A10239
STATE OF NEW YORK
________________________________________________________________________
10239
IN ASSEMBLY
March 17, 2004
___________
Introduced by M. of A. BRODSKY -- (at request of the Department of Law)
-- read once and referred to the Committee on Corporations, Authori-
ties and Commissions
AN ACT to amend the not-for-profit corporation law and the religious
corporations law, in relation to protections against financial fraud
and abuse, and to repeal certain provisions of the not-for-profit
corporation law relating thereto
The People of the State of New York, represented in Senate and Assem-
bly, do enact as follows:
1 Section 1. Section 519 of the not-for-profit corporation law is
2 amended by adding five new paragraphs (d), (e), (f), (g) and (h) to read
3 as follows:
4 (d) The president or the chief executive officer, and the treasurer or
5 the chief financial officer, of any corporation, other than a private
6 foundation, which has less than three million dollars in assets and
7 which receives or accrues in any fiscal year gross revenue and support
8 of less than one million dollars, shall each sign the annual report, and
9 shall thereby verify that the signing officer has reviewed the report,
10 and that based on the officer's knowledge, the financial information
11 included in the report fairly presents in all material respects the
12 financial condition and results of operations of the corporation as of,
13 and for, the periods presented in the report.
14 (e) The president or the chief executive officer, and the treasurer or
15 the chief financial officer, of any corporation which has at least three
16 million dollars in assets or which receives or accrues in any fiscal
17 year gross revenue and support of at least one million dollars, shall
18 each sign the annual report, and shall thereby verify the following:
19 (1) the signing officer has reviewed the report, and based on the
20 officer's knowledge:
21 (A) the report does not contain any untrue statement of a material
22 fact or omit to state a material fact necessary in order to make the
23 statements made, in light of the circumstances under which such state-
24 ments were made, not misleading; and
EXPLANATION--Matter in italics (underscored) is new; matter in brackets
[ ] is old law to be omitted.
LBD06251-06-4
A. 10239 2
1 (B) the financial information included in the report fairly presents
2 in all material respects the financial condition and results of oper-
3 ations of the corporation as of, and for, the periods presented in the
4 report;
5 (2) during the period covered by the report, the corporation main-
6 tained internal financial controls designed to reasonably ensure that
7 material financial information relating to the corporation is made known
8 to the signing officers by others within the corporation;
9 (3) the signing officers have reviewed the effectiveness of the corpo-
10 ration's internal financial controls as of a date within ninety days
11 prior to the close of the fiscal year covered by the report, and have
12 presented in the report their conclusions about the effectiveness of
13 such controls as of the date of such review; and
14 (4) the signing officers have disclosed to the corporation's auditors
15 (if any) and the audit committee of the board of directors (or the
16 entire board if there is no audit committee), based on such officer's
17 knowledge:
18 (A) any significant deficiencies and material weaknesses in the design
19 or operation of the internal financial controls, and
20 (B) any fraud, whether or not material, that involves management or
21 other employees who have a significant role in the corporation's inter-
22 nal financial controls.
23 (5) The provisions of this paragraph shall not apply to any corpo-
24 ration that is: (A) a private foundation; or (B) a Type A corporation as
25 defined in paragraph (b) of section 201 (Purposes) that is not required
26 to register and file annual reports with the attorney general pursuant
27 to article 7-A of the executive law or section 8-1.4 of the estates,
28 powers and trusts law.
29 (f) The president or the chief executive officer, and the treasurer or
30 the chief financial officer, of a private foundation shall each sign the
31 annual report and shall thereby verify that the signing officer has
32 reviewed the report, and that based on the officer's knowledge:
33 (1) the financial information included in the report fairly presents
34 in all material respects the financial condition and results of oper-
35 ations of the corporation as of, and for, the periods presented in the
36 report; and
37 (2) the corporation has complied in all material respects with the
38 requirements and prohibitions included in the certificate of incorpo-
39 ration pursuant to section 406 (Private foundation, as defined in the
40 United States internal revenue code of 1954: provisions included in the
41 certificate of incorporation).
42 (g) For the purposes of this section, the term "private foundation"
43 shall mean a private foundation as defined in section five hundred nine
44 of the United States internal revenue code of 1986, as amended, or any
45 comparable provision of any successor law.
46 (h) Nothing contained in this section shall be construed as creating a
47 private right of action against any signing officer based upon a verifi-
48 cation made pursuant to this section, provided that this paragraph shall
49 not preclude any private right of action which would exist regardless of
50 such verification.
