Any member of the board or any committee thereof may participate in the meeting through video screen communication (current law permits conference telephone) as long as all persons participating in the meeting can hear each other at the same time and can participate in all matters.
In order to take advantage of these changes, an organization may need to review and revise its bylaws.
5. Financial Oversight and Audit Matters Applicable to Corporations Required to File Independent CPA Report with AG (As noted above that solicit charitable contributions and have gross receipts exceeding $500,000.)
The board or a designated audit committee of the board comprised solely of independent directors of any corporation required to file an Independent CPA Audit Report with the AG pursuant to section 172-b of the Executive Law must oversee the accounting and financial reporting processes, and the audit of the corporation’s financial statements. The board or the designated audit committee must annually retain or renew the retention of an independent auditor to conduct the audit and to review the audit. If there is no audit committee of independent directors, only independent directors may participate or vote in matters pertaining to Financial Oversight and Audit at board meeting.
A corporation that in the prior fiscal year had, or in the current fiscal year expects more than $1 million in annual revenue must, in addition:
(1) Review with the independent auditor the scope and planning of the audit prior to the audit’s commencement.
(2) Upon completion of the audit, review and discuss with the independent auditor: (A) any material risks and weaknesses in internal controls; (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 process.
(3) Annually consider the performance of the independent auditor.
(4) If the activities are performed by an audit committee, the committee must report to the board.
– The board or designated audit committee must oversee the adoption, implementation and compliance with the Conflict of Interest Policy and Whistleblower Policy.
– Only independent directors (or Trustees) may participate in deliberations or voting by the board or committee relating to financial oversight and audit matters.
– Grace Period – Any corporation that had annual revenues of less than $10 million in the fiscal year ending prior to January 1, 2014 has until January 1, 2015 to comply with financial oversight and audit requirements.
6. Chair of the Board
No employee of the corporation may serve as Chair of the Board or hold any other title with similar responsibilities. This provision takes effect on January 1, 2015. See 2016 Amendments.
7. Authority of AG to Bring Action Against Related Party Transactions
The AG may bring legal action to void or rescind any Related Party Transactions, or to seek restitution, and the removal of directors or officers. The AG may require directors or officers to:
(1) Account for any profits and pay them to the corporation;
(2) Pay the corporation the value of the use of corporate property or assets;
(3) Return or replace any assets lost to the corporation as a result of the transaction;
(4) Pay double the amount of any improperly obtained benefit if conduct is found to be willful and intentional.
8. Related Party Transaction
No corporation may enter into any Related Party Transaction unless the transaction is determined to be fair, reasonable, and in the corporation’s best interest.
Any director, employee or key employee who has an interest in a Related Party Transaction must disclose in good faith to the board, or authorized committee, the material facts concerning such interest.
Additional Requirements for Related Party Transaction Involving Charitable Corporation
If a Related Party has a substantial financial interest, the board or authorized committee must:
(1) Prior to entering into the transaction, consider alternative transactions to the extent available;
(2) Approve the transaction by not less than a majority vote of the directors or committee members present at the meeting;
(3) Contemporaneously document in writing the basis for the board or authorized committee’s approval, including its consideration of any alternative transactions.
The certificate of incorporation, by-laws or policies may contain additional procedures required for the review and approval of related party transactions. See 2016 Amendments.
9. Conflict of Interest Policy
Every corporation must adopt a conflict of interest policy. The conflict of interest policy at a minimum must include the following provisions:
(1) A definition of the circumstances that constitute a conflict of interest;
(2) Procedures for disclosing a conflict of interest to the audit committee or, if there is no audit committee, to the board.
(3) A requirement that a person with a conflict of interest not be present at or participate in board or committee deliberation or vote on the matter giving rise to such conflict;
(4) A prohibition against any attempt by a person with the conflict to influence improperly the deliberation or voting on the matter giving rise to the conflict of interest;
(5) A requirement that the existence and resolution of the conflict be documented in the corporation’s records, including minutes of any meeting at which the conflict was discussed or voted upon; and
(6) Procedures for disclosing, addressing, and documenting Related Party Transactions.
