S04836-B
STATE OF NEW YORK
________________________________________________________________________
4836--B
2003-2004 Regular Sessions
IN SENATE
April 23, 2003
___________
Introduced by Sen. LEIBELL -- (at request of the Attorney General) --
read twice and ordered printed, and when printed to be committed to
the Committee on Corporations, Authorities and Commissions -- commit-
tee discharged, bill amended, ordered reprinted as amended and recom-
mitted to said committee -- recommitted to the Committee on Corpo-
rations, Authorities and Commissions in accordance with Senate Rule 6,
sec. 8 -- committee discharged, bill amended, ordered reprinted as
amended and recommitted to said committee
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
EXPLANATION--Matter in italics (underscored) is new; matter in brackets
[ ] is old law to be omitted.
LBD06251-07-4
S. 4836--B 2
1 year gross revenue and support of at least one million dollars, shall
2 each sign the annual report, and shall thereby verify the following:
3 (1) the signing officer has reviewed the report, and based on the
4 officer's knowledge:
5 (A) the report does not contain any untrue statement of a material
6 fact or omit to state a material fact necessary in order to make the
7 statements made, in light of the circumstances under which such state-
8 ments were made, not misleading; and
9 (B) the financial information included in the report fairly presents
10 in all material respects the financial condition and results of oper-
11 ations of the corporation as of, and for, the periods presented in the
12 report;
13 (2) during the period covered by the report, the corporation main-
14 tained internal financial controls designed to reasonably ensure that
15 material financial information relating to the corporation is made known
16 to the signing officers by others within the corporation;
17 (3) the signing officers have reviewed the effectiveness of the corpo-
18 ration's internal financial controls as of a date within ninety days
19 prior to the close of the fiscal year covered by the report, and have
20 presented in the report their conclusions about the effectiveness of
21 such controls as of the date of such review; and
22 (4) the signing officers have disclosed to the corporation's auditors
23 (if any) and the audit committee of the board of directors (or the
24 entire board if there is no audit committee), based on such officer's
25 knowledge:
26 (A) any significant deficiencies and material weaknesses in the design
27 or operation of the internal financial controls, and
28 (B) any fraud, whether or not material, that involves management or
29 other employees who have a significant role in the corporation's inter-
30 nal financial controls.
31 (5) The provisions of this paragraph shall not apply to any corpo-
32 ration that is: (A) a private foundation; or (B) a Type A corporation as
33 defined in paragraph (b) of section 201 (Purposes) that is not required
34 to register and file annual reports with the attorney general pursuant
35 to article 7-A of the executive law or section 8-1.4 of the estates,
36 powers and trusts law.
37 (f) The president or the chief executive officer, and the treasurer or
38 the chief financial officer, of a private foundation shall each sign the
39 annual report and shall thereby verify that the signing officer has
40 reviewed the report, and that based on the officer's knowledge:
41 (1) the financial information included in the report fairly presents
42 in all material respects the financial condition and results of oper-
43 ations of the corporation as of, and for, the periods presented in the
44 report; and
45 (2) the corporation has complied in all material respects with the
46 requirements and prohibitions included in the certificate of incorpo-
47 ration pursuant to section 406 (Private foundation, as defined in the
48 United States internal revenue code of 1954: provisions included in the
49 certificate of incorporation).
50 (g) For the purposes of this section, the term "private foundation"
51 shall mean a private foundation as defined in section five hundred nine
52 of the United States internal revenue code of 1986, as amended, or any
53 comparable provision of any successor law.
54 (h) Nothing contained in this section shall be construed as creating a
55 private right of action against any signing officer based upon a verifi-
56 cation made pursuant to this section, provided that this paragraph shall
S. 4836--B 3
1 not preclude any private right of action which would exist regardless of
2 such verification.
3 § 2. Section 520 of the not-for-profit corporation law, as amended by
4 chapter 58 of the laws of 1981, is amended to read as follows:
5 § 520. Reports of corporation.
6 Each domestic corporation, and each foreign corporation authorized to
7 conduct activities in this state, shall from time to time file [such]
8 complete and accurate reports on its activities as may be required by
9 the laws of this state. All registration and reporting requirements
10 pursuant to EPTL 8-1.4, or related successor provisions, are, without
11 limitation on the foregoing, expressly included as reports required by
12 the laws of this state to be filed within the meaning of this section.
