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NYC Dept. of Small Business ServicesLawyers Alliance for New York

June 19, 2013Board Governance for District Management

Associations (BIDs)

Neil Stevenson, Senior Staff Attorney, Lawyers Alliance for New York

(212) 219-1800 ext. 273nstevenson@lawyersalliance.org

(212) 219-1800 ext. 224 (Resource Call Hotline)

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Importance of Proper Governance• Serving on the Board of Directors of a not-for-profit District

Management Association (“BID”) carries with it important responsibilities and obligations.

• Board structure and governance are important to maintaining public trust and effective and efficient operations in charitable organizations, including BIDs.

– As a not-for-profit organization, a BID must be duly created, organized and maintained and follow certain procedures in order to take valid corporate action.

– As a not-for-profit organization, a BID must show that it in fact followed proper governance procedures in order to obtain funding.

– An organization's financial or legal problems can often be traced back to action, or inaction, of board members who either were unaware of their legal obligations or chose to ignore them.

– By helping to ensure that directors and officers are mindful of their responsibilities, you are helping the BID protect its assets and carry out its exempt purpose.

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Sources of Corporate Governance Guidance

• Generally, there are three sources of corporate governance guidance for BID boards:

– Statutory and Regulatory Provisions:• New York Not-for-Profit Corporation Law (“N-PCL”) sets forth the detailed rules

regarding the governance of not for profit corporations operated in New York. • Additionally, the New York State General Municipal Law § 980 (“NYS GMU”), and the

New York City Administrative Code § 25 (“NYC AC”) set forth additional rules regarding the composition of BID boards and proper corporate purposes.

• Internal Revenue Code (“IRC”) and, to a limited extent, Sarbanes-Oxley also impose requirements on not-for-profit organizations.

– SBS Requirements/Guidance• District Plan• Management Agreement with SBS imposes certain contractual requirements on BIDs• SBS Management Guide

– Sector wide "best practices" are also being promulgated by various corporate watch-dog groups:

• Examples include the New York State Attorney General’s Office Guidelines, and the Better Business Bureau “Standards for Charity Accountability”.

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BIDs Formation

• BIDs are Type C non-profit corporations (NFPC) that are governed by the N-PCL which is based on the Business Corporation Law but with significant differences.

1. Must be formed for non-pecuniary purposes.

2. There are no shareholders.

3. Processes of formation, certain amendments and dissolution or disposition of material assets/real property by NFPC are much more involved and time consuming.

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Tax Exemption• For most BIDs, incorporation is only the first step

after the District Plan• BIDs apply for tax exempt status because

– If not exempt, must pay taxes– Makes fundraising easier, especially for 501(c)(3)

organizations• There is no SBS requirement that BIDs seek tax

exempt status• Most BIDs seek 501(c)(3) status, but some

longstanding BIDs have 501(c)(6) status

Regulatory Requirements• BIDs must comply with regulatory

requirements– NY AG (Charities Bureau)– IRS (if tax exempt - most BIDs are)

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IRS Requirements - Form 990• Annual Reporting Obligation to the IRS.

• If a Form 990 is not filed for three consecutive years, the IRS will revoke tax exempt status.

• Informational tax form filed by tax exempt organizations.

• Form must be filed by the fifteenth day of the fifth month following the end of the organization’s fiscal year.

• Public relies on information contained in Form 990.

• Different Form 990s filed based upon “gross receipts”

• Use 990 to report organizational changes (name change, by-laws change)

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IRS Requirements - Form 990• Eligible for 990-N: annual gross receipts

are “normally” less than $50,000.• Eligible for 990-EZ: annual gross receipts

are between $50,000 and $200,000 and total assets are less than $500,000.

• Eligible for 990: annual gross receipts are $200,000 or more or total assets are $500,000 or more.

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State and Local Filing Requirements

• Once federal recognition of tax exempt status is obtained, state tax exemption applications are straightforward:– State Franchise tax – Sales and Use Tax– NYC Business Tax– Real property tax

• Organizations must file initial registration (CHAR410) and annual reports (CHAR500) with New York State Attorney General Charities Bureau – documents filed (including bylaws and certificate of incorporation) are posted

to AG’s website

SBS Requirements and Guidance

• Management Agreement – Contract may require:– Written approval from SBS before BID may incur indebtedness– Insurance – Separate finance and audit committees– Conflict of interest guidelines

• Management Guide– Must hold at least one annual meeting of full membership every

calendar year (present accomplishments of past year and goals for upcoming year, present budget and vote on Board)

– Provides guidance on SBS criteria for contract renewal• BIDs may tailor their by-laws so long as they are more

restrictive than SBS requirements (may not be less restrictive)

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Board of Directors

Statutory Mandates - NYS and NYC BID Law

• Both the NYS GMU and the NYC AC require that the Boards of Directors of BIDs must be composed of the following representatives (usually divided into classes as follows):– Class A: Representatives of Owners of non-exempt real property

(including condo owners) within the BID District (the “District”);– Class B: Representatives of commercial tenants who lease real

property within the District; – Class C: Representatives of residential tenants (including co-op

shareholders) who lease real property within the District; and– Class D: Representatives of (i) the Mayor, (ii) the Comptroller,

(iii) the Borough President of the Borough in which the District is located, and (iv) the council member representing the Council District in which the District is located. See NYC AC § 25-414; NYS GMU § 980-m.