51 § 2. Section 520 of the not-for-profit corporation law, as amended by
52 chapter 58 of the laws of 1981, is amended to read as follows:
53 § 520. Reports of corporation.
54 Each domestic corporation, and each foreign corporation authorized to
55 conduct activities in this state, shall from time to time file [such]
56 complete and accurate reports on its activities as may be required by
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1 the laws of this state. All registration and reporting requirements
2 pursuant to EPTL 8-1.4, or related successor provisions, are, without
3 limitation on the foregoing, expressly included as reports required by
4 the laws of this state to be filed within the meaning of this section.
5 Willful or persistent failure of a corporation to file [a report]
6 complete and accurate reports as required by law shall constitute a
7 breach of the directors' and officers' duty to the corporation and
8 shall: (a) subject the corporation, at the suit of the attorney-general,
9 to an action or special proceeding for dissolution under article 11
10 (Judicial dissolution) in the case of a domestic corporation, or under §
11 1303 (Violations) in the case of a foreign corporation; and (b) subject
12 the directors and officers, at the suit of the attorney-general, to an
13 action or special proceeding for such remedies as may be provided by
14 law, including removal in the case of directors and officers of a domes-
15 tic corporation.
16 § 3. Section 521 of the not-for-profit corporation law, as amended by
17 chapter 690 of the laws of 1978, is amended to read as follows:
18 § 521. Liability for failure to disclose required information.
19 Failure of the corporation to comply in good faith with the notice or
20 disclosure or reporting provisions of section 501 (Stock and shares
21 prohibited; membership certificates authorized), or paragraph (c) of
22 section 503 (Capital certificates), or paragraph (c) of section 505
23 (Subvention certificates), or paragraph (b) of section 513 (Adminis-
24 tration of assets received for specific purposes), [or section 518
25 (Reports to comptroller),] or section 519 (Annual report of directors),
26 or section 520 (Reports of corporation), shall make the corporation
27 liable for any damage sustained by any person in consequence thereof.
28 § 4. Section 712 of the not-for-profit corporation law, paragraph (e)
29 as amended by chapter 961 of the laws of 1972, is amended to read as
30 follows:
31 § 712. Executive committee and other committees.
32 (a) If the certificate of incorporation or the by-laws so [provide]
33 permit, the board, by resolution adopted by a majority of the entire
34 board, may designate from among its members an executive committee and
35 other standing committees, each consisting of three or more directors,
36 and each of which, to the extent provided in the resolution or in the
37 certificate of incorporation or by-laws, shall have all the authority of
38 the board, except that no such committee shall have authority as to the
39 following matters:
40 (1) The submission to members of any action requiring members'
41 approval under this chapter.
42 (2) The filling of vacancies in the board of directors or in any
43 committee.
44 (3) The fixing of compensation of the directors for serving on the
45 board or on any committee.
46 (4) The amendment or repeal of the by-laws or the adoption of new
47 by-laws.
48 (5) The amendment or repeal of any resolution of the board which by
49 its terms shall not be so amendable or repealable.
50 (b) The board may designate one or more directors as alternate members
51 of any standing committee, who may replace any absent member or members
52 at any meeting of such committee.
53 (c) The by-laws may provide for special committees of the board, or
54 may authorize the board to create such special committees as may be
55 deemed desirable. Unless otherwise provided in the by-laws, the members
56 of such committees shall be appointed by the chairman of the board or
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1 the president of the corporation if there is no chairman of the board,
2 with the consent of the board. Special committees shall have only the
3 powers specifically delegated to them by the board and in no case shall
4 have powers which are not authorized for standing committees under this
5 section.
6 (d) Each committee of the board shall serve at the pleasure of the
7 board. The designation of any such committee and the delegation thereto
8 of authority shall not alone relieve any director of his or her duty to
9 the corporation under section 717 (Duty of directors and officers).
10 (e) Committees, other than standing or special committees of the
11 board, whether created by the board or by the members, shall be commit-
12 tees of the corporation. Such committees may be elected or appointed in
13 the same manner as officers of the corporation. Provisions of this chap-
14 ter applicable to officers generally shall apply to members of such
15 committees.