13 Willful or persistent failure of a corporation to file [a report]
14 complete and accurate reports as required by law shall constitute a
15 breach of the directors' and officers' duty to the corporation and
16 shall: (a) subject the corporation, at the suit of the attorney-general,
17 to an action or special proceeding for dissolution under article 11
18 (Judicial dissolution) in the case of a domestic corporation, or under §
19 1303 (Violations) in the case of a foreign corporation; and (b) subject
20 the directors and officers, at the suit of the attorney-general, to an
21 action or special proceeding for such remedies as may be provided by
22 law, including removal in the case of directors and officers of a domes-
23 tic corporation.
24 § 3. Section 521 of the not-for-profit corporation law, as amended by
25 chapter 690 of the laws of 1978, is amended to read as follows:
26 § 521. Liability for failure to disclose required information.
27 Failure of the corporation to comply in good faith with the notice or
28 disclosure or reporting provisions of section 501 (Stock and shares
29 prohibited; membership certificates authorized), or paragraph (c) of
30 section 503 (Capital certificates), or paragraph (c) of section 505
31 (Subvention certificates), or paragraph (b) of section 513 (Adminis-
32 tration of assets received for specific purposes), [or section 518
33 (Reports to comptroller),] or section 519 (Annual report of directors),
34 or section 520 (Reports of corporation), shall make the corporation
35 liable for any damage sustained by any person in consequence thereof.
36 § 4. Section 712 of the not-for-profit corporation law, paragraph (e)
37 as amended by chapter 961 of the laws of 1972, is amended to read as
38 follows:
39 § 712. Executive committee and other committees.
40 (a) If the certificate of incorporation or the by-laws so [provide]
41 permit, the board, by resolution adopted by a majority of the entire
42 board, may designate from among its members an executive committee and
43 other standing committees, each consisting of three or more directors,
44 and each of which, to the extent provided in the resolution or in the
45 certificate of incorporation or by-laws, shall have all the authority of
46 the board, except that no such committee shall have authority as to the
47 following matters:
48 (1) The submission to members of any action requiring members'
49 approval under this chapter.
50 (2) The filling of vacancies in the board of directors or in any
51 committee.
52 (3) The fixing of compensation of the directors for serving on the
53 board or on any committee.
54 (4) The amendment or repeal of the by-laws or the adoption of new
55 by-laws.
S. 4836--B 4
1 (5) The amendment or repeal of any resolution of the board which by
2 its terms shall not be so amendable or repealable.
3 (b) The board may designate one or more directors as alternate members
4 of any standing committee, who may replace any absent member or members
5 at any meeting of such committee.
6 (c) The by-laws may provide for special committees of the board, or
7 may authorize the board to create such special committees as may be
8 deemed desirable. Unless otherwise provided in the by-laws, the members
9 of such committees shall be appointed by the chairman of the board or
10 the president of the corporation if there is no chairman of the board,
11 with the consent of the board. Special committees shall have only the
12 powers specifically delegated to them by the board and in no case shall
13 have powers which are not authorized for standing committees under this
14 section.
15 (d) Each committee of the board shall serve at the pleasure of the
16 board. The designation of any such committee and the delegation thereto
17 of authority shall not alone relieve any director of his or her duty to
18 the corporation under section 717 (Duty of directors and officers).
19 (e) Committees, other than standing or special committees of the
20 board, whether created by the board or by the members, shall be commit-
21 tees of the corporation. Such committees may be elected or appointed in
22 the same manner as officers of the corporation. Provisions of this chap-
23 ter applicable to officers generally shall apply to members of such
24 committees.
25 (f) In the case of any corporation which has a board of directors of
26 more than twenty-five members, unless prohibited by the certificate of
27 incorporation or the by-laws, the board by resolution adopted by a
28 majority of the entire board shall designate from among its members an
29 executive committee consisting of three or more members.
30 (g) (1) In the case of any corporation whose financial statements are
31 audited by a public accountant, or has at least three million dollars in
32 assets, or receives or accrues in any fiscal year gross revenue and
33 support of at least one million dollars, the board by resolution adopted
34 by a majority of the entire board shall designate from among its members
35 an audit committee consisting of three or more directors; provided,
36 however, that the provisions of this subparagraph shall not apply to any
37 corporation whose certificate of incorporation or by-laws prohibit the
38 appointment of an audit committee.