Written Disclosure of Corporate Relationships
Every corporation that has 20 or more employees and in the prior fiscal year had annual revenue in excess of $1 million must adopt a Whistleblower Policy to protect from retaliation persons who report suspected improper conduct. The policy must provide that no director, officer, employee or volunteer of a corporation who in good faith reports any action or suspected actions taken by or within the corporation that is illegal, fraudulent or in violation of any adopted policy of the corporation shall suffer intimidation, harassment, discrimination or other retaliation, or in the case of employees, adverse employment consequence.
The Whistleblower Policy must include the following provisions:
(1) Procedures for the reporting of violations or suspected violations of laws or corporate policies, including procedures for preserving the confidentiality of reported information.
(2) A requirement that an employee, officer or director of the corporation be designated to administer the Whistleblower Policy and to report to the audit committee or other committee of independent directors, or if no committee, to the board.
(3) A requirement that the Whistleblower Policy be distributed to all directors, officers, employees and to volunteers who provide substantial services to the corporation.
(A corporation that has adopted and possesses a Whistleblower Policy pursuant to federal, state or local laws that is substantially consistent with the above requirements will be deemed to be in compliance.) See 2016 Amendments.
11. Definitions Under Not-for-Profit Corporation Law
“Charitable Corporation” means any corporation formed for “Charitable purposes”.
“Charitable Purposes” means purposes contained in the certificate of incorporation that are charitable, educational, religious, scientific, literary, culture or for the prevention of cruelty to children or animals.
“Director” means any member of the governing board, whether designated as “director”, “trustee”, “manager”, or any other title.
“Non-Charitable Corporation” means a corporation formed under the Not-For-Profit Corporation Law other than a charitable corporation, including, but not limited to one formed for any one or more of the following non-pecuniary, purposes: civic, patriotic, political, social, fraternal, athletic, agricultural, horticultural, or animal husbandry, or for the purpose of operating a professional, commercial, industrial, trade or service association.
“Entire board” means the total number of directors entitled to vote which the corporation would have if there were no vacancies. If the by-laws of the corporation provide that the board shall consist of a fixed number of directors, then the “entire board” shall consist of that number of directors. If the by-laws of any corporation provide that the board may consist of a range between a minimum and maximum number of directors, and the number within that range has not been fixed in accordance with paragraph (a) of section seven hundred two of this chapter, then the “entire board” shall consist of the number of directors within such range that were elected or appointed as of the most recently held election of directors, as well as any directors whose terms have not yet expired.
“Independent Auditor” means any certified public account performing the audit of the financial statements.
Effective UNTIL May 27, 2017:
“Independent Director” means a director who:
(i) Is not, and has not been within the last 3 years, an employee of the corporation or an affiliate corporation, and does not have a relative who is, or has been within the last 3 years, a key employee of the corporation or an affiliate of the corporation;
(ii) Has not received, and does not have a relative who has received, in any of the last 3 fiscal years more than $10,000 in direct compensation from the corporation or an affiliate of the corporation (other than reimbursement for expenses reasonably incurred as a director or reasonable compensation for service as a director); and
(iii) 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 officer of or has a substantial financial interest in, an entity that has made payments to, or received payments from, the corporation or an affiliate 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'’ consolidated gross revenues. (“Payment” does not include charitable contributions.)
