New York charitable nonprofits seeking to sell or transfer significant assets must navigate a complex set of legal considerations and regulatory requirements. The New York Attorney General’s Charities Bureau plays a key role in overseeing nonprofit corporate transactions, including asset transfers, mergers, and dissolutions, in accordance with procedures outlined in the New York Not-for-Profit Corporation Law (“N-PCL”). Transfers of all or substantially all of a nonprofit’s assets are among the most common transactions and are undertaken for several reasons, including:
- The transfer of all or substantially all of an organization’s assets to effectuate the acquisition of one organization by another, without undertaking a legal merger. Asset transfer transactions are a popular structure when an organization seeks to expand its programs without assuming another organization’s liabilities. For other organizations, an asset transfer transaction may play a central role in winding down the organization’s operations before it is legally dissolved.
- The sale of a high-value asset, such as a building or other real property.
- The transfer of a significant program that is not well-aligned with the rest of the organization’s mission or which may operate more successfully as an independent organization or as part of another existing nonprofit .
What Constitutes All or Substantially All of the Assets of a Nonprofit?
There is no numerical definition of the threshold for what constitutes all or substantially all of the assets of a nonprofit. However, if a transaction involves most of the organization’s assets or has a significant impact on the organization’s ability to carry out its corporate purposes, Attorney General (“AG”) or court approval may be required. Whether a particular proposed transaction meets this threshold should be discussed with your legal counsel.
Key Steps in an Asset Transfer Transaction
The following summary outlines the key steps required in any asset transfer transaction.
1. Due Diligence
The parties to the transaction should conduct due diligence to identify key financial, legal, and operational risks and ensure that each organization makes an informed decision regarding the proposed transaction. For a closer look at specific components of due diligence, see my prior blog post, The Next Phase – Nonprofit Mergers & Acquisitions.
2. Negotiate the Asset Transfer Transaction Agreement
Key terms that should be included in the asset transfer transaction agreement include the list of assets and liabilities to be transferred, the purchase price, the transition of any employees to the acquiring entity, any pre-approval contingencies, the parties’ material representations and warranties, and the timing of the closing.
3. Organizational Approvals
The required organizational approvals are determined by both state laws governing nonprofits and the organization’s governance documents. At least 2/3 of the entire Board must vote to approve the transaction (if the Board has 21 or more directors, approval by a majority of the entire Board is sufficient). (N-PCL § 510) If the organization has voting members, 2/3 of the voting members present at a meeting must vote to approve the transaction, provided that the affirmative votes are at least equal to the quorum. (N-PCL § 510) An organization’s governance documents may require a higher vote requirement or additional approvals.
4. Regulatory Approvals
While a nonprofit can petition either the court or the AG for approval of the asset transfer, any petition to the court must include notice to the AG. As a result, many organizations opt to petition the AG for approval to avoid navigating approvals from two regulatory bodies. However, court approval is advisable in certain instances:
- If the corporation is insolvent or would become insolvent as a result of the transaction, it must proceed on notice to creditors under N-PCL § 511(c).
- The Attorney General may determine that court approval, on notice to the AG, is more appropriate than administrative approval by the AG in certain instances, including the following:
- The transaction involves the transfer of donor-restricted assets that require judicial cy pres relief to release or modify the restrictions;
- The AG has received complaints or objections from members, creditors, or other interested persons who are entitled to notice pursuant to N-PCL § 511(b);
- The AG has objections to the transaction that have not been resolved after discussion; or
- The transactions are unusually complex or will have an impact on the public.
Additional regulatory approvals may also be needed, depending on the organizations involved (e.g., state and federal education agencies for schools).
New York’s Regulatory Approval Process for Asset Transfers
As noted above, New York law requires that the AG or the court must approve the sale, lease, exchange or other disposition of all, or substantially all, the assets of a New York nonprofit corporation. These oversight procedures are intended to protect against the inappropriate transfer of assets of a nonprofit, to safeguard the assets, and provide for the interests of the nonprofit’s members and beneficiaries.
If the court or the AG determines, to its satisfaction, that (1) the consideration and the terms of the transaction are fair and reasonable to the corporation, and (2) the purposes of the corporation or the interests of the members will be promoted, the court or AG may authorize the transaction. (See N-PCL§ 511, 511-a).
The scope of transactions undertaken by New York religious corporations that are subject to AG or court approval is slightly broader than it is for other charitable nonprofits. A lease for more than five years, or a sale, mortgage, exchange, or other disposition of the real property of a religious corporation (regardless of whether the real property transfer constitutes all or substantially all of the assets of the religious corporation) requires approval of the court or the AG. (See Religious Corporations Law § 12 and N-PCL §§ 510, 511, and 511-a). This article does not cover the additional guidance specifically applicable to transactions governing religious corporations.
A Few Additional Considerations
While the asset transfer transaction process entails numerous detailed considerations and requirements that cannot all be included in this article, a few key requirements that are particularly important for such transactions in New York are worth noting.
Appraisals
An appraisal is a key component of the review process and helps the corporation and the reviewing regulatory body determine whether the price and terms of the transaction reflect the value of the asset and the rights being transferred, and whether the proposed consideration is fair and reasonable.
Use of Proceeds
An itemized list of closing costs must be included in the petition, along with an estimate of the net proceeds from the transaction. A description of how the net proceeds will be used must also be included and must be consistent with the corporation’s purposes. If the property being sold is the corporation’s main premises, the AG may require that the sales proceeds be placed in escrow until a new premises is secured to ensure the corporation can continue to carry out its corporate purposes.
Related Party Transactions
If the transaction is a related party transaction (e.g., the sale or transfer of assets to a director, officer, or key person of the organization), New York’s statutory procedures governing related party transactions must be followed. These procedures include disclosure and the recusal of all interested persons from deliberations or the vote on the transaction (N-PCL §§ 715 and 715-a). In addition, before approving a related party transaction, the board must explicitly consider reasonable alternatives to the transaction, to the extent available (N-PCL §715).
AG Registration Status Must be Current
If either party to the transaction is required to be registered with the AG pursuant to Article 7-A of the Executive Law or section 8-1.4 of the Estates, Powers and Trusts Law, the AG will check to ensure that the corporations are registered and that their annual financial reports are up to date before completing the review of the transaction. If either corporation is not registered or if its reports are delinquent, it will need to register and/or file all required annual financial reports before the AG’s review can be completed. Note that certain types of organizations (e.g., religious corporations) are exempt from the registration requirements.
In Closing
Asset transfer transactions play a vital role in helping an organization achieve its strategic objectives, but they require navigating several complex legal requirements and considerations. With careful planning and guidance, organizations can use these transactions to help achieve their key organizational goals.