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A05422 Memo:

BILL NUMBER:A5422

TITLE OF BILL:  An act to amend the not-for-profit corporation law, in
relation to its recodification, reorganization, and overall operation
of non-profit entities in New York state; and to repeal certain
provisions of such law relating thereto

PURPOSE OR GENERAL IDEA OF BILL: To undertake a comprehensive revision
of the Not-for-Profit Corporation Law.

SUMMARY OF SPECIFIC PROVISIONS: Following is an outline of selected
revisions to the N-PCL proposed by the Corporation Law Committee of
the New York State Bar Association, This outline focuses on
substantive changes rather than amendments simply designed to conform
to the Business Corporation Law. The outline tracks the fifteen
Articles of the statute, summarizing proposals for significant changes
in the first ten Articles.

Article 1 - Short title; Definitions; Application; Certificates;
Miscellaneous.

The title of the statute is changed from "Not-for-Profit Corporation
Law" to "Non-Profit Corporation Law," and shorthand citation is
changed from "N-PCL" to "NPCL"

Section 101. References to the Not-for-Profit Corporation Law or to
not-for-profit corporations are accordingly amended to reference the
Non-Profit Corporation Law or non-profit corporations throughout the
statute Chapter heading, and sections 102(a); 103; 202; 305(c): 402;
501:  503(c); 512; 804: 805: 807: 904: 906(d): 908; 910; 1003: 1304:
1309:  1310: 1311; Article 14 heading; 1401: 1411: 1412: 1406-a.

Revisions to Article 1 foreshadow substantive changes in Articles 2
and 4. In particular, references to "Types" are eliminated sections
103, 112-115. Definitions section 102 are renumbered in alphabetical
order. Three new definitions are added -- "assets received for
specific purposes," "charitable purposes," and "organized for
charitable purposes." Use of these terms throughout the statute is
designed to maintain clarity with respect to Attorney General and
judicial oversight in the absence of Types, focusing on the key
elements for government oversight: the presence of charitable purposes
and assets raised for specific purposes. The revised draft maintains
judicial authority to intervene in the event of misappropriation of
corporate funds section 114. "Visitation of supreme court" but makes
the provision applicable Jo all not-for-profit corporations rather
than only Types B and C corporations, an appropriate broadening of
oversight.

"Assets received for specific purposes" is a term adapted from current
section 513, It encompasses donor-restricted funds as well as funds
resulting from institutional solicitations for designated uses.
Subsequent provisions focus Attorney General and judicial oversight on
protection of such assets and their continued use for intended
purposes. The intent is to codify the developing practice within the
State and recognized by the courts that the directors or trustees of a
charitable corporation owe a duty of obedience to the corporate


purposes of the entity, assuring that assets received to advance those
purposes are not diverted without proper consent or court approval.

Requirements associated with agency approvals prior to Secretary of
State filing of certificates of incorporation are eliminated section
104. The new provision would maintain and facilitate regulatory
authority in the absence of agency approvals. First, new statutory
language section 103-A expressly provides that incorporation under
this statute does not exempt an-entity from requirements of any
regulatory law and does not authorize any entity to do anything
prohibited by law or regulation. The intent is to mirror the approach
in other jurisdictions and provide the new corporation the opportunity
to secure IRS recognition of tax-exempt status and engage in critical
planning and organizational activities while also preserving the
dominance of any state regulatory regime with respect to activities
subject to licensing requirements.

Article 2 - Corporate Purposes and Powers.

The primary change to Article 2 is the elimination of Types A, B, C,
and D. Thus definitions of Types and distinctions between Types are
also eliminated section 201. The provision is amended to prohibit any
non-profit corporation from conducting activities for pecuniary profit
or financial gain, except to support its other lawful activities,
essentially importing current section 204 into revised section 201.

The explicit power to establish conditions and requirements for
membership is added; section 202, foreshadowing clarification in
Article 6 of membership criteria and procedures. Provisions for
dollar-limits associated with income-producing real estate; section
202 and restricted transfer of real property to a member of the
corporation; section 205 are deleted. References to subventions and
capital contributions also are deleted section 202.

Article 3 - Corporate Name and Service of Process.