39 (2) The audit committee (or the entire board of directors in the case
40 of any corporation whose certificate of incorporation or by-laws prohib-
41 it the appointment of an audit committee) shall be directly responsible
42 for the appointment, compensation, and oversight of the work of any
43 public accountant or public accounting firm employed by that corporation
44 (including resolution of disagreements between management and the audi-
45 tor regarding financial reporting) for the purpose of preparing or issu-
46 ing an audit report or related work, and each such public accountant or
47 public accounting firm shall report directly to the audit committee (or
48 to the entire board, in the case of corporations whose certificate of
49 incorporation or by-laws prohibit the appointment of an audit commit-
50 tee).
51 (3) Each member of the audit committee shall be a member of the board
52 of directors of the corporation, and shall not, other than in his or her
53 capacity as a member of the audit committee, the board of directors, or
54 any other board committee: (A) accept any consulting fee, advisory fee,
55 or other compensation or other benefits from the corporation; or (B)
56 have participated in any other interested party transactions within the
S. 4836--B 5
1 meaning of section 715 (Interested directors and officers) within the
2 previous year.
3 (4) Each audit committee, or the entire board of directors in the case
4 of corporations whose certificate of incorporation or by-laws prohibit
5 the appointment of an audit committee, shall establish procedures for:
6 (A) the receipt, retention, and treatment of complaints received by the
7 corporation regarding accounting, internal accounting controls, or
8 auditing matters; and (B) the confidential, anonymous submission by
9 employees of the corporation of concerns regarding questionable account-
10 ing, auditing or other financial matters.
11 § 5. Section 715 of the not-for-profit corporation law is REPEALED and
12 a new section 715 is added to read as follows:
13 § 715. Interested directors and officers.
14 (a) No contract or other transaction directly or indirectly entered
15 into between a corporation and one or more of its or its affiliates'
16 directors or officers, or between a corporation and any other corpo-
17 ration, firm, association or other entity in which one or more of its or
18 its affiliates' directors or officers are directors or officers, or have
19 a substantial financial interest, shall be either void or voidable by
20 the corporation for this reason alone or by reason alone that such
21 director or directors or officer or officers are present at the meeting
22 of the board, or a committee thereof, which authorizes such contract or
23 transaction, or that the votes of any such persons are counted for such
24 purpose. Notwithstanding the foregoing, such contract or transaction may
25 be voided or modified by the corporation or the attorney general and
26 remedies under paragraph (c) shall be available to the corporation or to
27 the attorney general unless the interested director or officer, and any
28 approving director, shall establish affirmatively that such contract or
29 transaction was fair and reasonable as to the corporation at the time
30 the corporation entered into such contract or transaction.
31 (b) An interested party contract or transaction within the meaning of
32 paragraph (a), or compensation approved in accordance with paragraph (e)
33 or (f), shall be presumed to be fair and reasonable to the corporation,
34 if the following conditions are satisfied:
35 (1) The contract, transaction or compensation was approved in advance
36 by the board or committee entitled to vote thereon and the members, if
37 any, entitled to vote thereon, by a vote sufficient for such purpose
38 without, in the case of a board or committee vote, counting the vote or
39 votes of such interested director or officer, and the material facts as
40 to such contract, transaction or compensation, and any compensation paid
41 by an affiliate of the corporation for services related or substantially
42 similar to the services performed on behalf of the corporation, and such
43 director's or officer's interest therein were disclosed in good faith or
44 otherwise known to the board or committee or members, if any, entitled
45 to vote thereon;
46 (2) The board or committee obtained and relied upon appropriate data
47 as to comparability, prior to approving the contract, transaction or
48 compensation, and provided such data to the members, if any, entitled to
49 vote thereon; and
50 (3) The board or committee adequately documented the basis for the
51 approval of the contract, transaction or compensation at the time of
52 such approval, which documentation shall include:
53 (A) The terms of the contract, transaction or compensation, that was
54 approved and the date it was approved;
S. 4836--B 6
1 (B) The members of the board or committee who were present during
2 discussion of the contract, transaction or compensation, that was
3 approved and those who voted on it;
4 (C) The comparability data obtained and relied upon by the board or
5 committee and a description of how the data was obtained; and
6 (D) Any actions taken by the interested director or officer with
7 respect to consideration of the contract, transaction or compensation.