Board of Directors

Statutory Mandates - NYS and NYC BID Law

• Representatives of Owners of real property within the District (Class A above) shall comprise not less than a majority of the Board and not less than 7. See NYC AC § 25-414; NYS GMU § 980-m.

• Though not required by BID law, BIDs typically contain a fifth class (Class E) of non-voting representatives comprised of representatives from community boards and any other interested parties.

• If it is not possible to fill the requisite classes (e.g., if there are no residents in the BID district), the corresponding Board seat should be left vacant.

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Board of Directors

Statutory Mandates - N-PCL

• In addition to BID law, the N-PCL has a few mandates on structure and operation of Boards:

– The Board of Directors must exercise the duty of care in making

decisions and taking actions on behalf of the BID. N-PCL §717.– The only qualification for board members is age - generally they

must be eighteen years of age. N-PCL §701.

• The way boards operate is guided by statute and regulation, the board’s fiduciary duties and “best practices” suggested by regulatory agencies and shaped by watchdog groups and nonprofit practitioners.

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Operation of BID Boards

• The BID is to be managed by the Board. N-PCL §701.

• This does not mean micro-managing the organization's day to day operations. In managing the organization's internal affairs, boards are usually involved in two key areas:– Oversight – i.e., of budget, fiscal controls, resource allocation, programs

and key staff.– Making decisions key to the life and direction of the organization—i.e.

selecting the principal executive, establishing programmatic objectives, approving long-range plans, acquiring or disposing of real property and refining the organization's mission.

• Boards are also often involved in managing the BID’s external affairs (e.g., fundraising, organizing volunteers and raising public awareness)

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Exercising Fiduciary Oversight Over Organizational Documents

• Certificate of Incorporation and District Plan– Authority of the corporation to carry out its mission is derived from the certificate

of incorporation and should be in furtherance of the Plan. See N-PCL §201; NYS GMU § 980-m; NYC AC § 25-414. The Board should review its certificate annually.

– To the extent the purposes change over time (and if the Plan is amended pursuant to the requirements of NYS GMU § 980-i and NYC AC § 25-410 ) the certificate might need to be amended to reflect such changes. See N-PCL §801(a).

– If the BID is amending its purpose, it will need Supreme Court and Attorney General approval. See N-PCL §804(a)(ii).

– Amendments to Certificate of Incorporation must be approved by a majority vote of the membership. See N-PCL §613(c).

– Cy-Pres – If amending purposes, need to demonstrate that donations will not be diverted from the purposes for which they were donated.

• By-Laws– Make sure organization has a complete and up to date copy of the bylaws.– Should be referring continuously to by-laws. Does organization operate in

accordance with by-laws? May not be a problem when things are good but in times of conflict can be a problem. Actions can be challenged by AG's office; 5% of members, a funder.

– Keep a copy of the bylaws in your office so they can easily be referred to.

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Fiduciary Duties of BID Board Members

• Each member of the BID Board of Directors owes certain “fiduciary duties” to the BID.

• Scope of Fiduciary Duties is determined both by statute and by case law.

• Fiduciary Duties include the following duties:

– Duty of Care: requires that directors and officers be attentive to the BID’s finances and activities and actively oversee the way in which assets are managed. See N-PCL § 717.

– Duty of Loyalty: Requires that board members pursue the interests and mission of the organization with undivided allegiance. See N-PCL §§ 717(a), 102(a)(5), 716 and 715.

– Duty of Obedience: ensuring that the organization acts within the BID’s purposes and that it fulfills its mission as set forth in the certificate of incorporation and for the purposes of furthering the Plan. See N-PCL §§201-202, 402(a)(2); NYS GMU § 980-m; NYC AC § 25-414.

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Duty of Care - Requirements• General Rule: Directors and officers shall discharge the duties of

their respective positions in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions. N-PCL §717(a).

– BID Directors must use common sense, be diligent and attentive to the organization's management and attempt to make sound and informed decisions, and can rely in good faith on “information, opinions, reports or statements” made by other officers, directors, or experts. See N-PCL §§701(a) and 717.

