,
available here. The Report can be found here. For more information regarding the priorintroduction of the Act, please see our Memorandum “Introduction of the New York Non-Profit
Revitalization Act,” dated May 25, 2012, available here.

2

As indicated below, certain provisions of the Act will take effect at later dates.

3

The Act contains amendments to the Executive Law, the Banking Law, the Benevolent Orders
Law, the Education Law, the General Business Law, the Insurance Law, the Mental Hygiene Law,
the Public Authorities Law, the Private Housing Finance Law, the Public Lands Law, the Racing,Pari-Mutuel Wagering and Breeding Law, the Religious Corporations Law, the Surrogate’s Court
Procedure Act, the Not-for-Profit Corporation Law, and the Estates, Powers and Trusts Law.

4

As discussed below, the Act creates two categories of non-profit corporations, charitable and noncharitable. In this memorandum we use the term “non-profit corporation” to refer to bothcharitable corporations and non-charitable corporations generally.

5

As discussed below, the Act gradually increases the minimum annual gross revenue and support
that a charitable corporation or charitable trust must receive in order to be required to file an
Page 1

Memorandum – December 30, 2013For any charitable corporation or charitable trust with annual revenue of less than $10
million in its last fiscal year ending prior to January 1, 2014, the audit oversightrequirements of the Act will not take effect until January 1, 2015.
o

The Act requires that the audit committee consist solely of independent directors
or trustees, but permits audit committee functions to be performed by the board
as a whole, as long as only independent directors or trustees participate indeliberations and voting relating to audit committee matters.

o

The Act requires that the audit committee or the board (i) oversee the accounting
and financial reporting processes of the charitable corporation or charitable trust
and the audit of its financial statements, (ii) annually retain or review theretention of an independent auditor to conduct the audit, and (iii) uponcompletion of the audit, review the results of the audit and any related
management letter with the independent auditor.

o

In addition, the audit committee or the board is required to oversee adoption andimplementation of, and compliance with, any conflict-of-interest policy or
whistleblower policy (unless this function is performed by another committee ofthe board comprised solely of independent directors).

o

In addition to the foregoing, the board or audit committee of a charitablecorporation or charitable trust that is required to file an independent certified
public accountant’s audit report with the attorney general, and that in the priorfiscal year had or in the relevant fiscal year reasonably expects to have annual
revenue in excess of $1 million must also take the following steps:
prior to the commencement of the audit, review with the independent
auditor the scope and planning of the audit;



upon completion of the audit, review and discuss with the independent
auditor (a) any material risks and weaknesses in internal controls
identified by the auditor, (b) any restrictions on the scope of the auditor’s
activities or access to requested information, (c) any significant
disagreements between the auditor and management, and (d) the
adequacy of accounting and financial reporting processes of theapplicable charitable corporation or charitable trust;

annually consider the performance and independence of the independent
auditor; and

if applicable, report on the audit committee’s activities to the board.

independent certified public accountant’s audit report and audited financial statements with theattorney general.
6

The audit oversight provisions generally do not apply to New York religious corporations, but do
apply to certain New York education corporations.

Page 2

Memorandum – December 30, 2013•

Definition of Independent Director or Independent Trustee. The Act defines the terms“independent director” and “independent trustee” as a director or trustee, as applicable,
who (i) is not, and has not been within the last three years, an employee of the non-profit
corporation 7 or charitable trust or an affiliate 8 thereof, and does not have a relative 9 who
is, or who has been within the last three years, a key employee of the non-profit
corporation or charitable trust or an affiliate thereof; (ii) has not received, and does nothave a relative who has received, in any of the last three fiscal years, more than $10,000
in direct compensation from the non-profit corporation or charitable trust or an affiliate
thereof (other than reimbursement for expenses reasonably incurred as a director ortrustee or reasonable compensation for service as a director or trustee); and (iii) is not acurrent employee of or does not have a substantial financial interest in, and does nothave a relative who is a current officer of or has a substantial financial interest in, any
entity that has made payments (other than charitable contributions) to, or received
payments (other than charitable contributions) from, the non-profit corporation or
charitable trust or an affiliate thereof, for property or services in an amount that exceeds
the lesser of $25,000 or 2% of such entity’s consolidated gross revenue in any of the last
three fiscal years.