8 Notwithstanding the provisions of this paragraph, any qualifying
9 disbursement made by one organization described in section 501(c)(3) of
10 the code to another such organization, which constitutes an interested
11 party contract or transaction within the meaning of paragraph (a), shall
12 be presumed to be fair and reasonable as to any such organization that
13 is a corporation subject to this section if: (1) the conditions of
14 subparagraph (1) are met with respect to such corporation; or (2) in the
15 case of a grant or donation by one corporation described in section
16 501(c)(3) of the code and subject to this section to another organiza-
17 tion described in such section 501(c)(3), if the conditions of subpara-
18 graph (1) are met by the granting or donating corporation. For the
19 purposes of this section the term "qualifying disbursement" shall mean
20 capital contributions or subventions pursuant to subparagraph (7) of
21 paragraph (a) of section 202 (General and special powers), donations
22 pursuant to subparagraph (14) of paragraph (a) of section 202 (General
23 and special powers), or private foundation grants that are qualifying
24 distributions pursuant to section 4942(g) of the code.
25 (c) If the interested director or officer or approving director fails
26 to meet his or her burden under paragraph (a), the corporation or the
27 attorney general may void or modify the contract or transaction, unless
28 such voidance or modification would place the corporation in a position
29 worse than that in which it would be if the contract or transaction were
30 not voided or modified. In addition, if the interested director or offi-
31 cer or approving director fails to meet the burden under paragraph (a)
32 or if the board or committee fails to comply with paragraph (e) or (f),
33 regardless of whether or not the corporation is subject to section 4958
34 of the code, and regardless of whether or not the internal revenue
35 service pursues its remedies, the corporation or the attorney general
36 may seek to recover from the interested director or officer or approving
37 director, respectively, restitution in amounts equivalent to the reme-
38 dies that would be available to the internal revenue service from an
39 interested director or officer or approving director of a corporation
40 subject to said section, including the amount of any compensation
41 approved pursuant to paragraph (e) or (f) in excess of an amount that is
42 fair and reasonable, together with interest at the rate pursuant to
43 section 5004 of the civil practice law and rules on any such amounts.
44 (d) The certificate of incorporation or the by-laws may contain addi-
45 tional restrictions on contracts or transactions between a corporation
46 and its directors or officers or other persons and may provide that
47 contracts or transactions in violation of such restrictions shall be
48 void or voidable.
49 (e) Compensation of directors and officers in any capacity (other than
50 for serving on the board or any committee), including for service as a
51 director or officer of another corporation, firm, association or other
52 entity on behalf of the corporation, shall be fixed by the board, or by
53 a committee of the board authorized to vote thereon that is comprised
54 solely of directors who are not compensated by the corporation other
55 than in their capacity as directors, or, if the officers are elected by
56 the members pursuant to paragraph (b) of section 713 (Officers), by
S. 4836--B 7
1 majority vote of the members as provided in paragraph (c) of section 613
2 (Vote of members) unless a higher proportion of members is set by the
3 certificate of incorporation or by-laws, and such compensation shall be
4 in an amount that is fair and reasonable, determined in accordance with
5 section 4958 of the code, whether or not the corporation is subject
6 thereto.
7 (f) Compensation of directors for serving on the board or any commit-
8 tee shall be fixed by the affirmative vote of a majority of the entire
9 board unless a higher proportion is set by the certificate of incorpo-
10 ration or by-laws, and such compensation shall be in an amount that is
11 fair and reasonable, determined in accordance with section 4958 of the
12 code, whether or not the corporation is subject thereto.
13 (g) For purposes of this section:
14 (1) the term "code" shall mean the United States internal revenue code
15 of 1986, as amended, or any comparable provision of any successor law;
16 (2) the term "compensation" shall include salary and other economic
17 benefits under section 4958 of the code; and
18 (3) an entity shall be deemed an "affiliate" of a corporation if such
19 entity is a disqualified person pursuant to section 4958 of the code or
20 is controlled by, in control of or under common control with such corpo-
21 ration.