Modest revisions are proposed for Article 3. The most significant
change section 301 would expand the options for required terms in the
name of a not-for-profit corporation. Currently, a corporate name must
include the word (or abbreviation of) "corporation," "incorporated,"
or "limited"; the draft revision adds "association," "club,"
"foundation," "fund," "institute," "union" or "society" to the list.

Article 4 - Formation of Corporations.

Article 4 is revised to eliminate the requirement to include
designation of Type A, B, C, or D in the contents of the certificate
of incorporation of a not-for-profit corporation. The revisions
further eliminate the need to list names and addresses of initial
directors in the certificate.  section 402. Conforming with BCL
section 402(b), which is now a well-accepted form of director
protection, the revised Article 4 would allow the certificate to limit
personal liability of directors to the corporation or its members -
although not to third parties - for certain breaches of duty.  section
402. This limitation of liability will not protect a director whose
conduct involved bad faith, intentional misconduct, knowing violations
of law or receipt of an improper financial gain or other advantage.


The revised Article 4 also streamlines the approval process for
incorporation section 404. Under current law, prior to submitting a
certificate of incorporation to the Secretary of State, not-for-profit
incorporators in New York must first obtain written approval or
consent from any other state agency with jurisdiction over activity
the corporation might eventually undertake pursuant to its stated
purposes. Such approval is required even if the corporation is formed
in order to conduct preliminary planning, fundraising, and
organizational activity short of the substantive operation that
ultimately would be subject to state regulation or licensing; and,
this agency approval requirement is triggered by purposes stated in
the certificate of incorporation, whether or not the corporation ever
operates in furtherance of such purposes. State agency oversight is
protected through the requirement that the new corporation provide a
certified copy of the filed certificate of incorporation to the
applicable state agency following incorporation.

Accompanying this shift from agency approval to Secretary of State
notice is a provision section 404 echoing the new section 103-A, i.e.,
further reinforcing the regulatory application of other laws and
affirming the authority of any governmental body to require a
corporation to obtain a license or permit legally required for conduct
of specific activities.

Article 5 - Corporate Finance.

Revisions to Article 5 simplify the framework for capital structure of
not-for-profit corporations by eliminating the "subvention," a
subordinated debt instrument unique to New York law sections 504-505.
Although the Committee expresses no principled opposition to
subventions, it assumes that use of more conventional subordinated
debt instruments such as promissory notes is adequate, less complex,
and more consistent with the capital structure of non-profit
corporations in other states. This change, if enacted, would require a
mechanism to account for subventions previously authorized and
outstanding.

Also in Article 5, provisions for relative rights, preferences, and
limitations of capital certificates are clarified in conformance with
the BCL section 502. issuance of transferable membership certificates
section 501 or capital certificates section 502 would be permitted, if
so authorized in the certificate of incorporation or bylaws.

In Sections 510 and 511, judicial approval is required with respect to
applicable asset transactions by corporations formed for charitable
purposes or corporations that hold restricted assets.

These provisions reflect appropriate oversight of both charitable
organizations and restricted assets. Government oversight is broadened
over current law in that transactions by a corporation without
charitable purposes would be subject to judicial approval if the
corporation also holds restricted assets, which is an appropriate
method to assure that restricted assets are not endangered by the
larger asset transaction. An exception is added for transfers to
constituent charitable corporations, i.e. to charitable corporations
controlled by or under common control with the selling corporation.


Failure of the corporation to file required reports would subject the
corporation to an order of the Attorney General compelling such
report(s) to be filed within 60 days of such order.  section 520.
Continued noncompliance following the 60-day period would give rise to
potential further action by the Attorney General for judicial
dissolution pursuant to Article 11. Greater focus on enforcing current
law appears to the Committee as a more efficient route than the
heightened standards for annual reporting by corporate officers
reflected in numerous legislative proposals since January 23, 2003
though the two are not incompatible.