Effective May 27, 2017:
“Independent Director” means a director who: (i) is not, and has not been within the last three years, an employee or a key person of the corporation or an affiliate of the corporation, and does not have a relative who is, or has been within the last three years, a key person of the corporation or an affiliate of the corporation; (ii) has not received, and does not have a relative who has received, in any of the last three fiscal years, more than ten thousand dollars in direct compensation from the corporation or an affiliate of the corporation; (iii) 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 officer of or has a substantial financial interest in, any entity that has provided payments, property or services to, or received payments, property or services from, the corporation or an affiliate of the corporation if the amount paid by the corporation to the entity or received by the corporation from the entity for such property or services, in any of the last three fiscal years, exceeded the lesser of ten thousand dollars or two percent of such entity’s consolidated gross revenues if the entity’s consolidated gross revenue was less than five hundred thousand dollars; twenty-five thousand dollars if the entity’s consolidated gross revenue was five hundred thousand dollars or more but less than ten million dollars; one hundred thousand dollars if the entity’s consolidated gross revenue was ten million dollars or more; or (iv) is not and does not have a relative who is a current owner, whether wholly or partially, director, officer or employee of the corporation’s outside auditor or who has worked on the corporation’s audit at any time during the past three years. For purposes of this subparagraph, the terms: “compensation” does not include reimbursement for expenses reasonably incurred as a director or reasonable compensation for service as a director as permitted by paragraph (a) section 202 (General and special powers) of this chapter, and "payment" does not include charitable contributions, dues or fees paid to the corporation for services which the corporation performs as part of its nonprofit purposes, or payments made by the corporation at fixed or non-negotiable rates or amounts for services received, provided that such services by and to the corporation are available to individual members of the public on the same terms, and such services received by the corporation are not available from another source.
“Affiliate” of a corporation means any entity controlled by or in control of such corporation.
“Relative” of an individual means (i) his or her spouse or domestic partner as defined insection twenty-nine hundred ninety-four-a of the public health law; (ii) his or her ancestors, brothers and sisters (whether whole or half blood), children (whether natural or adopted), grandchildren, great-grandchildren; or (iii) the spouse or domestic partner of his or her brothers, sisters, children, grandchildren, and great-grandchildren.
Effective UNTIL May 27, 2017:
“Related Party” means (i) any director, officer or key employee of the corporation or any affiliate of the corporation; (ii) any relative of any director, officer or key employee of the corporation or any affiliate of the corporation; or (iii) any entity in which any individual described in (i) and (ii) 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%.
Effective May 27, 2017:
“Related Party” means (i) any director, officer or key person of the corporation or any affiliate of the corporation; (ii) any relative of any individual described in clause (i) of this subparagraph; or (iii) any entity in which any individual described in clauses (i) and (ii) of this subparagraph has a thirty-five percent 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%.
Effective UNTIL May 27, 2017:
“Related Party Transaction” means 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.
Effective May 27, 2017:
“Related Party Transaction” means any transaction, agreement or any 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, except that a transaction shall not be a related party transaction if: (i) the transaction or the related party’s financial interest in the transaction is de minimis, (ii) the transaction would not customarily be reviewed by the board or boards of similar organizations in the ordinary course of business and is available to others on the same or similar terms, or (iii) the transaction constitutes a benefit provided to a related party solely as a member of a class of the beneficiaries that the corporation intends to benefit as part of the accomplishment of its mission which benefit is available to all similarly situated members of the same class on the same terms.
Effective UNTIL May 27, 2017:
“Key Employee” means any person in a position to exercise substantial influence over the affairs of the corporation.
Effective May 27, 2017:
“Key Person” means any person, other than a director or officer, whether or not an employee of the corporation, 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.
The 2016 Legislation include amendments to the definitions of “Independent Director”,
The primary change to the definition of “Independent Director” is that subparagraph (iii) has a sliding scale based on the entity’s gross revenue. In addition, the terms “compensation” and “payment” are defined.
The primary change to the definition of “Related Party” is that the term “Key Employee” is replaced by the term “Key Person”. The term “Key Person” replaces the term “Key Employee” because it is recognized that an individual may not be an employee but exercise powers or influence over the corporation.
The primary change to the definition of “Related Party Transaction” is to codify de minimis transactions. See Guidance Document 2015 issued by the NYS Attorney General Conflicts of Interest Policy Under the Non-Profit Revitalization Act of 2013.
The 2016 Legislation replaces the term “Key Employee” with “Key Person”. A Key Person may or may not be an employee of the corporation, who has responsibilities and exercises powers or influence over the corporation.