• Board members have a responsibility to ensure that charitable assets are utilized appropriately, and may be held liable for waste or loss of assets through negligence or improper distribution. See Vacco v. Aramony, N.Y.L.J., Aug. 7, 1998, p. 21 (Sup. Ct. N.Y County July 13, 1998).

• The Board should regularly review the organization's finances, should participate in setting compensation levels and hire competent accountants and auditors.

• Board may invest organizational assets in any property it deems advisable. In making investment decisions, Board should consider long and short term financial needs, cash requirements, overall economic conditions, and Board can delegate investment decisions (as long as they exercise duty of care). N-PCL §512, N-PCL § 717.

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Duty of Care – Cont’d• Restricted assets, which are donated for a specific

purpose, must be used for that purpose. N-PCL §§ 513, 522.

• To evidence participation in decision making and show due care in exercise of its duties, the Board should:– Schedule regular board meetings (and maintain minutes and

resolutions); Board members should review and approve the minutes.

– Establish committees to delegate specific responsibilities.– Circulate relevant information to board (announcement of new

contracts, financial information, performance reviews).– Have access to corporate books and records and procedures for

monitoring finances.• The Board is entitled to access books and records unless they have

some unacceptable purpose for doing so.

• Applicability of “business judgment rule” to nonprofits

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Duty of Loyalty• General Rule: Board members must pursue the not-for-profit interests

and mission of the organization with undivided allegiance. See N-PCL §§ 717(a), 102(a)(5), 716 and 715.

• The Duty of Loyalty is concerned with conflicts of interest. Therefore, it is recommended that each BID adopt a conflicts of interest policy.

• A transaction where a director or officer has a financial interest or serves on the boards of both parties to a transaction may be canceled or voided. N-PCL §715. In order for such a transaction to be binding on the corporation:

– The material facts of the director's or officer's interest in the transaction must be disclosed in good faith to the board members or known by them; and

– The transaction must be authorized by a board vote sufficient for those purposes without including the vote of the interested directors. N-PCL §715(a)(1).

– While the vote of the interested director cannot be counted, the interested individuals can be counted when determining whether a quorum is present. N-PCL §715.

– Alternatively, if the material facts are disclosed to the members, the transaction can be approved by the membership. N-PCL §715(a)(2).

– If the board approves the transaction without the proper disclosure, the transaction will still be binding if it can be established "affirmatively that the contract or transaction was fair and reasonable as to the corporation . . ." N-PCL §715(b).

• Diversion of corporate opportunity doctrine applies to not-for-profit organizations as well. See American Baptist Churches of Metropolitan New York v. Galloway, 271 A.D.2d 92 (N.Y. App. Div. 2000).

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Duty of Loyalty, Cont’d – IRS Requirements

• Internal Revenue Code requires that for tax exempt organizations, "no part of [its] earnings . . . [shall] inure to the benefit of any private shareholder or individual.” IRC §501(c)(3).

• The IRC and IRS Regulations impose excise taxes, aka “intermediate sanctions,” on disqualified insiders of public charities who benefit from or participate in “excess benefit transactions." In some cases, board members may incur personal liability. IRC § 4958.

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Duty of Loyalty, Cont’d

• Concrete steps for observing Duty of Loyalty:

– Have clear procedures for setting compensation of employees.

– Develop written conflict of interest policy that details how transaction with related parties will be considered. The policy should set forth the standards of permissible conduct. Board members should be required to comply with the policy. Having a written policy is not required by law but is extremely advisable as best practices for BIDs.

– See sample Conflict of Interest Policy.

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Duty of Obedience

• Duty of Obedience – The Board must assure that the organization acts within the BID’s purposes and that it fulfills its mission as set forth in the certificate of incorporation and for the purposes of carrying out the Plan. See N-PCL §§201-202, 402(a)(2); NYS GMU § 980-m; NYC AC § 25-414.

– Board must exercise meaningful oversight to ensure that the organization complies with the law.

– The Duty of Obedience requires that a board of a not-for-profit corporation be faithful to the purposes and goals of the organization. See In re: Manhattan Eye, Ear & Throat Hospital and Memorial Sloan Kettering Cancer Center et al. v. Eliot Spitzer, 715 N.Y.S.2d 575 (1999).

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Personal Liability for Board Members

• In most cases, the N-PCL protects uncompensated Board Members. Board Members will not be liable unless there is gross negligence (N-PCL §720-a). D&O insurance may or may not cover this liability.

• In some instances, Board Members may have personal liability in connection with the corporation, most notably for payroll withholding taxes and insurance coverage related to employees (workers compensation, disability)

• Excess benefit transactions (see below) are another exception.