22 (h) Except with respect to compensation of directors or officers, this
23 section shall not apply to any contract or transaction of which the
24 interested director or officer has no actual knowledge and which does
25 not exceed the lesser of one percent of the gross receipts of the corpo-
26 ration for the preceding fiscal year or one hundred thousand dollars.
27 § 6. Section 724 of the not-for-profit corporation law, as amended by
28 chapter 368 of the laws of 1987, is amended to read as follows:
29 § 724. Indemnification of directors and officers by a court.
30 (a) Notwithstanding the failure of a corporation to provide indemnifi-
31 cation, and despite any contrary resolution of the board or of the
32 members in the specific case under section 723 (Payment of indemnifica-
33 tion other than by court award), indemnification shall be awarded by a
34 court to the extent authorized under paragraph (a) of section 723 and
35 may be awarded by a court as authorized under section 722 (Authorization
36 for indemnification of directors and officers)[, and paragraph (a) of
37 section 723]. Application therefor may be made, in every case, either:
38 (1) In the civil action or proceeding in which the expenses were
39 incurred or other amounts were paid, or
40 (2) To the supreme court in a separate proceeding, in which case the
41 application shall set forth the disposition of any previous application
42 made to any court for the same or similar relief and also reasonable
43 cause for the failure to make application for such relief in the action
44 or proceeding in which the expenses were incurred or other amounts were
45 paid.
46 (b) The application shall be made in such manner and form as may be
47 required by the applicable rules of court or, in the absence thereof, by
48 direction of a court to which it is made. Such application shall be upon
49 notice to the corporation and, in the case of type B or C corporations,
50 to the attorney general. The court may also direct that notice be given
51 at the expense of the corporation to the members and such other persons
52 as it may designate in such manner as it may require.
53 (c) [Where] Upon the director's or officer's furnishing the corpo-
54 ration with an undertaking to repay such amount as, and to the extent,
55 required by paragraph (a) of section 725 (Other provisions affecting
56 indemnification of directors and officers), where indemnification is
S. 4836--B 8
1 sought by judicial action, the court may [allow a person] order the
2 corporation to pay such reasonable expenses, including attorneys' fees,
3 during the pendency of the litigation as are necessary in connection
4 with [his] the director's or officer's defense [therein], if the court
5 shall find that the defendant has by his or her pleadings or during the
6 course of the litigation raised genuine issues of fact or law.
7 (d) No Type B or Type C corporation under this chapter shall grant
8 indemnification pursuant to section 721 (Nonexclusivity of statutory
9 provisions for indemnification of directors and officers) unless such
10 corporation shall file with the attorney general a notice of its
11 proposed grant of indemnification, upon a form prescribed by the attor-
12 ney general, and such notice shall be on file with the attorney general
13 for at least thirty days without the attorney general notifying the
14 corporation of its objections to the proposed indemnification. Failure
15 by the attorney general to object within the thirty-day period shall not
16 in any way impair the rights and powers of the attorney general under
17 this chapter to object to such indemnification.
18 § 7. Paragraph (c) of subdivision 1 of section 2-b of the religious
19 corporations law, as amended by chapter 623 of the laws of 1992, is
20 amended to read as follows:
21 (c) The following provisions of the not-for-profit corporation law
22 shall not apply to religious corporations: subparagraph (7) and (8) of
23 paragraph (a) of section one hundred twelve, section one hundred thir-
24 teen, section one hundred fourteen, section two hundred one, section
25 three hundred three, section three hundred four, section three hundred
26 five, section three hundred six, article four except section four
27 hundred one, section five hundred fourteen, paragraphs (d), (e), (f) and
28 (g) of section five hundred nineteen, that portion of section five
29 hundred twenty-two (b) which reads "The attorney general shall be noti-
30 fied of the application and shall be given an opportunity to be heard",
31 section six hundred five, section six hundred seven, section six hundred
32 nine, section eight hundred four, article nine except section nine
33 hundred ten, article ten except as provided in section eleven hundred
34 fifteen, section eleven hundred two, and article fifteen except para-
35 graph (c) of section fifteen hundred seven.
36 § 8. This act shall take effect January 1, 2005, and shall apply to
37 all indemnification actions taken on or after such date.