Article 5 contains several provisions arising out of New York's
adoption of its version of the Uniform Management of Institutional
Funds Act ("UM1FA") back in 1978. UM1FA, like the N-PCL, is poorly
suited to serve the non-profit and especially the charitable sector
after decades of development, arid a successor act, the Uniform
Prudent Management of Institutional Funds Act ("UPMIFA"), had been
proposed. At this early juncture, while the Committee has several
suggestions on how to improve the N-PCL in this regard, to do so in
light of the developments of UPMIFA would be premature. Continued
attention will need to be paid to this subject, given the continued
large concentration of investment assets within New York non-profits
and the challenges posed by imaginative investment vehicles.

Article 6 - Members.

Revisions to Article 6 enable any New York not-for-profit corporation
to designate itself as a membership or a non-membership organization.
(Under current law, Type B corporations may have members or not, but
other Types must have members.) A corporation with more than one class
of members must designate its multiple classes of members in the
certificate of incorporation section 601. Revisions further clarify
the designation of events constituting membership termination.

The Article 6 revisions also clarify procedures for member meetings
meeting notices, rights of inspection, voting on bylaw amendments, and
other decision-making by the board or the members sections 602-603.
605-606. 610-611, 614, 621.

Article 7 - Directors and Officers.

Revisions to Article 7 maintain the current requirement that a
not-for-profit corporation have at least three directors section 102.
With respect to officers, however, it would allow one person to hold
all or any combination of the offices of president, secretary, or
treasurer in a one-member not-for-profit corporation section 713.

The draft revision deletes the "special committees" provisions
contained in paragraph (c). Those provisions have provoked
considerable confusion among organizations, including whether a
special committee must be composed exclusively of directors. The draft
also, consistently, deletes reference to "standing" committees.  The
revised section will authorize committees of the board composed of
three or more directors and committees" of the corporation" that need
not be composed of directors. These revisions make this section
consistent with the parallel section in the Business Corporation Law.


The draft revisions implicate fiduciary duties of directors and
officers section 717 with language parallel to BCL section 717(b).
This provision enables directors to consider the interests of a range
of stakeholder interests in the context of a potential change in
control of the corporation. A provision section 720-a imported from
BCL section 402(b) allows the certificate of incorporation to limit
certain liability of a director to the corporation or its members,
providing further incentive to attract non-profit corporation
directors. This provision does not allow for limiting liability to
third parties, nor does it apply in the event of misconduct or undue
personal gain by the director.

With respect to corporate transactions with interested directors, the
Committee notes that current law requires transactions to be fair or
to be approved by disinterested directors. Many nonprofit corporations
rely on beneficial business relationships with directors, and the
N-PCL section 715 sets adequate bounds without discouraging such
relationships. No further restrictions appear necessary, especially
given Attorney General authority currently for action against
interested directors pursuant to Article 7 and Internal Revenue
Service authority to enforce related restrictions under IRC section
4958.

Article B - Amendments and Changes.

Similar to Article 4 changes with respect to incorporation, the
revisions to Article 8 eliminate references to Types and, more
notably, requirements of state agency approvals prior to filing
certificates of amendment by the Secretary of State.  section 804.
This change recognizes the reality that the conditions that society
expects non-profit organizations to address can and do evolve rapidly,
yet the limitations and delays inherent in existing law on
corporations' ability to update their corporate purposes impede them
from fully benefitting society.

New language - section 801 provides that no amendment to a certificate
of incorporation can enable use of any assets received for specific
purposes in a manner inconsistent with such purposes, A new provision
new section 806(d) provides that amendment of purposes would not
prevent a corporation from applying assets acquired prior to such
amendment to such amended purposes, provided that the corporation
abides by any gift instrument for assets received for specific
purposes prior to such amendment. By those provisions, a corporation's
ability to efficiently update its purposes will not conflict with
legal restrictions on then-existing assets.

Modest changes also clarify the relative authority of the members and
the board of directors with respect to voting on amendments to the
certificate of incorporation or bylaws sections 802-803. Judicial
approval of certificates of amendment would not be required new
section 806: formerly section 804, provided that corporate assets will
continue to be used for the specific purposes for which funds were
given to the corporation section 801. This provision conforms to
recent repeal of parallel judicial approval provisions in Article 4
governing formation of Types B and C corporations.

Article 9 - Merger or Consolidation.