Personal Liability for Board Members

• Adequate insurance coverage is key.• General commercial liability policies have two key

components in this connection: – D&O insurance: reimbursement for losses or advancement of

defense costs in the event of a legal action brought for alleged wrongful acts in the insured’s capacity as directors or officers

– Employment Practices: deals with wrongful termination, sexual harassment, discrimination, invasion of privacy, false imprisonment, breach of contract, emotional distress, and wage and hour law violations

• Review policies to ensure coverage exists and that it’s adequate.

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Statutory Mandates – IRS Intermediate Sanctions

• The IRC and the related regulations now impose excise penalty taxes on managers of public charities and other "disqualified persons" who engage in "excess benefit transactions." See 26 C.F.R. 53.4958.

• These regulations provide the IRS with a remedy to control undue personal inurement, one that is less drastic than revocation of exempt status, and introduce for the first time taxes on self-dealing involving the assets of public charities.

• Applies to all 501(c)(3) and 501(c)(4) exempt organizations, including 501(c)(3) organizations not required to seek recognition of exempt status (e.g., those with less than $5000 gross receipts).

• The statute and the regulations do not contain any explicit deference to state-law standards for fiduciary conduct (in a “no preemption” provision).

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Intermediate Sanctions – cont’d• Excess Benefit Defined:

– An "excess benefit transaction" is any transaction in which an economic benefit is provided by a tax-exempt organization to a disqualified person if the value of the benefit exceeds the value of the consideration. Reasonable compensation, i.e. what would ordinarily be paid for like services under similar circumstances, is not excess benefit.

– Difference between the value of the consideration paid to the disqualified person and the value of the consideration received in exchange by the tax-exempt organization is subject to intermediate sanctions.

• Disqualified Person Defined:– A disqualified person is any person during the five-year "look back period" who exercised

substantial influence.– A person will be considered to hold substantial influence when they are:

• A voting member of the Board; • A person who has ultimate authority for implementing decisions of the board or is

responsible for supervising management, administration or operation of the organization; or

• A person who has ultimate responsibility for managing the finances of the organization. – Founders of the corporation and significant contributors may be viewed as having substantial

influence.– Family members of a person in a position to exert substantial influence are also disqualified.

Entities in which persons with substantial influence over the organization (or their family members) hold more than 35% of the voting power, profits interests or beneficial interest will also be considered disqualified persons.

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Intermediate Sanctions – cont’d• Certain people are presumed not to be in a position to exert

substantial influence:– An exempt organization under sections 501(c)(3) or (c)(4) (except for

private foundations); and – An employee receiving less than $100,000 in annual compensation who

is not a person with ultimate authority for management or financial decisions, substantial contributor or a disqualified person for other reasons.

• Whether or not a person is considered a disqualified person will depend upon the facts and circumstances of each individual case.

• Penalties:– Disqualified persons are personally liable and must pay an initial penalty

of 25% in excess of the benefit amount. If not corrected (i.e. repaid to organization) IRS can impose a 200% in excess of the excess benefit.

– Organization managers are personally liable for a 10% tax on each organization manager who knowingly participated in excess benefit transaction. For tax years beginning in 2007, cap is $20,000.

– If more than one manager is liable; joint and several liability.

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Intermediate Sanctions – cont’d• Defenses – Rebuttable Presumption

– The parties to a transaction can rely upon a rebuttable presumption that a transaction with a disqualified person is reasonable when:

• The transaction is approved in advance by the Board of Directors; • The board was comprised entirely of disinterested persons; • The board obtained and relied upon appropriate comparable data; and • Adequately documented its reasons for its decisions.

– The key is that the board approving the transaction must be independent and entirely free of any conflict of interest.

– When considering the comparability of compensation the relevant data which the board can consider includes, but is not limited to:

• Compensation levels paid by similarly situated organizations, both exempt and non-exempt;

• The availability of similar services within the geographic area; • Current compensation surveys compiled by independent firms; • The survey need not be independently commissioned;• Written offers from institutions competing for the same person’s services.

– Small organizations (gross receipts under $1 million) can appropriately consider data on compensation paid by 3 comparable organizations in the same geographic area for the same services.

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Intermediate Sanctions – cont’d

• An organization manager can be deemed to have participated in an excess benefit transaction through silence or inaction when the manager is under a duty to speak or act and fails to do so.

– Organization managers can also rely on the aforementioned rebuttable presumption and can also rely on advice of professionals such as counsel (in-house or external), CPAs, or valuation experts.

• Adequate Documentation: For a decision to be adequately documented, the minutes of the board meeting at which the transaction is approved must include:

– The terms of the transaction as approved and the date upon which it is approved; – A list of the board members who were present and voted; – The comparability data upon which they relied and how it was obtained; and – Any actions taken by board members determined to have a conflict of interest.