16 (f) In the case of any corporation which has a board of directors of
17 more than twenty-five members, unless prohibited by the certificate of
18 incorporation or the by-laws, the board by resolution adopted by a
19 majority of the entire board shall designate from among its members an
20 executive committee consisting of three or more members.
21 (g) (1) In the case of any corporation whose financial statements are
22 audited by a public accountant, or has at least three million dollars in
23 assets, or receives or accrues in any fiscal year gross revenue and
24 support of at least one million dollars, the board by resolution adopted
25 by a majority of the entire board shall designate from among its members
26 an audit committee consisting of three or more directors; provided,
27 however, that the provisions of this subparagraph shall not apply to any
28 corporation whose certificate of incorporation or by-laws prohibit the
29 appointment of an audit committee.
30 (2) The audit committee (or the entire board of directors in the case
31 of any corporation whose certificate of incorporation or by-laws prohib-
32 it the appointment of an audit committee) shall be directly responsible
33 for the appointment, compensation, and oversight of the work of any
34 public accountant or public accounting firm employed by that corporation
35 (including resolution of disagreements between management and the audi-
36 tor regarding financial reporting) for the purpose of preparing or issu-
37 ing an audit report or related work, and each such public accountant or
38 public accounting firm shall report directly to the audit committee (or
39 to the entire board, in the case of corporations whose certificate of
40 incorporation or by-laws prohibit the appointment of an audit commit-
41 tee).
42 (3) Each member of the audit committee shall be a member of the board
43 of directors of the corporation, and shall not, other than in his or her
44 capacity as a member of the audit committee, the board of directors, or
45 any other board committee: (A) accept any consulting fee, advisory fee,
46 or other compensation or other benefits from the corporation; or (B)
47 have participated in any other interested party transactions within the
48 meaning of section 715 (Interested directors and officers) within the
49 previous year.
50 (4) Each audit committee, or the entire board of directors in the case
51 of corporations whose certificate of incorporation or by-laws prohibit
52 the appointment of an audit committee, shall establish procedures for:
53 (A) the receipt, retention, and treatment of complaints received by the
54 corporation regarding accounting, internal accounting controls, or
55 auditing matters; and (B) the confidential, anonymous submission by
A. 10239 5
1 employees of the corporation of concerns regarding questionable account-
2 ing, auditing or other financial matters.
3 § 5. Section 715 of the not-for-profit corporation law is REPEALED and
4 a new section 715 is added to read as follows:
5 § 715. Interested directors and officers.
6 (a) No contract or other transaction directly or indirectly entered
7 into between a corporation and one or more of its or its affiliates'
8 directors or officers, or between a corporation and any other corpo-
9 ration, firm, association or other entity in which one or more of its or
10 its affiliates' directors or officers are directors or officers, or have
11 a substantial financial interest, shall be either void or voidable by
12 the corporation for this reason alone or by reason alone that such
13 director or directors or officer or officers are present at the meeting
14 of the board, or a committee thereof, which authorizes such contract or
15 transaction, or that the votes of any such persons are counted for such
16 purpose. Notwithstanding the foregoing, such contract or transaction may
17 be voided or modified by the corporation or the attorney general and
18 remedies under paragraph (c) shall be available to the corporation or to
19 the attorney general unless the interested director or officer, and any
20 approving director, shall establish affirmatively that such contract or
21 transaction was fair and reasonable as to the corporation at the time
22 the corporation entered into such contract or transaction.
23 (b) An interested party contract or transaction within the meaning of
24 paragraph (a), or compensation approved in accordance with paragraph (e)
25 or (f), shall be presumed to be fair and reasonable to the corporation,
26 if the following conditions are satisfied:
27 (1) The contract, transaction or compensation was approved in advance
28 by the board or committee entitled to vote thereon and the members, if
29 any, entitled to vote thereon, by a vote sufficient for such purpose
30 without, in the case of a board or committee vote, counting the vote or
31 votes of such interested director or officer, and the material facts as
32 to such contract, transaction or compensation, and any compensation paid
33 by an affiliate of the corporation for services related or substantially
34 similar to the services performed on behalf of the corporation, and such
35 director's or officer's interest therein were disclosed in good faith or
36 otherwise known to the board or committee or members, if any, entitled
37 to vote thereon;
38 (2) The board or committee obtained and relied upon appropriate data
39 as to comparability, prior to approving the contract, transaction or
40 compensation, and provided such data to the members, if any, entitled to
41 vote thereon; and
42 (3) The board or committee adequately documented the basis for the
43 approval of the contract, transaction or compensation at the time of
44 such approval, which documentation shall include:
45 (A) The terms of the contract, transaction or compensation, that was
46 approved and the date it was approved;
47 (B) The members of the board or committee who were present during
48 discussion of the contract, transaction or compensation, that was
49 approved and those who voted on it;
50 (C) The comparability data obtained and relied upon by the board or
51 committee and a description of how the data was obtained; and
52 (D) Any actions taken by the interested director or officer with
53 respect to consideration of the contract, transaction or compensation.