Other Amendments enacted in 2016:
1. Committees of the Board. NPCL section 2012 provides that the certificate of incorporation or the bylaws or the board may create committees of the board, each consisting of three or more directors has 30 or more directors, appointment to a committee of the board must be made by at least three quarters of the directors present at the time. Section 712 provides that certain powers of the board may not be delegated by the board to a committee of the board. The 2016 legislation expands the list of powers that the board may not delegate to any committee.
2. NPCL §713(f) provides that no employee of the board may serve as a chair of the board or hold any other title with similar responsibilities. The 2016 legislation created an exception as follows:
(a) the board approves such employee serving as chair of the board by a two-thirds vote of the entire board;
(b) the board contemporaneously documents, in writing, the basis for the board approval;
(c) Such employee is not considered an independent director.
3. Related Party Transaction
Section 715(a) of the NCPL provides that no corporation may enter into any related party transaction unless the transaction is determined by the board, or an authorized committee thereof, to be fair, reasonable and in the corporation’s best interest at the time of the determination. Any director, officer or key person who has an interest in any related party transaction must disclose in good faith to the board, or committee thereof, the material facts concerning such interest. Additional steps must be undertaken by a charitable corporation, including, prior to entering into a related party transaction the board, or authorized committee, must consider alternative transactions, to the extent available.
The 2016 legislation establishes two defenses that may be asserted in any claim of a violation of section 715.
1) Actions by persons other than the Attorney General – it is a defense that the transaction was fair, reasonable and in the corporation’s best interest at the time the corporation approved the transaction.
2) Action by the Attorney General (1) it is a defense that the transaction was fair, reasonable and in the corporation’s best interest at the time the corporation approved the transaction; and (2) prior to receipt of any request for information by the Attorney General regarding the transaction, the board has: (A) (i) ratified the transaction by finding in good faith that it was fair, reasonable and in the corporation’s best interest, (ii) in the case of a charitable corporation in which a related party transaction is involved, the board considered alternative transactions to the extent available, and approved the transaction by not less than a majority vote of the board of directors or committee members present at the meeting; (B) documented in writing the nature of the violation and the basis for the board’s or committee’s ratification of the transaction and (C) put into place procedures to ensure that the corporation will not violate the law in the future.
4. Conflict of Interest Policy
Section 715-a of the NPCL was amended to clarify (1) that it is the board that must adopt, and oversee the implementation of, and compliance with the conflict of interest policy to ensure that its directors, officers and key persons act in the corporation’s best interest and with applicable legal requirements.
5. Whistleblower Policy
Section 715-b of the NPCL provides the required elements of a whistleblower policy. Subparagraph (2) of 715-b(b) includes a requirement that an employee, officer, or director of the corporation be designated to administer the whistleblower policy and to report to the audit committee, other committee of independent directors, or, if there are no such committees to the board. The 2016 Amendments add language to subparagraph 2 to prohibit any director who is also an employee of the corporation from participating in any board or committee deliberations or voting relating to the administration of the whistleblower policy.
In addition, the 2016 Amendments insert a new subdivision 3 to Section 715-b(b) to include as a required element of a whistleblower policy that the person who is the subject of a whistleblower complaint may not be present at or participate in board or committee deliberations or vote on the matter relating to the complaint, provided that such prohibition does not prohibit the board or committee from requesting that the person who is the subject of the complaint present information as background or answer questions at a committee or board meeting prior to the commencement of deliberations or voting relating thereto.
The definition of “Affiliate” was amended to delete the term “or under common control with”. As a result, an affiliate is now any entity that is under control of in control of the corporation.
The definition of “Entire Board” was amended to make clear that the Entire Board may be a range as set in the Bylaws. If the bylaws provide a range and the board has not set a number within that range, then “Entire Board” means the number of directors within the range that were elected or appointed. The significance of the term “Entire Board” is that certain provisions of the NPCL require corporate action to be adopted by a majority of the Entire Board, rather than just a majority of the board that was present and voting.
The definition of “Relative” was amended to add reference to “domestic partners”.
Kern Augustine, P.C., Attorneys to Health Professionals, DrLaw.com, is solely devoted to the representation and defense of physicians and other health care professionals. The author may be contacted at 1-800-445-0954 or via email at email@example.com.
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