Our work on behalf of our client, Angkor Hospital for Children (“AHC”), in Siem Reap, Cambodia, reached a milestone with a New York Supreme Court order on September 15, 2014, transferring all the assets from a New York not-for-profit organization, Friends Without a Border (“FWAB”), to a Hong Kong company limited by guarantee, Angkor Hospital for Children Limited (“AHC HK”), established for charitable purposes.
AHC, located in Siem Reap, Cambodia was founded by photographer Kenro Izu in gratitude for the inspiration he received from the country’s ancient monuments, which he captured in his photographic series “Light Over Ancient Angkor.” Being Cambodia’s first teaching hospital, one of only two in the country, AHC draws patients who suffer from serious illness and often from acute malnutrition as well. They travel for hours, or even days, usually from rural areas, seeking higher level care that cannot be found in their own communities. AHC not only provides the neediest of these patients with free treatment, but also reimburses their travel costs in order to ensure that they will not hesitate to seek care when it is needed. AHC has also established a satellite clinic in the district town of Sotnikum in order to reach a larger number of poor children in the rural communities. Between AHC and the satellite clinic, over 150,000 children are treated each year.
FWAB was established by Izu and others to fund, operate and raise funds for AHC, with the intention of ultimately transferring AHC to local control. This goal has now been achieved with the establishment, by a Proskauer team, of AHC HK to develop and maintain AHC and the transfer of AHC receivables, equipment vehicles, buildings and improvements from FWAB to AHC HK.
As important, exciting, and rewarding as this result is for AHC, the path to get to this goal was not without hurdles, because an international non-profit transaction of this type draws scrutiny beyond the traditional state Attorney General non-profit charitable asset or merger transaction review, and also by many different levels of government from various jurisdictions. Therefore, there were several useful “learning” points.
First, during the initial stages of the transaction, the Proskauer team incorporated AHC HK and assisted AHC HK while successfully obtaining its tax exempt status charity status from the Hong Kong Inland Revenue Department, a key AG/IRS requirement, especially for a potential transfer of control of charitable assets to a foreign country. Once AHC HK was set-up as a charity, AHC HK proceeded to negotiate with the Cambodian government to obtain the necessary governmental approvals so that AHC HK is authorized to manage and operate AHC in Cambodia, the capacity for more local board governance oversight being the major reason for the transfer.
Second, reaching all of these milestones was crucial prior to proceeding with the most critical part of the asset transfer, which was seeking the approval of the Division of Public Charities in the Office of the New York Attorney General (“AG”), the relevant US “regulator” because FWAB was incorporated in NY. Any substantial disposition of assets by a U.S. charity requires the approval of the state AG, or other state overseer of charitable assets, to ensure the transfer complies with general state charitable principles and law. Without AG approval, the asset transfer to a non-profit in another state, let alone another country, will rarely be approved by a court, and cannot proceed.
Third, in our transaction, there was heightened AG scrutiny because these FWAB assets, accrued through tax-free donations, once transferred to AHC HK, would fall outside the territorial reach of the NY AGO. Furthermore, the AG’s review is conducted on a case-by-case basis, within general guidelines, but is very fact-based, and in this case, especially focused on the purposes for which the FWAB donations were made, to ensure that they would not be diverted from the original intent of the donors, since, once transferred, the NYAG could not enforce any failure to comply. However, in our case, AHC HK founders have been significant donors to FWAB, having contributed approximately US$1.5 million per year to AHC. AHC HK, as a HK tax-exempt charity, had also obtained the necessary governmental approvals from the Cambodian government to continue the operations of AHC by AHC HK. These factors, we believe, substantiated this proposed transaction as a legitimate asset transfer between two international charities, for uses consistent with donor intent.
Fourth, as legal representatives for the transferee, we had very limited control of the application to the AG, or the review process. The AG review process could only be initiated and processed by the New York transferor, FWAB. As such, we relied heavily on cooperation and coordination with FWAB’s counsel to drive the AG review, with very limited opportunity for input by us. Our role was primarily to initially explain to FWAB what the AG requests were, provide insight into the NY AG process from our prior experience, utilize our contacts there from time to time to keep the process on track, and, most importantly, to provide FWAB’s counsel with as much information as possible to facilitate AG’s review, and to follow-up with FWAB’s counsel to ensure that the AG review was proceeding.
Finally, one year after the lengthy review began, FWAB counsel obtained AG approval, and then after final review and formal approval by both boards, a petition was ultimately filed in the Supreme Court, with the approval of the AG (that approval being essential as a practical matter for expedited court approval). The order was approved and entered on September 15, 2014.
The Proskauer team was led by Yuval Tal of our Hong Kong office, and his colleague, Vivian Ho, who has been the driving force behind this AHC project. The great benefit of an international office team partnership was made crystal clear by the key roles played by the domestic members of the team – Elizabeth Mills in Chicago, (IRS and regulatory expert), Kevin Nolan in Boston (Corporate), Herschel Goldfield in New York (AG regulatory expert), and Pro Bono Initiative Chair Scott Harshbarger in Boston (on state AG charity regulation).