References to Types are deleted from Article 9

section 908. Further revisions to Article 9 add the power of a New
York not-for-profit corporation to merge, not simply with another New
York not-for-profit corporation, but also with a non-profit
corporation in a different state

section 901. Procedures for merger plan approval are clarified

section 903. Merger of any corporation that is organized for
charitable purposes and that holds assets received for specific
purposes must be approved by the supreme court

section 907, with opportunity for appearance and objection to the plan
by the Attorney General

section 907(b). Following such approval, the corporation must submit a
certificate of merger to the Secretary of State, who in turn notifies
state agencies with oversight of any of the corporation's purposes.
Any assets received for specific purposes prior to the merger will
retain such designation of use after the merger, except as otherwise
directed by the Supreme Court that approves the merger

section 905, Criteria for judicial approval are narrowed to focus upon
use of assets in accordance with specific purposes for which such
assets were received

section 907.

Article 10 - Non-Judicial Dissolution.

Revisions to Article 10 require approval of the Supreme Court for
dissolution of any corporation that is organized for charitable
purposes or that holds assets received for specific purposes (rather
than applying to Types B and C corporations)

sections 1001. 1003, with opportunity for appearance and objection to
the plan by the Attorney General section 1003. As with the changes to
Sections 510 and 511, these changes reflect the appropriate exercise
of government oversight over charitable organizations and any
non-profit organization holding restricted assets.

Following any such judicial approval, a corporation would be required
to submit a certificate of dissolution to the Secretary of State who
in turn would notify state agencies related to any of the
corporation's purposes. Decision-making procedures with respect to
dissolution are clarified

section 1002. Procedures after dissolution are focused upon winding up
corporate affairs and assuring use of assets received for specific
purposes for such purposes

section 1005. Provisions for revocation or annulment of voluntary
dissolution proceedings are deleted sections 1010. 1012.

Article 11- et. seq.


The NYSBA has drafted no significant amendments to:Article 11 -
Judicial Dissolution; Article 12 -Receivership; Article 13 - Foreign
Corporations; Article 14 - Special Not-for-Profit Corporations;
Article 15 -Public Cemetery Corporations.

JUSTIFICATION: The Corporation Law Committee (the "Committee") of the
New York State Bar Association ("NYSBA") has initiated a process of
review and proposed revision of the N-PCL. Initially undertaken to
conform the N-PCL to the current Business Corporation Law in New York,
this process presents an opportunity to revisit and improve selected
provisions of the N-PCL, especially in light of the dramatic changes
in corporate governance throughout the sector in response to the
Sarbanes-Oxley Act. The Committee's analysis, in consultation with
other experts, has resulted in a comprehensive draft revision of the
N-PCL, a statute that has not seen extensive revision since its
adoption over three decades ago.

The non-profit sector in New York State is enormous and wide-ranging -
foundations and charities, health care organizations, service
agencies, clubs and neighborhood groups, cultural institutions,
religious organizations, research and educational centers, chambers of
commerce, economic development corporations, and more. The impact of
the sector and even certain of the entities within it is vital to the
people and economy of the State of New York. The Committee has
benefitted from the expertise of the many and varied parties engaged
with the N-PCL - non-profit directors, officers, and employees;
lawyers and other professionals who advise non-profit corporations;
interested committees of the organized bar; government officials,
including legislators, the office of the state Attorney General, and
the office of the Secretary of State; and commentators and scholars.

The Committee's goal was to produce a revised statute that best serves
the public interest and the New York non-profit sector. The draft
revision compares favorably with comparable laws in other states and,
if enacted, will substantially reduce current incentives for
organizations in New York State to incorporate or move investment
assets out of state, reduce government burdens, and streamline
nonprofit governance without compromising oversight. The Committee's
ongoing consultations with respect to concurrent drafting initiatives
-including work on the American Bar Association's Revised Model
Nonprofit Corporation Act and the American Law Institute's Project on
Principles of the Law of Nonprofit Corporations - further assure that
New York's revised N-PCL will reflect best practices nationally.

