New York Law Review

Tag: Not-For-Profit Corporation Law

  • People v. Grasso, 11 N.Y.3d 64 (2008): Attorney General’s Authority to Sue for Excessive Executive Compensation in Not-For-Profit Corporations

    11 N.Y.3d 64 (2008)

    The Attorney General’s authority to bring claims against officers and directors of not-for-profit corporations is limited to the specific causes of action authorized by the Not-For-Profit Corporation Law (N-PCL), and the Attorney General cannot circumvent the statutory scheme by asserting common-law claims that would lower the burden of proof or eliminate statutory defenses.

    Summary

    This case concerns the Attorney General’s attempt to recover allegedly excessive compensation paid to Richard Grasso, the former Chairman and CEO of the New York Stock Exchange (NYSE), a not-for-profit corporation at the time. The Attorney General brought several causes of action, some based directly on the N-PCL and others grounded in common-law theories of unjust enrichment and breach of fiduciary duty. The Court of Appeals held that the Attorney General could only pursue the statutory claims because the common-law claims impermissibly lowered the burden of proof and bypassed the protections afforded to directors and officers under the N-PCL, effectively undermining the legislative intent behind the statute’s carefully constructed enforcement scheme.

    Facts

    Richard Grasso served as Chairman and CEO of the NYSE from 1995 until 2003. During his tenure, his compensation, including bonuses, significantly increased. In 2003, the NYSE approved a compensation package for Grasso totaling $187.5 million. The Attorney General alleged that the compensation was excessive, unreasonable, and not commensurate with Grasso’s services. The Attorney General claimed that the Compensation Committee, hand-picked by Grasso, ignored a benchmark system and provided inaccurate information to the Board regarding Grasso’s compensation.

    Procedural History

    The Attorney General brought suit against Grasso, alleging eight causes of action, including statutory claims under N-PCL 720(a) and (b) and non-statutory claims based on common-law principles. Grasso moved to dismiss the non-statutory claims for lack of authority. Supreme Court denied the motion, finding the Attorney General had standing under the parens patriae doctrine. The Appellate Division reversed, dismissing the non-statutory claims. The Court of Appeals affirmed the Appellate Division’s decision.

    Issue(s)

    Whether the Attorney General can maintain non-statutory causes of action against the former Chairman and CEO of a not-for-profit corporation, premised on the same underlying facts as statutory claims, when those non-statutory claims would circumvent the fault-based requirements and protections afforded by the N-PCL.

    Holding

    No, because the Attorney General cannot circumvent the legislative scheme of the N-PCL by asserting common-law claims that would lower the burden of proof required for the statutory claims or eliminate defenses, such as the business judgment rule, that the Legislature intended to provide to directors and officers of not-for-profit corporations.

    Court’s Reasoning

    The Court emphasized that while the N-PCL grants the Attorney General broad powers to oversee public corporations, this power is not unlimited. The Legislature created a comprehensive enforcement scheme with specific provisions allowing the Attorney General to bring actions against individual directors or officers for particular misconduct, such as unlawful transfers of corporate assets or breach of fiduciary duty, but these actions require a showing of fault or bad faith. The statute also affords officers and directors the protections of the business judgment rule. The Court reasoned that the Attorney General’s non-statutory claims—for a constructive trust, payment had and received, restitution of benefit awards, and improper loans—were an attempt to circumvent these statutory requirements by crafting causes of action with a lower burden of proof. For example, the claims for constructive trust and payment had and received sought the same relief as the statutory claims but lacked any element of knowledge or bad faith, effectively imposing strict liability. Similarly, the claim regarding improper loans sought to bypass the business judgment defense. The Court stated, “Although the Executive must have flexibility in enforcing statutes, it must do so while maintaining the integrity of calculated legislative policy judgments. That balance falters where, as here, the Executive seeks to create a remedial device incompatible with the particular statute it enforces.” By attempting to impose liability based solely on the size of Grasso’s compensation package, without proving the fault or bad faith required by the N-PCL, the Attorney General was overstepping the bounds of their authority and infringing on the Legislature’s policy-making role. The Court noted that it “has consistently held that a private right of action may not be implied from a statute where it is ‘incompatible with the enforcement mechanism chosen by the Legislature’.”

  • 64th Associates, LLC v. Manhattan Eye, Ear & Throat Hospital, 2 N.Y.3d 585 (2004): Judicial Oversight of Not-for-Profit Asset Sales

    64th Associates, LLC v. Manhattan Eye, Ear & Throat Hospital, 2 N.Y.3d 585 (2004)

    When a not-for-profit hospital seeks judicial approval for the sale of its assets, any termination-payment clause or similar damages provision in the sales transaction should be reviewed under the Not-For-Profit Corporation Law (N-PCL) 511 standard of fairness, reasonableness, and furtherance of corporate purpose.

    Summary

    Manhattan Eye, Ear & Throat Hospital (MEETH), a not-for-profit hospital, sought to sell its assets, including buildings, to a real estate developer (64th Associates) and another hospital. The sale contract included a provision requiring MEETH to reimburse the developer’s expenses up to $800,000 if judicial approval for the sale was not obtained. The New York Supreme Court disapproved the sale. 64th Associates then sued MEETH to recover expenses under the reimbursement clause. The lower courts ruled that the judicial disapproval rendered the entire contract, including the reimbursement provision, inoperative. The New York Court of Appeals reversed, holding that the reimbursement provision must be evaluated under N-PCL 511(d) to determine if it is fair, reasonable, and furthers the not-for-profit’s purpose.