54 Notwithstanding the provisions of this paragraph, any qualifying
55 disbursement made by one organization described in section 501(c)(3) of
56 the code to another such organization, which constitutes an interested
A. 10239 6
1 party contract or transaction within the meaning of paragraph (a), shall
2 be presumed to be fair and reasonable as to any such organization that
3 is a corporation subject to this section if: (1) the conditions of
4 subparagraph (1) are met with respect to such corporation; or (2) in the
5 case of a grant or donation by one corporation described in section
6 501(c)(3) of the code and subject to this section to another organiza-
7 tion described in such section 501(c)(3), if the conditions of subpara-
8 graph (1) are met by the granting or donating corporation. For the
9 purposes of this section the term "qualifying disbursement" shall mean
10 capital contributions or subventions pursuant to subparagraph (7) of
11 paragraph (a) of section 202 (General and special powers), donations
12 pursuant to subparagraph (14) of paragraph (a) of section 202 (General
13 and special powers), or private foundation grants that are qualifying
14 distributions pursuant to section 4942(g) of the code.
15 (c) If the interested director or officer or approving director fails
16 to meet his or her burden under paragraph (a), the corporation or the
17 attorney general may void or modify the contract or transaction, unless
18 such voidance or modification would place the corporation in a position
19 worse than that in which it would be if the contract or transaction were
20 not voided or modified. In addition, if the interested director or offi-
21 cer or approving director fails to meet the burden under paragraph (a)
22 or if the board or committee fails to comply with paragraph (e) or (f),
23 regardless of whether or not the corporation is subject to section 4958
24 of the code, and regardless of whether or not the internal revenue
25 service pursues its remedies, the corporation or the attorney general
26 may seek to recover from the interested director or officer or approving
27 director, respectively, restitution in amounts equivalent to the reme-
28 dies that would be available to the internal revenue service from an
29 interested director or officer or approving director of a corporation
30 subject to said section, including the amount of any compensation
31 approved pursuant to paragraph (e) or (f) in excess of an amount that is
32 fair and reasonable, together with interest at the rate pursuant to
33 section 5004 of the civil practice law and rules on any such amounts.
34 (d) The certificate of incorporation or the by-laws may contain addi-
35 tional restrictions on contracts or transactions between a corporation
36 and its directors or officers or other persons and may provide that
37 contracts or transactions in violation of such restrictions shall be
38 void or voidable.
39 (e) Compensation of directors and officers in any capacity (other than
40 for serving on the board or any committee), including for service as a
41 director or officer of another corporation, firm, association or other
42 entity on behalf of the corporation, shall be fixed by the board, or by
43 a committee of the board authorized to vote thereon that is comprised
44 solely of directors who are not compensated by the corporation other
45 than in their capacity as directors, or, if the officers are elected by
46 the members pursuant to paragraph (b) of section 713 (Officers), by
47 majority vote of the members as provided in paragraph (c) of section 613
48 (Vote of members) unless a higher proportion of members is set by the
49 certificate of incorporation or by-laws, and such compensation shall be
50 in an amount that is fair and reasonable, determined in accordance with
51 section 4958 of the code, whether or not the corporation is subject
52 thereto.
53 (f) Compensation of directors for serving on the board or any commit-
54 tee shall be fixed by the affirmative vote of a majority of the entire
55 board unless a higher proportion is set by the certificate of incorpo-
56 ration or by-laws, and such compensation shall be in an amount that is
A. 10239 7
1 fair and reasonable, determined in accordance with section 4958 of the
2 code, whether or not the corporation is subject thereto.
3 (g) For purposes of this section:
4 (1) the term "code" shall mean the United States internal revenue code
5 of 1986, as amended, or any comparable provision of any successor law;
6 (2) the term "compensation" shall include salary and other economic
7 benefits under section 4958 of the code; and
8 (3) an entity shall be deemed an "affiliate" of a corporation if such
9 entity is a disqualified person pursuant to section 4958 of the code or
10 is controlled by, in control of or under common control with such corpo-
11 ration.
