In many ways, a co-op or condo building is a lot like a tiny democratic nation. Like an independent state, a building elects its leaders, and those leaders have certain responsibilities to the people who elected them. Each “citizen” of the building has a vested interest in the continuing prosperity and harmony of their community—and each has a right to know how their elected directors are making decisions and running the building’s business affairs.
In a post-ENRON world, transparency and openness in business administration are more important than ever—and that goes for co-ops and condos as well as multinational corporations.
A Look at the Law
The primary statute covering co-op board operations and shareholder/owner rights in New York City is New York State’s Business Corporation Law, or BCL. Enforced by the New York Attorney General’s office (currently under the leadership of Attorney General Elliot Spitzer), the BCL affects co-ops in two ways. First, it lays out the duties and responsibilities of directors and officers, and second, it outlines shareholders’ rights to information and participation in the governance of their building.
Regardless of whether your building has 14 units or 414, understanding and abiding by the BCL’s standards of disclosure, fairness, and regulation can foster open, productive communication between residents and board members and keep your community on the right side of the law.
Consider the issue of elections, for example. In smaller buildings where there’s little resident turnover, it’s not uncommon for the same few people to run the board for years uncontested. In really big buildings, the board is often largely ignored by the non-serving shareholders. In some buildings, voter turnout is so poor that the board doesn’t even bother to hold yearly elections—if residents don’t seem to care, the board may figure, “If it ain’t broke, don’t fix it.”
According to the BCL, this lackadaisical approach is illegal, even if nobody’s complaining. Apathetic boards should take a look at BCL Section 602, which states that there must be at least one annual meeting of shareholders “at which an election for directors is held.” Even if the residents of a small co-op opt to re-elect the same handful of directors year after year, the law is satisfied and the building is operating in good faith—as far as Section 602 is concerned.
According to Michael Horwitz, a principal with the Manhattan law firm Horwitz & Zim Law Group, PC, regular meetings and votes are crucial. “When you’ve got people who’ve spent millions on an apartment, they should have a say—or at the very least, an opportunity to be heard.”
Occasionally, a shareholder/owner is unable to attend that all-important annual meeting. Whatever the reason for their absence, that person’s inability to attend does not negate their right to vote on board members or to weigh in on issues affecting building policy. According to the BCL (Section 609), “Shareholders must be allowed to vote by ‘proxy’ (or substitute) if they do not attend the shareholders meeting.”
According to Marc Schneider, an attorney based in Garden City, “You can give a proxy to anybody to vote your interest—though it’s usually better to designate another unit-owner. The original proxy form must be submitted to the manager prior to the vote, or presented to the board at the meeting before the vote is taken.”
Count, Recount, Discount
In the unlikely event that a shareholder/owner takes issue with a board election, the Section 610 of the BCL provides that “Any shareholder may demand that an election inspector be appointed in order to insure the fairness of the election.” Schneider points out that shareholders are actually entitled to move for the appointment of two inspectors to examine the issue and deliver a report.
Of course, the best way to avoid having to tap somebody to baby-sit your building’s voting process is to conduct it in an open, fair, and equitable manner in the first place. Some good ways to do that include giving residents plenty of notice of an upcoming vote, making sure everyone understands their right to a proxy vote if they can’t make the meeting, and honoring shareholders’ right to an election inspection if doubts arise.
While not every word spoken by every board member is public domain, there are certain pieces of information that a board is obligated to provide shareholder/owners.
For starters, according to the BCL (Section 607), “Upon request, any shareholder is entitled to receive a list of all shareholders [in the building], with the addresses of any non-residents.”
There are a number of reasons why a shareholder might want or need to know the names of his or her neighbors—including suspicions of board misconduct that might necessitate an emergency shareholder meeting, or just to know who needs copies of the new building newsletter. It’s the board’s responsibility to see to it that a master list is kept of all shareholders’ names and addresses and that the list is updated on a regular basis.
According to Horwitz, a co-op board is really no different from the board of a regular corporation. “Shareholders are entitled to a list because they’re shareholders. If residents are concerned about privacy and security, affidavits can be drawn up to protect their privacy.”
Hold on a Minute
It’s also up to the board to keep accurate, complete minutes of shareholder meetings—which must also “[be made] available for inspection by a shareholder or the shareholder’s agent or attorney” (BCL Section 624).
That said, it’s important to remember that there’s a difference between shareholder meetings and board meetings. While records of shareholder meetings must be kept and disclosed upon request, the BCL makes no such requirement for the minutes taken during closed board meetings. Those are considered confidential, and generally, board minutes taken behind closed doors must be subpoenaed by a judge in the event of a lawsuit.
