The New York State Senate

JUSTIFICATION:

Current not-for-profit corporations law (N-PCL) Section 704 outlines the
classification of directors, or the process of staggering the terms of
board members such that their terms of service do not all begin and
expire at the same time. While this is a critical practice for institu-
tional knowledge and organizational stability, Section 704(a) provides
that an organization with a board elected by the directors, i.e., a
non-membership organization, may only adopt a classified board structure
where the certificate of incorporation so authorize. Membership organ-
izations, on the other hand, may authorize board classification via a
by-law adopted by the members under the current law.

In order to be in compliance with this requirement, non-member organiza-
tions must either anticipate such growth at the outset as they put their
charter documentation in place or amend their certificate of incorpo-
ration later in their life cycle in advance of implementing the prac-
tice. A common practice for organizations adopting a classified board
later in their life cycle is to record the authority in their by-laws.
Under the present law, however, organizations that follow this common
practice are operating with invalidly composed boards, threatening the
authority of their board and therefore calling into question corporate
decisions.

The current classification of directors' structure under Section 704 of
the NPCL is likely a carryover from the Business Corporation Law, which
requires corporations to have shareholders (akin to members).  Unlike
for-profit business corporations, not-for-profits do not have sharehold-
ers and many organizations are non-member entities that would benefit
from the ability to classify their boards through a by-law

To address this concern, N-PCL,704(a) should be revised to strike the
language `adopted by the members.'

 
PRIOR LEGISLATIVE HISTORY:

This is new bill.

 
FISCAL IMPLICATIONS:

None.

 
EFFECTIVE DATE:
This act shall take effect immediately.