12 (h) Except with respect to compensation of directors or officers, this
13 section shall not apply to any contract or transaction of which the
14 interested director or officer has no actual knowledge and which does
15 not exceed the lesser of one percent of the gross receipts of the corpo-
16 ration for the preceding fiscal year or one hundred thousand dollars.
17 § 6. Section 724 of the not-for-profit corporation law, as amended by
18 chapter 368 of the laws of 1987, is amended to read as follows:
19 § 724. Indemnification of directors and officers by a court.
20 (a) Notwithstanding the failure of a corporation to provide indemnifi-
21 cation, and despite any contrary resolution of the board or of the
22 members in the specific case under section 723 (Payment of indemnifica-
23 tion other than by court award), indemnification shall be awarded by a
24 court to the extent authorized under paragraph (a) of section 723 and
25 may be awarded by a court as authorized under section 722 (Authorization
26 for indemnification of directors and officers)[, and paragraph (a) of
27 section 723]. Application therefor may be made, in every case, either:
28 (1) In the civil action or proceeding in which the expenses were
29 incurred or other amounts were paid, or
30 (2) To the supreme court in a separate proceeding, in which case the
31 application shall set forth the disposition of any previous application
32 made to any court for the same or similar relief and also reasonable
33 cause for the failure to make application for such relief in the action
34 or proceeding in which the expenses were incurred or other amounts were
35 paid.
36 (b) The application shall be made in such manner and form as may be
37 required by the applicable rules of court or, in the absence thereof, by
38 direction of a court to which it is made. Such application shall be upon
39 notice to the corporation and, in the case of type B or C corporations,
40 to the attorney general. The court may also direct that notice be given
41 at the expense of the corporation to the members and such other persons
42 as it may designate in such manner as it may require.
43 (c) [Where] Upon the director's or officer's furnishing the corpo-
44 ration with an undertaking to repay such amount as, and to the extent,
45 required by paragraph (a) of section 725 (Other provisions affecting
46 indemnification of directors and officers), where indemnification is
47 sought by judicial action, the court may [allow a person] order the
48 corporation to pay such reasonable expenses, including attorneys' fees,
49 during the pendency of the litigation as are necessary in connection
50 with [his] the director's or officer's defense [therein], if the court
51 shall find that the defendant has by his or her pleadings or during the
52 course of the litigation raised genuine issues of fact or law.
53 (d) No Type B or Type C corporation under this chapter shall grant
54 indemnification pursuant to section 721 (Nonexclusivity of statutory
55 provisions for indemnification of directors and officers) unless such
56 corporation shall file with the attorney general a notice of its
A. 10239 8
1 proposed grant of indemnification, upon a form prescribed by the attor-
2 ney general, and such notice shall be on file with the attorney general
3 for at least thirty days without the attorney general notifying the
4 corporation of its objections to the proposed indemnification. Failure
5 by the attorney general to object within the thirty-day period shall not
6 in any way impair the rights and powers of the attorney general under
7 this chapter to object to such indemnification.
8 § 7. Paragraph (c) of subdivision 1 of section 2-b of the religious
9 corporations law, as amended by chapter 623 of the laws of 1992, is
10 amended to read as follows:
11 (c) The following provisions of the not-for-profit corporation law
12 shall not apply to religious corporations: subparagraph (7) and (8) of
13 paragraph (a) of section one hundred twelve, section one hundred thir-
14 teen, section one hundred fourteen, section two hundred one, section
15 three hundred three, section three hundred four, section three hundred
16 five, section three hundred six, article four except section four
17 hundred one, section five hundred fourteen, paragraphs (d), (e), (f) and
18 (g) of section five hundred nineteen, that portion of section five
19 hundred twenty-two (b) which reads "The attorney general shall be noti-
20 fied of the application and shall be given an opportunity to be heard",
21 section six hundred five, section six hundred seven, section six hundred
22 nine, section eight hundred four, article nine except section nine
23 hundred ten, article ten except as provided in section eleven hundred
24 fifteen, section eleven hundred two, and article fifteen except para-
25 graph (c) of section fifteen hundred seven.
26 § 8. This act shall take effect January 1, 2005, and shall apply to
27 all indemnification actions taken on or after such date.