“Everyone’s scared to death of litigation,” says Horwitz. “I’ve seen minutes get shorter and shorter, to where they consist of a single line—‘approved buyer so-and-so,’ for example. It’s understandable, but communication is then a real difficulty. Ultimately, it’s a disservice to shareholders.”
Section 624 of the BCL also weighs in on the issue of a building’s financial records. Any shareholder—regardless of the number of shares they own or whether or not they’re on the board—can examine his or her building’s balance sheets and profit-versus-loss statements for past fiscal years. If a building is still owned all or in part by a sponsor, it is the sponsor’s legal responsibility to state in all residents’ offering plans his or her commitment to draw up and distribute certified, annual financial statements, and add amendments to those statements covering any unit sales during the year.
Lastly, and, perhaps obviously, the BCL specifies that any board member or sponsor with a “substantial financial interest” (Section 713) in a particular contract or transaction related to his or her building must notify the board of the conflict of interest, and generally be excluded from any related motions or votes. This provision helps cut down on kickbacks, insider contracting jobs, and fraud that can adversely affect a building and its residents.
The Cooperator gets a surprising number of calls and letters from shareholders asking about what residents and other board members can do to remove “problem” directors, or dissolve an inept, apathetic, or tyrannical board and replace it with a new set of leaders. While such last-resort measures can be difficult and contentious, the BCL does indeed provide for such situations.
Section 706 of the BCL states, “Any director may be removed for cause (that is, a good reason)”—or without any reason at all, if a given building’s certificate of incorporation and bylaws permit it. Section 720 gives shareholders the right to sue directors and officers for misconduct if they fail to act in good faith and with prudence for the good of the corporation.
That said, Horwitz points out that Section 717 says that board members— while duty-bound to act in the best interests of the co-op corporation—are “…entitled to rely on information, reports and financial statements which are prepared by officers, committees, employees, or outside professionals,” like accountants or attorneys. So while a board member must strive to be equitable, fair, and above-board as a matter of course, the BCL recognizes that oftentimes a decision is only as good as the information behind it.
Putting Things Right
Of course, things have to deteriorate pretty badly before litigation or the removal of an entire board becomes a serious consideration. As is usually the case in matters of consensus and group living, diplomacy, mediation, and compromise are always preferable to bringing out the big guns and going to court.
“Lots of stuff just should not be litigated,” says Horwitz. “People shouldn’t have to run to court all the time for every little thing—more use should be made of mediation and binding arbitration.”
Likewise, Schneider urges disgruntled shareholders to “Remember, boards have to abide by your building’s bylaws and the BCL, but they don’t have to do everything you ask. Make sure you’re familiar with your lease, your bylaws, your offering plan, and house rules before you start firing off letters—and make sure your request is reasonable and proper.”
But say a shareholder hasn’t been notified of an election in three years, or that nobody in a given co-op has any idea what kind of financial shape their building is really in? What’s the first step in rectifying the information gaps and seeing to it that the board isn’t operating in a sealed environment? Attorney General Spitzer’s office recommends the simplest approach first: a tactful verbal mention of a board’s non-compliance with the BCL is often enough to do the trick. Sometimes the problem is as simple as lack of awareness on behalf of the board, and the directors simply need a well-intentioned wake-up call.
Failing that, Schneider recommends that concerned shareholders should always put their grievances in writing and deliver them not to the board, but to their managing agent via registered or certified mail. Once the agent has the document in hand, he or she will present it at the next board meeting.
“Most boards meet once a month or so,” says Schneider, “so give them 30 to 60 days to respond—unless your issue is urgent in nature. If you’re injured and need a ramp installed so you can access your building, then set forth that urgency in your letter, and the board must address it in a timely manner.”
If the issue is one that impacts more than just one or two residents, the complainant’s case is all the more compelling. United shareholders can lobby for reform as a bloc, or band together to vote in new, more progressive directors at the next annual election.
Schneider also points out that if a coalition of residents request a meeting, they must also specifically call for a vote at the same time, or the board can “just sit there, thank everyone for coming, and go home” without taking action.
Only after talking, writing, and mediating have failed to produce results should anyone consider retaining private legal counsel and launching a lawsuit, says the Attorney General’s office. The reasons for this are obvious: lawsuits are expensive, they can drag on for years, and they can make for a very uncomfortable, even hostile, living environment for both plaintiffs and defendants. Far better for directors to avoid them in the first place by familiarizing themselves with and upholding the BCL, and for shareholder/owners to take a productive, cooperative role in the governing of their residential community.
“In this climate of corporate fraud and irresponsibility,” says Horwitz, “There’s a need for transparency [with boards]. Otherwise, you’re living in a dictatorship.”
More information on the Business Corporation Law is available at the Attorney General’s website at www.oag.state.ny.us, or at the New York Department of State website at www.dos.state.ny.us.
Hannah Fons is associate editor of The Cooperator.