•

Related Party Transactions. In an effort to prevent self-dealing, the Act requires every
non-profit corporation and charitable trust to take specified affirmative actions before
entering into any related party transaction.
o

The Act defines a “related party transaction” as a transaction, agreement, orother arrangement in which a related party has a financial interest and in which
the non-profit corporation or charitable trust or an affiliate thereof is aparticipant. A “related party” is (i) any director, trustee, officer, or key employeeof the non-profit corporation or charitable trust or any affiliate thereof; (ii) any of
their respective relatives; or (iii) any entity in which any of the foregoing
individuals has a 35% or greater ownership or beneficial interest, or, in the caseof a partnership or professional corporation, a direct or indirect ownershipinterest in excess of 5%.

7

Throughout the remainder of this memorandum, requirements noted as applicable to a “nonprofit corporation” generally also apply to New York education corporations and New York
religious corporations, except where otherwise noted.

8

For purposes of the Act, an “affiliate” of a non-profit corporation or charitable trust means any
entity controlled by, in control of, or under common control with such non-profit corporation or
charitable trust.

9

For purposes of the Act, a “relative” of an individual means his or her (i) spouse, ancestors,
brothers and sisters (whether whole or half blood), children (whether natural or adopted),
grandchildren, great-grandchildren, and spouses of brothers, sisters, children, grandchildren, andgreat-grandchildren; or (ii) domestic partner as defined in Section 2994-A of the Public Health
Law.

Page 3

Memorandum – December 30, 2013

•

10

o

Specifically, prior to entering into any related party transaction, the board must
determine that the transaction is fair, reasonable, and in the best interest of the
non-profit corporation or charitable trust at the time of the determination.

o

In addition, enhanced review is required for related party transactions involving
a charitable corporation or charitable trust and in which a related party has asubstantial financial interest. 10 Specifically, the board, or an authorizedcommittee thereof, must (i) prior to entering in the transaction, consider
alternative transactions to the extent available; (ii) approve the transaction by notless than a majority vote of the directors or trustees or committee memberspresent at the meeting; and (iii) contemporaneously document in writing thebasis for the board or authorized committee’s approval, including its
consideration of any alternative transactions.

oRelated parties are not permitted to participate in deliberations or voting withrespect to related party transaction matters. However, any director, officer or
key employee who has an interest in a related party transaction must disclose thematerial facts concerning such interest in good faith to the board or authorizedcommittee thereof. In addition, the board or authorized committee may requestthat any related party present information concerning a related party transaction
at a board or committee meeting prior to the commencement of deliberations orvoting related thereto.

o

In addition, the Act clarifies the authority of the attorney general to remedy selfdealing. In particular, the Act provides that the attorney general may bring anaction to enjoin, void, or rescind any related party transaction or proposed
related party transaction that violates any provision of the Not-for-Profit
Corporation Law or was otherwise not reasonable or in the best interests of the
non-profit corporation or charitable trust at the time the transaction wasapproved, or seek other relief, including, for example, restitution, removal of
directors, trustees, or officers, or, in the case of willful and intentional conduct,
payment of an amount up to double the amount of any benefit improperly
obtained.

Conflict-of-Interest Policies. The Act requires every non-profit corporation andcharitable trust to adopt a conflict-of-interest policy to ensure that its directors, trustees,
officers, and key employees act in the best interest of the non-profit corporation or
charitable trust and comply with applicable legal requirements, including therequirements set forth in the Act’s provisions regarding related party transactions (asdescribed above). The Act requires that each conflict-of-interest policy, at a minimum,(i) contain a definition of the circumstances that constitute a conflict-of-interest; (ii) set
out procedures for disclosing conflicts-of-interest to the audit committee, or if there is“Substantial financial interest” is not defined for purposes of the Act. Guidance on this pointfrom the Attorney General’s Charities Bureau would be useful.