• The record must be prepared before the later of the next meeting of the Board of Directors or 60 days after the final action.

• See model conflict of interest policy that the IRS attaches to Form 1023, application for tax exemption.

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Statutory Mandates – Sarbanes Oxley• Sarbanes-Oxley Act of 2002 was enacted in response to corporate scandals

such as Enron, WorldCom and Adelphia. The Act only applies to publicly traded companies, with two exceptions. Regardless, not-for-profit organizations should keep in mind:

– The financial reports and corporate governance procedures of all corporations are subject to heightened scrutiny in the post-Enron era, and

– Former New York State Attorney General Eliot Spitzer proposed several times to enact into state law certain aspects of the Sarbanes-Oxley Act to be applied to not-for-profit corporations.

• Sarbanes–Oxley Act’s Applicability to Nonprofits– It is a crime to knowingly alter, falsify or destroy documents with the intent to obstruct

a governmental or official investigation. Punishable by fine and/or up to 20 years imprisonment. Sarbanes-Oxley Act of 2002, 107 P.L. 204, Title VIII, Section 802(a).

– It is a crime to knowingly retaliate, including by interfering with their lawful employment or livelihood, against any person for providing truthful information to a law enforcement officer relating to the commission or possible commission of a Federal offense. Punishable by fine and/or up to 10 years imprisonment. Sarbanes-Oxley Act of 2002, 107 P.L. 204, Title XI, Section 1107.

• Protects employees from retaliation for reporting violation of laws that constitute a Federal offense. Note that nonprofit governance types and auditors are recommending that nonprofits adopt whistleblower and document retention policies.

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Best Practices – NYS Attorney General Guidelines

• The NYS Attorney General has promulgated guidelines regarding Internal Controls and Financial Accountability for Not-for-Profit Boards (available at http://www.oag.state.ny.us/home.html, under Charities).

• NYS Attorney General recommends that all charities should have policies and procedures established so that (1) boards and officers understand their fiduciary responsibilities, (2) assets are managed properly and (3) the charitable purposes of the organization are carried out, focusing on (at least) the following areas:

– Internal controls including internal financial controls (e.g., sound accounting policies and procedures manual)

– Written job descriptions– Personnel policies– Training (for employees, new directors and volunteers)– Conflicts of interest policy and code of ethics– Audit committee– Independent certified public accountants– Review of organization’s governance structure, procedures and programs

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Best Practices – BBB Wise Giving Alliance

• The BBB Wise Giving Alliance (“Wise Giving Alliance”) is a 501(c)(3) charitable organization, affiliated with the Council of Better Business Bureaus, which evaluates charities based on a set of twenty standards covering the manner in which charities solicit from the public, administration of assets and/or corporate governance.

• Watchdog organizations like the Wise Giving Alliance have become an increasingly powerful voice in a climate of suspicion about charitable activity that has been fueled by well-publicized scandals, leading to public uncertainty about charitable accountability.

• Failure to meet watchdog standards may substantially affect an organization's ability to attract individual donations and, in a growing number of instances, inhibit philanthropic support. Therefore, nonprofits disregard these standards at their peril.

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Best Practices – Wise Giving Alliance, cont’d

• First Six Governance and Oversight Standards (can be built into Bylaws and/or corporate governance procedures). Charities should have the following:

1. A Board of Directors providing adequate oversight of the charity’s operations and its staff, including “regularly scheduled appraisals of the CEO's performance, evidence of disbursement controls such as board approval of the budget, fund raising practices, establishment of a conflict of interest policy, and establishment of accounting procedures sufficient to safeguard charity finances.”

2. A minimum of three evenly spaced meetings per year of the full Board with a majority in attendance, with face-to-face participation (N-PCL only requires one annual Board meeting; meetings can be conducted via telephone).

3. Not more than one or 10% (whichever is greater) directly or indirectly compensated person(s) serving as voting member(s) of the Board. Compensated members shall not serve as the board's chair or treasurer.

• Under the BBB standards, a founder may not serve as both paid staff and Board chair, contrary to practice in many start-up organizations.

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Best Practices – Wise Giving Alliance, cont’d

• First Six Governance and Oversight Standards , cont’d:

4. No transaction(s) in which any board or staff members have material conflicting interests with the charity resulting from any relationship or business affiliation.

• Board should consider (at least) the following factors: any arm's length procedures established by the charity; the size of the transaction relative to like expenses of the charity; whether the interested party participated in the board vote on the transaction; if competitive bids were sought and whether the transaction is one-time, recurring or ongoing.

• Note: these standards may be confusing and it may be preferable to analyze such transactions based on IRS Intermediate Sanctions regulations and/or adopt a conflicts of interest policy.