The NYSBA seeks a more consistent statutory framework for non-profit
corporations and business corporations in New York State. Such
symmetry will simplify the practice and interpretation of corporate
law in the state, particularly given the significant and growing
overlap of non-profit and business law practice. Substantial revision
of the New York Business Corporation Law in. recent years has not been
accompanied by parallel changes to the N-PCL. These N-PCL draft
revisions conform where appropriate to the BCL, including parallel
articles and section numbers as well as similar language in parallel
provisions. Beyond conforming the N-PCL to the BCL, the draft
revisions reflect an effort to reduce excessive barriers to formation
and operation of not-for-profit corporations in New York, while
maintaining sufficient government oversight and emphasizing the


fiduciary responsibilities of directors and officers. These proposed
changes are the product of a generation's worth of learning since the
enactment of the original statute. For example, unlike non-profit
corporation statutes in most other states, New York's N-PCL requires
incorporators to obtain advance approvals from various state agencies
as a condition of incorporation. This denies organizations the
opportunity to conduct planning and seek crucial federal recognition
of tax-exempt status while simultaneously securing state regulatory
approval to operate. A more streamlined approach, commonly used
throughout the U.S., is recommended by which incorporation can occur
but regulated activities cannot be conducted until appropriate
licensure is obtained. Other changes with respect to dissolutions of
not-for profit corporations have largely already been incorporated by
recent changes to the N-PCL - an indication of the recognized need to
modernize the statute without compromising the public interest.

The draft revisions eliminate many of the idiosyncratic provisions
unique to New York law, created at a time when the law in the field
was not as well developed and the legislature was grappling with
amalgamating various model acts and the recently adopted BCL into a
single statute. In particular, the draft revisions eliminate the
designation of statutory "Types" of not-far-profit corporations. The
N-PCL definitions of four types - A, B, C or D - create undue
complexity in formation and ambiguity at the borders between Types,
disguise the impact of the common and statutory law on charitable
funds managed by corporations, and provide potential dissonance with
federal internal Revenue Code ("IRC") categories for tax exemption.

Elimination of Types would result in consistent statutory rules for
all non-profit corporations incorporated in New York, with targeted
protections for continued use of donor-restricted and charitable funds
for their intended purposes, a refinement that recognizes recent
enforcement actions by the Attorney General Charities Bureau and its
important oversight role in this area.

The Committee has given careful consideration to and received valuable
inputs with respect to the possible incorporation of various aspects
of the Sarbanes-Oxley Act into the N-PCL. The consideration of these
elements - required executive and audit committees; adoption of a code
of ethics; whistleblower and document retention/destruction policies;
verification or certification of financial statements and other
filings; auditor independence standards; and so on - has resulted in a
varied and vigorous debate in the non-profit and charitable
communities nationwide. The Committee, while sensitive to the
importance of transparency and protections against wrongdoing among
not-for-profit corporation boards and executives, has not incorporated
these elements into the draft revisions. Instead, the Committee has
deferred to the approach taken by the Attorney General Charities
Bureau, and relied upon individual corporations to consider and adopt
appropriate measures, consonant with industry practice and their
obligations to meet the standard of care imposed by NPCL Section 717.
The Committee expects (and invites) continued consideration of this
approach as various constituencies around the State comment on the
draft revisions.

Finally, the NYSBA recommends changing the title of the statute to the
"Non-Profit Corporation Law," adjusting the reference to "NPCL." The


current title - "Not-for-Profit Corporation Law" italics added - was
intended originally to clarify that a corporation organized under this
statute is permitted to make a "profit" within the limitations of the
statute. That principle of law has come to be widely and well
understood, without regard to the title of the statute. indeed, the
nomenclature is unique to New York - another distinction which no
longer makes a difference and causes confusion even within New York
but also, certainly, as New York corporations deal with others around
the country. Today, in New York and elsewhere, numerous non-profit
corporations engage in commercial activity within the limits of state
and federal law, making net revenues in some instances but adhering to
the prohibition on distributing profit. Changing the title of the
N-PCL to the Non-Profit Corporation Law will provide for more succinct
and understandable terminology and will put New York in step with the
doctrinal norm.

PRIOR LEGISLATIVE HISTORY: A11042 (2007-2008); A5855 of 2009-10; A5727
of 2011-12  - in Corporations committee.

FISCAL IMPLICATIONS: None to state or local government.

EFFECTIVE DATE: This act shall take effect immediately.
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