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Memorandum – December 30, 2013

none, to the board; (iii) require that a person with a conflict not be present at 11 orparticipate in the board or committee deliberation or vote on the matter giving rise tosuch conflict; (iv) prohibit any attempt by a person with a conflict to improperly
influence the deliberation or voting on the matter giving rise to such conflict; (v) requirethat the existence and resolution of the conflict be documented in the corporation’srecords, including meeting minutes; and (vi) contain procedures for disclosing,addressing, and documenting related party transactions. In addition, the Act requires
directors or trustees to submit a statement disclosing any potential conflicts of interest
prior to joining the board and then on an annual basis thereafter. Non-profit
corporations or charitable trusts that have adopted a conflict-of-interest policy pursuant
to federal, state, or local law that is substantially consistent with the requirements set
forth in the Act will be deemed to be in compliance with the Act.

11•

Whistleblower Policies. The Act requires that non-profit corporations and charitable
trusts with 20 or more employees and annual revenue in the prior fiscal year in excess of$1 million adopt a whistleblower policy to protect from retaliation persons who reportsuspected improper conduct. The Act requires generally that the whistleblower policy
provide that no director, trustee, officer, employee, or volunteer who in good faithreports any action or suspected action taken by or within the non-profit corporation or
charitable trust that is illegal, fraudulent, or in violation of any adopted policy of the
non-profit corporation or charitable trust will suffer intimidation, harassment,
discrimination, or other retaliation, or, in the case of employees, adverse employment
consequences. In addition, the Act requires that the whistleblower policy contain thefollowing provisions: (i) procedures for reporting violations or suspected violations oflaws or policies, including procedures for preserving the confidentiality of reported
information; (ii) a requirement that an employee, officer, director, or trustee of the nonprofit corporation or charitable trust be designated to administer the policy and report tothe audit or other committee consisting of independent directors or trustees, or, if none,
the board; and (iii) a requirement that a copy of the policy be distributed to all directors,
trustees, officers, employees, and to volunteers who provide substantial services to thenon-profit corporation or charitable trust. Non-profit corporations or charitable trusts
that have adopted a whistleblower policy pursuant to federal, state, or local law that is
substantially consistent with the requirements set forth in the Act will be deemed to be
in compliance with the Act.

•

Executive Compensation.
While a non-profit corporation may pay reasonable
compensation to its members, directors, or officers for services rendered, the Act
We note that the requirement that the person with the conflict of interest “not be present at” theboard or committee deliberation or vote, in addition to “not participate in” the board orcommittee deliberation or vote, appears only in the conflict-of-interest policy and compensation
provisions of the Act. In contrast, the audit oversight provision requires only that only
independent directors participate in any board or committee deliberations or voting on audit
matters, and the related party transaction provision requires only that no related party
participate in deliberations or voting relating to a related party transaction, and not that these
individuals not be present at the applicable meetings. These provisions are not necessarily
contradictory, but guidance on this point from the Attorney General’s Charities Bureau would be
useful.

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Memorandum – December 30, 2013

requires that no person may be present at or otherwise participate in any board orcommittee deliberation or voting concerning his or her own compensation. However,the board or authorized committee may request that a person present information as
background or answer questions at a board or committee meeting prior to thecommencement of deliberations or voting with respect to his or her compensation.
•

III.

12

Board Governance. The Act requires that no employee of a non-profit corporation may
serve as the chair of the board or hold any other title with similar responsibilities. This
provision of the Act is not effective until January 1, 2015.

REDUCING UNNECESSARY AND OUTDATED BURDENS•

Elimination of Types. The Act creates two categories of non-profit corporations(charitable and non-charitable) rather than the current four types (Type A, B, C, and D).
The Act defines a “charitable corporation” as a non-profit corporation formed, or
deemed to be formed, for charitable purposes, and “charitable purposes” as purposes
included in the certificate of incorporation of a non-profit corporation that are charitable,
educational, religious, scientific, literary, cultural, or for the prevention of cruelty tochildren or animals. The Act defines a “non-charitable corporation” as any non-profit
corporation formed under the Not-for-Profit Corporation Law, other than a charitablecorporation, including but not limited to one formed for any one or more of thefollowing non-pecuniary purposes: civic, patriotic, political, social, fraternal, athletic,
agricultural, horticultural, or animal husbandry, or for the purpose of operating aprofessional, commercial, industrial, trade, or service association.
Non-profit
corporations formed prior to July 1, 2014 will not be required to amend their formation
documents to conform to the new categories, rather: (i) Type A corporations will bedeemed to be non-charitable corporations; (ii) Type B and Type C corporations will bedeemed to be charitable corporations; 12 (iii) Type D corporations formed for charitablepurposes will be deemed to be charitable corporations; and (iv) Type D corporations
formed for non-charitable purposes will be deemed to be non-charitable corporations.

