Last week Richard Grasso, the former Chairman of the New York Stock Exchange, filed a motion to have the suit by New York State Attorney General removed to Federal court. Mr. Grasso argued that Federal court made more sense because the matter involves Federal law and the Securities Exchange Commission. The technical argument is that Mr. Grasso was acting under Federal authority, there is a colorable Federal defense, and there was a casual connection between the conduct charged and the official conduct.
We simply don’t see the merits to this argument. While the NYSE is subject to SEC regulation and oversight, the conduct at issue has absolutely nothing to do with Federal issues. It involves the determination of compensation.
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The New York Stock Exchange is organized and operated under the New York Not-For-Profit Corporation Act (the "New York Act"). It could have been organized as a cooperative, a for-profit corporation, or as a partnership. It could have been organized under the laws of any number of states. Yet the directors opted for non-profit corporation status under the New York Act. The New York Act specifically addresses director duties and conflicts of interest. And non-profit corporations organized under the New York Act are subject to the jurisdiction of the New York State Attorney General.
In short, the New York Stock Exchange picked its forum and organizational type. In our view, the NYSE and Mr. Grasso must now and should live with the consequences. We will see whether the courts agree with us.
LESSON:
As one non-profit attorney has said to us, “Forming a non-profit corporation should not be viewed as a walk in the park.” This is serious business. Those considering forming a new non-profit entity should first ask why they want to form the entity as a non-profit. In most cases, it will because the organizers want to be able to fund the planned activities using tax-deductible charitable contributions or to take advantage of property tax exemptions. That’s fine. But if the organization will not be receiving charitable contributions or will not own real estate, the better course of action may be to opt for an organizational form that does not subject the resulting entity to the sort of regulatory oversight and restrictions that often come with non-profit status.
Along these same lines, there is nothing wrong with forum shopping, although it may be of limited benefit. Nobody says an organization must incorporate in the state where it will do business. If another state has more flexible laws, the organizers should consider organizing the entity in that state. But keep in mind that the entity must comply with the laws in any jurisdiction where it does business. So the entity may not be able to escape tougher restrictions simply by incorporating elsewhere. This will be particularly true with respect to annual fundraising reporting requirements.
The organizers should consult with an attorney about these and other issues before proceeding with the formation.
THE FOREGOING IS NOT AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. IF LEGAL ADVICE IS REQUIRED, THE NON-PROFIT OR OTHER PARTY IN QUESTION SHOULD SEEK THE ADVICE OF QUALIFIED LEGAL COUNSEL.
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