Revisiting Related Party Transactions
The New York Not-For-Profit Corporation Law was substantially amended in 2014. Among other things, those amendments introduced the concept of “related party transactions” in order to reduce the possibility of unlawful self-dealing by corporate insiders. A “related party” was defined as an officer, director or key employee of the nonprofit. A “related party transaction” was defined as “any transaction, agreement or other arrangement in which a related party has a financial interest and in which the corporation or any affiliate of the corporation is a participant.”
Related party transactions were not prohibited, but there were procedures that had to be followed to determine whether the transaction was fair, reasonable, and in the best interest of the corporation. In addition, if the corporation was a charitable nonprofit, alternative transactions had to be considered, and all the deliberations had to be put into the minutes of a board meeting.
These requirements were criticized because they would apply even where a nonprofit wanted to buy a pizza for a board meeting from one of its board members. Effective May 27, 2017, the amendments were further amended to make them much more reasonable.
First, three exceptions were created to the definition of “related party transaction”:
- The transaction or the related party’s financial interest in the transaction is de minimis. “De minimis” is not specifically defined but generally means too trivial or minor to merit consideration. Context probably matters here. A $5,000 transaction might be very substantial for a small arts organization, but trivial for a large nonprofit college or university.
- The transaction would not customarily be reviewed by the board or boards of similar organizations in the ordinary course of business and is available to others on the same or similar terms. For example, a Board of Directors would not usually be involved in ordering paper for the photocopier. This kind of transaction would not be a related party transaction.
- The transaction constitutes a benefit provided to a related party solely as a member of a class of the beneficiaries that the corporation intends to benefit as part of the accomplishment of its mission which benefit is available to all similarly situated members of the same class on the same terms. For example, a trustee of a hospital has a medical procedure in the hospital as a patient, and in that context is treated just like any other patient.
Another significant change was in the definition of a “related party.” The old definition included directors, officers and key employees. A key employee was defined as employee in a position to exercise substantial influence over the affairs of the organization, and was tied to the definition used in the Internal Revenue Code.
The new definition abandons the phrase “key employee” and instead uses the new and much broader phrase “key person”:
“Key person” means any person, other than a director or officer, whether or not an employee of the corporation, who (i) has responsibilities, or exercises powers or influence over the corporation as a whole similar to the responsibilities, powers, or influence of directors and officers; (ii) manages the corporation, or a segment of the corporation that represents a substantial portion of the activities, assets, income or expenses of the corporation; or (iii) alone or with others controls or determines a substantial portion of the corporation’s capital expenditures or operating budget.
This new definition would appear to include members of an organization providing they have the powers referred to in the definition.
Nonprofits whose bylaws or conflict of interest policies do not reflect these new rules and definitions should consider updating their documentation.
Gary Schuster is a Partner with the firm and practices Arts & Entertainment and Business Law. He can be reached by phone at 866-303-9595 toll free or 845-764-9656 and by email.