The Soapbox and Toolbox for New York State's Nonprofits

February 8, 2016

Top 5 Bylaws Pitfalls for New York State's Nonprofits

Welcome to the New Year! Can you believe it's 2016 already? Our legal team  spent much of 2015 reviewing and revising hundreds of our members bylaws for compliance with the new Nonprofit Revitalization law.As you probably know by now, the law governing nonprofits recently changed pretty drastically. Some changes are for the better (yes, email voting can happen now!) but some make running a nonprofit a little more difficult.

For better or worse, most of the time they necessitate a change in the way we structure and govern our organizations, and that means revising our bylaws to bring ourselves into compliance.

Our attorneys have seen the same pitfalls time after time. So, NYCON is kicking off the new year with knowledge gleaned from the bylaw reviews our team has already done... And here is what they learned!

Legal Pitfall #1: An Inadequate Conflict of Interest Policy
As many nonprofits are aware, the 2014 NYS Nonprofit Revitalization Act ("NPRA") requires far more formality than was previously required with respect to the disclosure, review, assessment and reporting of real and potential conflicts of interest.  Yet, it's still common to see nonprofit by-laws with a clause saying it will "maintain, regularly-updated conflict of interest procedures in order to fully comply with all applicable laws and regulations."


So, what's wrong with that? Well, for starters, such a limited conflicts of interest "policy" fails to comply with the law.  New NPRA obligations require all nonprofits to adopt and implement written conflicts of interest policies and procedures, which must address specific criteria.

Beyond statutory obligations, from a practical standpoint, a nonprofit with such a deficient policy simply doesn't have appropriate policies and procedures in place to properly address any real or potential conflicts of interest, let alone justify its response to any such situations, if ever questioned. A deficient policy needlessly undermines the mission, compromises operations and potentially exposes the nonprofit to liabilities.

Need Additional Resources?
Check out the Attorney General's Guidance entitled "Conflicts of Interest Policies Under the Nonprofit Revitalization Act of 2013." That resource will outline the minimum statutory requirements for New York nonprofits.

Legal Pitfall #2 on our "Top 5 Legal Pitfalls" for your Bylaws is 
Incorrect Committee Descriptions and Authorities
Did you know that now all nonprofit committees must be classified as one of two types (each with a specific statutory definition):

  • Committees of the Board
  • Committees of the Corporation

While a number of nonprofits account for these new designations, we rarely review a set of 
bylaws that account for all the limitations on committee authority. 
For instance, did you know that no Committee of the Board can be empowered to authorize a bylaws amendment? This is just one of five limitations that must be addressed.  A committee of the Board may have delegated authority to bind the corporation on any matter except:

  • The submission to the Member of any action requiring the Member's consents under the N-PCL and any successor provisions or amendments thereto
  • The filling of vacancies in the Board or in any committee
  • The fixing of compensation of the directors for serving on the Board or on any committee
  • The amendment or repeal of the bylaws or the adoption of new bylaws (as noted above)
  • The amendment or repeal of any resolution of the Board that by its terms shall not be so amendable or repealable
NYCON Offers our Top Five Tips for Committee Restructuring. 


Legal Pitfall#3 on our "Top 5 Legal Pitfalls" for your nonprofit's Bylaws is our most frequently asked question by far!  So, can your board vote via e-mail or proxy?The simple answer is YES, by e-mail, but only if on unanimous consent. But, can they vote by proxy? NO.Nonprofit boards of directors have always been empowered to transact business in the absence of an actual meeting via means of written consent, provided all directors act on the given resolution and all are in support of the contemplated action. There must be unanimous consent.

The Nonprofit Revitalization Act expressly provides that electronic communication, such as e-mail, can be used as a means by which consent resolutions can be sent and received.  So, your board can vote by e-mail, but it can only authorize an action with unanimous participation and consent.

Unlike voting on unanimous consent, nonprofit boards have never been permitted to utilize proxy voting.  It is impermissible for a director to authorize another director to vote in his/her place, cast a ballot in advance for a vote to be conducted at a meeting that the director will be unable to attend, cast a ballot after a vote has already been conducted, etc.



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Bylaw Pitfall #4:  Neglecting Significant Financial Transaction Requirements 

The Problem
Most boards of directors aren’t aware that the purchase, mortgage, lease (for a term of 5, or more, years), sale, exchange or other disposition of real property or other assets that constitutes “all, or substantially all,” of the assets of a nonprofit requires approval by a two-thirds majority of the “entire board.”  In fact, even if such transactions don’t involve “all, or substantially all,” corporate assets, a simple majority vote of the “entire board” is still required.  This means that when it comes to acquisition or disposition of property or other assets, your nonprofit is required to identify both your “entire board” and whether the transaction would amount to “all, or substantially all,” of your assets.  For nonprofits with voting memberships, analogous member approval standards must also be considered.
 

Entire Board With the recent enactment of the Nonprofit Revitalization Act, the Not-for-Profit Corporation Law now specifically defines the term “entire board” to mean “the total number of directors entitled to vote which the corporation would have if there were no vacancies.”  The new statutory definition even goes on to address situations where there is a set number or directors and where a range in number is stipulated, but not clearly identified.  

All or Substantially All Unfortunately, the Revitalization Act did not address the term “all, or substantially all.”  The Office of the Attorney General even advises “there is no fixed numerical or arithmetic measure of ‘all or substantially all.’”  Nevertheless, the approval of the Attorney General or NYS Courts is required for any transaction involving the disposition large or significant proportion of a nonprofit’s total assets (most commonly the sale of real property) or when it may affect the ability of the nonprofit to carry out its purposes, regardless of the actual percentage of the nonprofit’s total assets that are the subject of the transaction.