•

Notice to the State Education Department in Lieu of Consent. The Act eliminates therequirement that certain non-profit corporations obtain the advance approval of theState Education Department prior to incorporation. As a result, only schools, colleges,
universities, or other entities providing post-secondary education; libraries; museums;
and historical societies are required to obtain approval of the State Education
Department, or, in the case of a college or university, the Regents of the University of theState of New York, prior to incorporation. Any other non-profit corporation whosecertificate of incorporation includes a purpose for which a corporation might bechartered by the Regents of the University of the State of New York is required only toprovide notice to the State Education Department of its incorporation within 30 business
The Act makes conforming amendments to the Education Law and the Religious Corporations
Law to provide that education corporations or religious corporations, as applicable, to which theNot-for-Profit Corporation Law is applicable, are charitable corporations, not Type B
corporations.

Page 6

Memorandum – December 30, 2013

days after receipt of confirmation that the non-profit corporation’s certificate ofincorporation has been accepted for filing.
•

Streamlining the Incorporation Process. The Act clarifies the required contents of thecertificate of incorporation of a non-profit corporation. Specifically, the Act makes clearthat the certificate of incorporation must state the purpose or purposes for which thenon-profit corporation is being formed and whether it is a charitable corporation or a
non-charitable corporation, but that the certificate of incorporation need not set forth theactivities to be undertaken by the non-profit corporation in furtherance of its purpose or
purposes. In addition, the Act empowers the Department of State to correct minor
errors in filings with the authorization of the non-profit corporation. Specifically, theDepartment of State may, upon the written or electronic mail authorization of a nonprofit corporation, correct any typographical or similar non-material error in a certificate
or other instrument relating to a domestic or foreign non-profit corporation submitted to
the Department of State under the Not-for-Profit Corporation Law.

•

Procedural Governance Matters. The Act clarifies that board and membership meeting
notices, waivers of notice, and votes requiring unanimous consent may be transmitted
electronically, including via electronic mail. In addition, the Act allows meetings to beheld by videoconference.

•

Definition of the Entire Board. The Act modifies the definition of “entire board.”
Pursuant to the Act, the entire board means the total number of directors who would beentitled to vote if there were no vacancies. If the by-laws of the non-profit corporation
provide that the board will consist of a fixed number of directors, then the entire board
is that number of directors. If the by-laws of the non-profit corporation provide that theboard may consist of a range between a minimum and maximum number of directors,
then the entire board is the number of directors within such range that were elected as ofthe most recently held election of directors.

•

Financial Reporting. The Act will gradually increase the thresholds for financial
reporting applicable to certain non-profit corporations 13 and charitable trusts in order toreduce burdens on smaller organizations.
o13

Currently, charitable corporations and charitable trusts that are registered withthe attorney general to solicit contributions and that have annual gross revenue
and support in excess of $250,000 must file with the attorney general an annual
written financial report, accompanied by an independent certified public
accountant’s audit report and audited financial statements. The Act will increase
this threshold to annual gross revenue and support in excess of $500,000 for theperiod July 1, 2014 through June 30, 2017, to annual gross revenue and support inexcess of $750,000 for the period July 1, 2017 through June 30, 2021, and to annual
gross revenue and support in excess of $1 million thereafter.

The Financial Reporting provisions of the Act are generally not applicable to religious
corporations.