5. Board should assess the organization's performance and effectiveness every two years and determine future actions required to achieve its mission, and submit a written report outlining results of performance and effectiveness assessment and recommendations for future actions.

6. Board composition: should adhere to standards set forth by BID law.

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By-Laws

• Bylaws are a set of agreed upon rules and procedures for the internal operations of a not-for-profit corporation. N-PCL section 102(a)(2)

• Contain the rules and procedures that govern the decision-making processes of the Board and for membership organizations, the members.

• Governed by the N-PCL in New York State.

• If the organization is or will be exempt under section 501(c)(3) of the IRC, may add provisions to comply with those regulations.

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By-laws: Support Charitable Mission

• Clear rules and procedures enable organizations and their Boards to function smoothly and efficiently, so that they can focus on carrying out the organization’s charitable mission.

• By-laws should be a readily accessible document that Board and staff regularly refer to.

• Well-crafted, easily understood by-laws make it possible for an organization to:

– make binding decisions;

– turn those decisions into actions; and

– resolve internal disputes when they arise.

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By-laws: Governing Law

• By-laws are governed by the law of the state of incorporation.

• N-PCL provides the legal framework for the corporation’s by-laws and establishes minimum standards to which the by-laws must conform.

• In New York, the by-laws of BIDs are also governed by the NYC AC and the NYS GMU.

• N-PCL offers Boards a good deal of discretion to draft their by-laws and allows flexibility that enables an organization to establish rules and procedures that suit that organization’s particular needs.

• Lawyers Alliance encourages Boards to adopt by-laws that provide clear direction and establish realistic practices.

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By-laws: Best Practices

• Several charitable watchdog and other not-for-profit advisory groups have developed “best practices” that go beyond the requirements of the law.

• Some of these best practices are procedures designed to encourage directors to be knowledgeable and engaged; others are preventative measures developed in light of high profile examples of dysfunctional Boards or director misconduct.

• Generally, these ‘best practices’ are worthwhile guidelines that help organizations be compliant with the law and enable organizations to be more effective.

Key By-Law Provisions

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Membership

• Classes of Members (Sample By-Laws, Section 2.1)• Five (5) classes of members

– Class A: Owners of real property.– Class B: Tenants (commercial).– Class C: Tenants (dwelling units) and proprietary lessees (residential

cooperative units).– Class D: Representatives appointed by the Mayor, the Comptroller, the

Manhattan Borough President and the Member of the New York City Council representing the District (or, if more than one such member, by the Speaker of the New York City Council).

– (Optional) Class E: One representative appointed from each Community Board within the jurisdiction of the District, other interested parties (note: this class is not required by law to be included)

• Having a mechanism in place to register and keep track of members is paramount, because the annual membership meeting is the key to validly electing a Board.

Membership

• Membership is entitled to access to By-laws and certain information about decisions made by the Board, but not to minutes of Board meetings. In contrast, the general public is only entitled to publicly filed documents (e.g., certificate of incorporation).

• BIDs are not public agencies, so Freedom of Information Act requests are not applicable.

• BIDs are not subject to open meetings laws, and may therefore restrict or ban filming and/or photography of annual membership meetings.

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Membership Meetings

• Record Date (Sample By-Laws, Section 2.4)

• By-laws (or the corporation’s certificate of incorporation) may provide that the Board may fix a record date for determining the members entitled to vote at any meeting of members. In the event that the Board does set a record date, it must not be more than fifty nor less than ten days before the date of the meeting.

• If no provision for a record date is made in either the certificate of incorporation or the by-laws, any member in good standing and otherwise eligible to vote is entitled to vote at any meeting of members.

l– NPCL, Section 611

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Membership Meetings

• Quorum (Sample By-Laws, Section 3.4)• Quorum requirement: the members entitled to cast a majority of the

total number of votes entitled to be cast at the meeting must be present.

• Certificate of Incorporation or by-laws may provide for any lesser quorum, provided it is not less than:– ten percent (10%) of the total number of votes entitled to be

cast; OR– one hundred (100) votes,

– WHICHEVER IS LESSER.• N-PCL, Section 608

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Membership Meetings

• Notice of Meeting (Sample By-Laws, Section 3.3)

• Written notice of membership meetings shall be given personally or by mail to each member entitled to vote at such meeting.

• Personal notice / First Class mail: not less than ten (10) nor more than fifty (50) days before the date of the meeting

• Any other class of mail: not less than thirty (30) nor more than sixty (60) days before the date of the meeting

• If the corporation’s membership exceeds 500 members: notice may be served by publication in lieu of mailing, in a newspaper published in the county in which the corporation’s principal office is located, once a week for three (3) successive weeks next preceding the date of the meeting.