Not-for-Profit Corporation Considerations It is worth specifically noting that nonprofits formed under the Not-for-Profit Law as “Charitable Corporations” (most commonly organizations with charitable or educational purposes) generally do not require Attorney General or Court approval in order to purchase or lease property or enter into a mortgage or other loan agreement.  In this regard, nonprofits considered to be “Non-Charitable Corporations” (for instance, civic, patriotic, fraternal and athletic organizations) are never statutorily required to obtain any form of regulatory or judicial approval for any customary financial transaction, regardless of size or scope.

Religious Corporation Considerations Unlike nonprofits, many faith-based organizations formed under the Religious Corporation Law are required to obtain Attorney General or Court approval not only to sell or lease (for a term of 5, or more, years) of any real property (regardless of whether it constitutes “all, substantially all” corporate assets), but even to enter into a mortgage, which could include simple refinancing.  There are limited exceptions available for certain purchase money mortgages and purchase money security agreements.  Likewise, certain religious denominations are exempt from customary approval obligations, most notably Roman Catholic, AME Zion, certain Greek Orthodox and most so-called “Mainline” Protestant Churches.

Actions to Consider

  1. Apprise yourself of all obligations applicable to nonprofits if considering the purchase, lease, mortgage, sale, exchange or disposition of “all, or substantially all,” assets, most commonly real property.
  2. By-Laws, and possibly Certificates of Incorporation, should be amended, as needed, in order to assure that minimum required voting thresholds are properly stipulated.  In this regard, nonprofits are free to establish standards higher than those mandated by NYS when it comes to voting, quorum and the like.
  3. Nonprofits with voting Members warrant special consideration as By-Laws should confirm that membership approval is also required for any disposition of “all, or substantially all,” assets (customarily the sale of property)byvoteof, at least, a two-thirds majority at a properly convened meeting.  Procedures for membership meeting notice,quorumand voting (whichcanincludeuseofproxyvoting)are,themselves,strictly regulated by statute necessitating careful attention in order to assure that related By-Law provisions are both practical and lawful.
  4. For nonprofits with large boards (those with 21, or more, voting directors), there is an exception to the customary two-thirds majority voting requirement, permitting approval of a disposition of “all, or substantially all,” corporate assets by a simple majority of directors.  If deemed advisable, a lower voting majority should be specifically addressed in the by-laws. 
     

For Further Reading Here is a link to the most current NYS Charities Bureau guidance on nonprofit financial transactionsBe advised, the publication has yet to be updated to reflect a recent addition to the Revitalization Act permitting Religious Corporations to seek Attorney General or Court approval for certain real property transactions when required, but is otherwise up-to-date.

 


Bylaws Pitfall #5: Having Overly Generalized Indemnification & Insurance Policies

The Problem:
When it comes to potential exposure to personal liability faced by board and staff members affiliated with nonprofits, many organizations fail to clearly and sufficiently stipulate what guarantees and protections they offer. In some cases, unfortunately, organizations don't even secure appropriate insurance necessary to truly honor their promises.  Virtually all nonprofits should, and do, endeavor to indemnify their stakeholders from legal claims arising as a result of their service to the organization. Such decisions, however, merit requisite due diligence. 


Indemnification obligations are generally two-fold: 

    • Coverage of expenses that might be incurred in defending a legal action;
    • Payment of any judgments or necessary settlement fees


How do nonprofit meet these obligations?
For most nonprofits, only with appropriate insurance coverage can they truly honor their indemnification commitments.  In our experience, many nonprofits needlessly expose themselves, and their stakeholders, to liability and potentially disastrous financial obligations by simply adopting brief, catch-all indemnification and insurance clauses in their by-laws.

Carefully consider the following questions:
Does the indemnification and insurance clause expressly require the nonprofit to procure insurance coverage appropriate for its organizational needs and does it provide for procedures to assure that such coverage is maintained and can be adjusted as needed as the organization evolves?

Assuming a nonprofit's bylaws obligate the organization to maintain insurance coverage for purposes of indemnification, are the by-laws clear as to those who are actually indemnified?  Are staff expressly indemnified?  What about volunteers?  If so, are the terms of the underlying insurance policies in sync with the by-laws?

Should the nonprofit also guarantee corporate funds in order to indemnify a stakeholder if its insurance carrier were to refuse to pay or if actual damages exceeded coverage limits? Remember, insurance coverage has its limitations.

What discretion should a board of directors have, if any, in authorizing the indemnification of a stakeholder who acted in bad-faithorengaged illegal conduct while loosely acting on behalf of the nonprofit?  (An unfortunate example can be found here.)

Actions to Consider:

 You may also want to read the following:

For more information on NYCON's Members Only Directors & Officers Insurance (and to get a "Quick Quote") click here.


 
Register Today:
The New Legal Bylaw Pitfalls Every New York Nonprofit Should Know [Webinar] Click here.

Just Announced!
Special Discount on our Nonprofit Revitalization Act Remedial Action Plan will be offered to all attendees!

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NYCON develops and promotes an effective and vibrant charitable nonprofit community throughout New York State.  We strengthen organizational capacity, act as an advocate and unifying voice, help to inform philanthropic giving, and conduct research and planning to demonstrate relevance and impact.