    Facts

    MEETH, a not-for-profit hospital, decided to sell its buildings and close the hospital due to financial difficulties. It contracted to sell buildings to 64th Associates for apartments and to Memorial Sloan-Kettering Cancer Center for medical purposes. The contract required MEETH to reimburse 64th Associates for expenses if judicial approval was not obtained, up to $800,000. Because the sale involved a substantial portion of its assets, MEETH was required to seek judicial approval under the Not-For-Profit Corporation Law.

    Procedural History

    MEETH petitioned the Supreme Court for judicial approval of the sale. The Attorney General opposed the sale. The Supreme Court denied MEETH’s petition, disapproving the transaction. 64th Associates then sued MEETH for breach of contract, seeking reimbursement of expenses per the contract’s termination-payment provision. The Supreme Court dismissed the action, holding the contract was inoperative without judicial approval. The Appellate Division affirmed. The Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a termination-payment clause in a contract for the sale of assets by a not-for-profit corporation is subject to review under N-PCL 511(d) to determine if it is fair, reasonable, and furthers the corporation’s purpose, even after the court disapproves the underlying sale.

    Holding

    Yes, because the statute requires that the court examine “the consideration and the terms of the transaction” (N-PCL 511 [d]), which includes all facets of the agreement, encompassing any termination-payment clause or similar damages or reimbursement provision.

    Court’s Reasoning

    The Court of Appeals reasoned that unlike for-profit entities, not-for-profits lack shareholders, necessitating greater public oversight of their finances and major transactions. N-PCL 510 and 511 are designed to “preserve charitable assets to serve public purposes.” The Court held that N-PCL 511’s requirements apply to the contract as a whole, not just the asset sale itself. It emphasized that the statutory language requires the court to examine “the consideration and the terms of the transaction” (N-PCL 511 [d]), encompassing all facets of the agreement. The court reasoned that judicial scrutiny protects not-for-profit organizations against board actions that might be adverse to the entity’s well-being. The Court acknowledged the Attorney General’s argument that such provisions may be valuable to not-for-profits, allowing them to negotiate beneficially. Because the lower courts did not examine the reimbursement provision under the N-PCL 511(d) standard, the Court of Appeals reversed and remitted the matter to the Supreme Court for further proceedings to determine whether the reimbursement provision was fair and reasonable and in furtherance of the not-for-profit’s corporate purpose. The court stated that reimbursement provisions “should be reviewed, whenever appropriate, in the same proceeding and under the same standard in which the court is asked to approve the sale.”

  • American Society for Prevention of Cruelty to Children v. New York Society for Prevention of Cruelty to Children, 46 N.Y.2d 1067 (1979): Limitation on Foreign Corporation Powers

    American Society for Prevention of Cruelty to Children v. New York Society for Prevention of Cruelty to Children, 46 N.Y.2d 1067 (1979)

    A foreign corporation seeking authorization to conduct activities in New York is limited to those activities it is authorized to conduct under the laws of its state of incorporation, even if domestic corporations in New York have broader powers.

    Summary

    The American Society for the Prevention of Cruelty to Children (American Society), a Delaware corporation, sought authorization to conduct activities in New York. The New York State Society for the Prevention of Cruelty to Children (New York Society) declined to give its approval, leading the American Society to initiate a proceeding to dispense with such approval. The lower courts assumed the American Society sought all the powers of a domestic society, but the Court of Appeals noted the American Society is limited by Delaware law. The Court remitted the case for reconsideration based on this limitation.

    Facts

    The American Society, a Delaware-incorporated entity, applied for authorization to conduct activities in New York under Section 1304 of the Not-For-Profit Corporation Law.

    The New York Society refused to approve the American Society’s application, as required by state law for certain activities.

    The American Society then initiated a legal proceeding under subdivision (g) of section 404 of the statute to bypass the New York Society’s required approval.

    Procedural History

    The Supreme Court initially granted the American Society the relief it sought, dispensing with the New York Society’s approval.

    The Appellate Division reversed the Supreme Court’s decision and dismissed the proceeding.

    The American Society appealed to the New York Court of Appeals.

    Issue(s)

    Whether the American Society, as a foreign corporation, can be authorized to conduct activities in New York beyond what it is authorized to do under the laws of Delaware, its state of incorporation.

    Holding

    No, because under subdivision (a) of section 1301 of the Not-For-Profit Corporation Law, the American Society’s authorization is limited to activities permissible under Delaware law, regardless of the broader powers granted to domestic New York societies.

    Court’s Reasoning

    The Court of Appeals focused on the limitations imposed on foreign corporations operating in New York.

    The court emphasized that the American Society’s application had been considered under the incorrect assumption that it sought all the powers of a domestic New York society. The court stated, “Although the application of the American society did not so state, in the Supreme Court and at the Appellate Division the litigation proceeded and the determinations were made on the assumption that the application of the American society sought authorization to conduct in New York all the activities a domestic Society for the Prevention of Cruelty to Children could conduct…”

    The court highlighted the relevant statute: “[U]nder subdivision (a) of section 1301 of the Not-For-Profit Corporation Law at most it can obtain authorization to conduct activities which may be conducted lawfully by a domestic corporation only to the extent that it is authorized to conduct such activities under the laws of the State of Delaware, the State of its incorporation.”

    Because the application had not been considered with this limitation in mind, the Court deemed it necessary to remit the proceeding to the Supreme Court for reconsideration. This would allow the court to evaluate the American Society’s application based solely on the activities permissible for it under Delaware law. The court reasoned that remitting the case was preferable to affirming the Appellate Division’s decision because of the extensive record already developed, stating that it was “preferable to remit the present proceeding for such consideration and determination, rather than to affirm the determination of the Appellate Division (which was correct as the matter stood before it) without prejudice to the initiation of a new proceeding.”