– N-PCL, Section 605(a)

• Email notification of membership meetings is not sufficient; however, this is a proposed revision to the N-PCL

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Membership Meetings

• Actions requiring vote of members (Sample By-Laws, Section 3.7)

• Certain corporate actions may not be taken without the specific approval of the corporation’s members.

• For example (NOT an exhaustive list):– Election of Directors: Requires plurality of votes cast at a meeting of

members by the members of the class entitled to vote – Amendment to Certificate of Incorporation: requires a majority of the

votes cast at a meeting of members– Disposal of all or substantially all of the assets of the corporation:

requires two thirds of the votes cast at a meeting of members– Approval of a plan of merger: requires two thirds of the votes cast at a

meeting of members

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Membership Meetings

• Annual Report of Directors (Sample By-Laws, Section 4.15)

• The Board shall present at each annual meeting of members a report (the “Annual Report of Directors”) which shall be:

– verified by the President and Treasurer; OR – verified by a majority of the Directors; OR– certified by an independent public or certified public accountant or a firm of such

accountants selected by the Board.• The Annual Report of Directors must include (among other things):

– The assets and liabilities of the corporation as of the end of the fiscal period terminating not more than six months prior to the meeting;

– Principal changes in assets and liabilities during said fiscal period;– Revenues and expenses during said fiscal period;– Number of members of the corporation as of the date of the report.

• N-PCL, Section 519(a)

47

Board of Directors

• Composition (Sample By-Laws, Sections 4.2 and 4.3)• BID law requires:• Class A Directors: not less than a majority of the entire Board,

elected by the members of Class A• Class B Directors: at least one (1), elected by the members of

Class B• Class C Directors: at least one (1), elected by the members of

Class C• Class D Directors: four (4) total, elected by the Mayor, the

Comptroller, the Manhattan Borough President and the New York City Council Member representing the District (or if more than one such member, by the Speaker)

48

Board of Directors

• Term of Office (Sample By-Laws, Section 4.5)

• Length of Director's term of office may not exceed five years, but there is no statutory limit on re-election. N-PCL §703(b).

• Terms may be staggered by dividing the Directors into classes (max. five). Each class should contain as nearly equal a number as possible. Staggered terms allow the Board to maintain institutional knowledge. N-PCL §704.

• If the Board is classified under Section 704, the maximum term of office must not exceed the number of years equal to the number of classes into which the Board is classified. N-PCL §703(b).

49

Board of Directors

• Vacancies (Sample By-Laws, Section 4.6)

• Vacancies among Directors elected or appointed by special districts or membership sections shall be filled by action of the persons entitled to vote thereon (i.e., the relevant class of members); except that, if a vacancy remains unfilled for six months and a quorum of the Board cannot be obtained, the remaining Directors, or a majority of them, may appoint a Director to fill the vacancy.

• A Director elected or appointed to fill a vacancy shall hold office until the next annual meeting at which the election of Directors is in the regular order of business, and until the election (or appointment) and qualification of a successor.

– N-PCL, Section 705

50

Board of Directors

• Removal of Directors (Sample By-Laws, Section 4.6)

• Directors elected by the members of a specific class can only be removed (with or without cause) by vote of the members of that class. – N-PCL §706(c)

51

Board of Directors

• Board Committees (Sample By-Laws, Section 4.7)• By-Laws (or Certificate of Incorporation) may provide that the Board, by

resolution adopted by a majority of the entire Board, may designate from among the members of the Board, an executive committee and other standing committees.

• Each standing committee must consist of at least three (3) Directors• Each committee shall (to the extent provided in the resolution / Certificate of

Incorporation / by-laws) have all the authority of the Board, subject to the exceptions set forth in the N-PCL, namely:

– submission to members of any action requiring members’ approval under the NPCL

– filling Board / committee vacancies– fixing compensation of Directors for sitting on the Board or any committee– amendment / repeal / adoption of by-laws– amendment / repeal of any Board resolution which by its terms is not repealable /

amendable• NPCL, Section 712(a)

52

Board of Directors

• Quorum (Sample By-Laws, Section 4.10)

• Board of fifteen (15) members or less: Quorum shall be at least one-third of the entire number of (voting and non-voting) Directors

• Board of more than fifteen (15) members: Quorum shall be at least five (5) Directors plus one (1) additional Director for every ten (10) Directors (or fraction thereof) in excess of fifteen.

