March 19, 2019

Something Old and Something New: What New York Nonprofits with Members Need to Know

4 min

Something New:

The New York Not-for-Profit Corporation Law (N-PCL) has been amended again. Beginning on July 1, 2019, New York not-for-profit corporations with members will be required to have a minimum of three members, directly or indirectly. (In New York, noncharitable corporations are required to have members, and charitable corporations may, but are not required to, have members.) Until this amendment, it was permissible and typical for New York not-for-profit corporations to be formed with a single individual member, who retained certain governance rights by virtue of their membership.

The amendment to Section 601 of the N-PCL applies to both new and existing membership corporations and will require immediate governance changes for not-for-profit corporations that have a sole member that is an individual or a very closely held entity. Section 601, as amended, does allow a not-for-profit corporation to have a corporation, joint-stock association, unincorporated association, or partnership as a sole member, as long as that entity is owned or controlled by no fewer than three persons.[1]

Not-for-profit corporations with members should review their governing documents to ensure compliance with the amendment. For corporations that have a sole member that does not qualify for the exception for entities controlled by three or more persons, it may be necessary to amend the certificate of incorporation and/or bylaws of the corporation in order to bring them into compliance with the N-PCL. Charitable corporations may choose to eliminate their membership entirely, or to expand it to encompass three or more members, but oddly, even though they are not required to have members at all, if they choose to have members, they must have at least three.

We note that this amendment applies only to not-for-profit corporations formed under New York law, and does not apply to all corporations with authority to do business or solicit for contributions in New York.

Something Old:

A little-known provision of the N-PCL may help some membership corporations adapt to an increase in their membership following the enactment of the amendment to Section 601, and help others make both their routine and their extraordinary actions a little easier to administer. The general rule for members acting outside of a meeting is that any written consent must be unanimous. In other words, members can't vote outside of a meeting. This is also true for boards of directors, but as the membership of a not-for-profit corporation can number in the hundreds or thousands, this provision can essentially eliminate all member actions outside of a meeting. While membership corporations sometimes rely on proxies to mitigate the challenge of membership action, there is another way!

The last sentence of subpart (a) of Section 614, Action by Members Without a Meeting, reads that the paragraph "shall not be construed to alter or modify any provision in a certificate of incorporation not inconsistent with this chapter under which the written consent of less than all of the members is sufficient for corporation action." What this means is that, if a membership corporation has a provision in its certificate of incorporation that allows for non-unanimous member action outside of the meeting, members can essentially vote in writing, or electronically, between meetings.

For membership corporations that will be amending their certificates of incorporation to expand beyond a sole member, it may be a good time to add a provision that allows for non-unanimous action outside of a meeting. Such a provision would increase their flexibility should an issue requiring a membership vote arise unexpectedly, while also providing the opportunity to increase member engagement for members who do not attend meetings and potentially to reduce meeting costs once in-person voting is no longer required.

[1] The question of how the law applies to the situation of a not-for-profit corporation that is the sole member of another not-for-profit corporation may arise. While the statute provides no specific guidance, it seems a reasonable position would be to look through to the members or board of the sole member as the group that controls such a corporation. As long as there are at least three members, if applicable, or three directors of that sole member, it should satisfy these requirements. This may raise complications for New York not-for-profit corporations whose sole member is a corporation formed under the laws of another state, such as Delaware, that permits a board of directors with one member.