Page 7

Memorandum – December 30, 2013o

In addition, charitable corporations and charitable trusts that are registered withthe attorney general to solicit contributions and that have annual gross revenue
and support of at least $100,000 but not more than $250,000 are currently
required to file with the attorney general an annual written financial report,
accompanied by an independent certified public accountant’s review report. The
Act will increase this threshold to annual gross revenue and support of at least$250,000 but not more than $500,000 for the period July 1, 2014 through June 30,
2017, to annual gross revenue and support of at least $250,000 but not more than
$750,000 for the period July 1, 2017 through June 30, 2021, and to annual grossrevenue and support of at least $250,000 but not more than $1 million thereafter.
However, the Act provides that the attorney general may require the charitablecorporation or charitable trust to obtain and file an independent certified public
accountant’s audit report and audited financial statements following the attorney
general’s review of the independent certified public accountant’s review report.

oFinally, charitable corporations and charitable trusts that are registered with theattorney general to solicit contributions and that have annual gross revenue andsupport of up to $100,000 are currently required to file with the attorney generalan unaudited financial report. The Act will increase this threshold to annual
gross revenue and support of up to $250,000.

•

Authorizations of Real Property Transactions. The Act lowers the board approval
threshold required for routine real estate transactions.
Specifically, non-profit
corporations are permitted to undertake most purchases, sales, mortgages, leases,
exchanges and other dispositions of real property with the authorization of a majority ofthe directors or a majority of a committee authorized by the board. However, purchases,
sales, mortgages, leases, exchanges or other dispositions of real property that constituteall or substantially all of the assets of the non-profit corporation will continue to require
the approval of (i) two-thirds of the entire board or (ii) if there are twenty-one or more
directors, a majority of the entire board.

•

Approvals of Substantial Transactions. The Act simplifies the approval processes for
dispositions of all or substantially all assets, merger and consolidation transactions, anddissolutions by certain non-profit corporations. Specifically, a charitable corporation
seeking to sell, lease, exchange, or otherwise dispose of all or substantially all its assets ispermitted to undertake a one-step approval process, consisting of attorney generalapproval, in lieu of the current two-step approval process, consisting of court approvalfollowing attorney general review. Likewise, a charitable corporation seeking to merge
or consolidate is permitted to seek approval of the attorney general, rather than court
approval following attorney general review. Finally, a charitable corporation or a noncharitable corporation that holds assets legally required to be used for a particularpurpose may seek approval of the attorney general of any plan of dissolution, rather
than court approval. In each case, if the attorney general does not approve of thetransaction or if the attorney general concludes that court review is appropriate, the nonprofit corporation may seek court approval on notice to the attorney general. In
addition, the Act amends applicable provisions of the Education Law and Religious
Corporations Law to permit education corporations and religious corporations to enter
into merger transactions like other non-profit corporations.
Page 8

Memorandum – December 30, 2013IV.

APPLICABILITY OF THE ACT TO FOREIGN CORPORATIONS.

Generally, the Act applies to non-profit corporations incorporated in New York State, and, incertain cases, to New York charitable trusts. The Act also eliminates certain burdens on foreign
corporations applying for authority to do business in New York and has a number of provisions
applying specifically to corporations and trusts required to register to solicit charitable
contributions in New York. If you wish to discuss the applicability of the Act’s provisions toyour organization, please contact one of the attorneys in the Exempt Organizations Group.
The Act can be found at
http://open.nysenate.gov/legislation/bill/A8072-2013.
***

For more information, please contact one of the following members of Simpson Thacher &Bartlett LLP’s Exempt Organizations Group:David A. Shevlin(212) 455- 3682
dshevlin@stblaw.com

John N. Bennett(212) 455- 3723
jbennett@stblaw.com

Jennifer I. Reynoso(212) 455-2287
jreynoso@stblaw.com

Maura L. Whelan(212) 455-2494
mwhelan@stblaw.com

Jennifer L. Franklin(212) 455- 3597
jfranklin@stblaw.com

Kevin E. Roe(212) 455- 2647
kevin.roe@stblaw.com

Jillian P. Diamant(212) 455-3303
jillian.diamant@stblaw.com

This memorandum is for general information purposes and should not be regarded as legal advice. Pleasecontact your relationship partner if we can be of assistance regarding these important developments. The
names and office locations of all of our partners, as well as our recent memoranda, can be obtained fromour website, www.simpsonthacher.com.
The contents of this publication are for informational purposes only. Neither this publication nor the lawyers who authored it are
rendering legal or other professional advice or opinions on specific facts or matters, nor does the distribution of this publication to
any person constitute the establishment of an attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability inconnection with the use of this publication.

Page 9Memorandum – December 30, 2013

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