• The Certificate of Incorporation or a by-law adopted by the members may set the quorum at higher than a majority of Directors. (If the Certificate of Incorporation or by-laws are being amended to include a supermajority quorum, a vote of 2/3 of the members is required)– N-PCL, Sections 707 and 709

53

Board of Directors

• Voting (Sample By-Laws, Section 4.10)• Except as otherwise required by the N-PCL, the vote of a majority of

the Directors present and entitled to vote at the meeting (provided a quorum is present), shall be the act of the Board (no proxies and no votes by email unless unanimous, in which case a unanimous written consent is acceptable).– N-PCL, Section 708(d)

• Participation by Conference Telephone (Sample By-Laws, Section 4.13)

• Absent a prohibition in the certificate of incorporation or bylaws, Directors may participate in a Board meeting by means of a conference telephone, or similar communications equipment so long as all persons participating in the meeting can hear each other at the same time. Participation by such means shall constitute presence in person at a meeting.– N-PCL, Section 708(c)

54

Board of Directors

• Participation by Alternates (Sample By-Laws, Section 4.17)

• Certificate of Incorporation or by-laws may provide that a special district or membership section entitled to elect or appoint Directors may elect or appoint an alternate for each such Director.

• In the absence of a Director from a meeting of the Board, his or her alternate may, upon written notice to the secretary of the corporation, attend the meeting and exercise therein the rights, powers and privileges of the absent Director.– N-PCL, Section 703(d)

55

Board of Directors

• Action without a Meeting (Sample By-Laws, Section 4.12)

• Any action required or permitted to be taken by the Board or any committee thereof may be taken without a meeting if all of the members of the Board or the committee consent in writing to the adoption of a resolution authorizing the action.

• The resolution and the written consents thereto must be filed with the minutes of proceedings of the Board or the committee.– N-PCL, Section 708(b)

Board of Directors• There are mechanisms in place to deal when problems

arise with the Board. • How can the BID conduct emergency business in the

absence of a Board? – As a threshold issue, Board members have a fiduciary duty to

ensure that a functional Board remains (e.g., Board members should not resign en masse without providing for successors).

– First step if there is no Board is to call a membership meeting.– An officer of a corporation may take actions within the scope of

their existing authority. • Deadlocked Board

– First step if Board is completely dysfunctional is to call a membership meeting.

– The N-PCL allows corporations to go to court to resolve issues in certain circumstances.

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Officers

• Appointment and Term of Office (Sample By-Laws, Section 5.1)• Board elects / appoints:

– President / Chairperson– Vice President / Vice Chairperson– Secretary– Treasurer– and such other officers as it may determine (or as may be provided in the by-

laws).• Any two or more offices may be held by the same person, except the offices

of president and secretary, or the offices corresponding thereto.• The certificate of incorporation or a by-law adopted by the members may

provide that officers shall be elected by the members instead of by the Board.

• Officers shall hold office for the term for which they are elected or appointed, and until a successor has been elected/appointed and qualified.

• Unless otherwise provided in the certificate of incorporation or by-laws, all officers shall be elected or appointed annually.

– N-PCL, Section 713

58

Conflict of Interest Policies (Sample By-Laws, Article X)

• Regulated by both State and Federal Law• Not required to be in by-laws but is advisable• There are circumstances under which a Corporation can void a transaction

between it and one or more of its directors or officers, or between it and any other entity in which one or more of its directors or officers are directors or officers, or have a substantial financial interest. N-PCL §715.

• In order for such a transaction to be binding on the Corporation:

– The material facts of the interest / common directorship or officership must be disclosed in good faith to the Board or committee or known by them; and

– The transaction must be authorized by a Board or committee vote sufficient for those purposes without including the vote of the interested directors. N-PCL §715(a)(1).

– While the vote of the interested director cannot be counted, the interested director can be counted when determining whether a quorum is present. N-PCL §715.

– Alternatively, in a membership corporation, if the material facts are disclosed or known to the members, the transaction can be approved by the membership. N-PCL §715(a)(2).

– If the Board / committee / membership approves the transaction without the proper disclosure or knowledge, the transaction will still be binding if it can be established "affirmatively that the contract or transaction was fair and reasonable as to the corporation at the time it was authorized..." N-PCL §715(b).

Amending the By-Laws• Any by-law adopted by the Board may be

amended or repealed by the members. N-PCL §602

• Unless otherwise provided in the certificate of incorporation or the by-laws adopted by the members, any by-law adopted by the members may be amended or repealed by the Board. N-PCL §602

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Additional Resources• Lawyers Alliance Resource Call Line (212-219-1800 ext.

224)• Lawyers Alliance Legal Alerts

– (http://lawyersalliance.org/news_legal_alerts.php)• NYS Attorney General Guidelines for Board members

– Right From the Start: http://www.charitiesnys.com/pdfs/Right%20From%20the%20Start%20Final.pdf

– Internal Controls: http://www.charitiesnys.com/pdfs/Internal%20Controls%20-%20Final%20-%20Small%20Type.pdf

• Better Business Bureau Wise Giving Guidelines– http://www.t-tlaw.com/gr-08.htm

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