Q&A: Board Ignoring Quorum

Q Our co-op has not had an election for the board since 2004. Many shareholders rent their units and are concerned that the sponsor has two seats on the board and owns/runs the management company and rental office from here. The problem is that we no longer have a quorum since the sponsor sold his shares to investors. I researched Business Corporation Law, and found Section 603 about the right of shareholders to call a special meeting. I therefore informed the lawyer that I would use this section if in fact we did not have a quorum. The board appointed someone to the board vacancy, in a rush, without the benefit of a quorum. I then asked the lawyer about this, and expressed concern that it was improper to have an election without a quorum. He replied that it was being investigated.

My question is can the board and their lawyer ignore New York State Law regarding quorums and elections?

—Fed Up Shareholder

A “Section 603 of New York’s Business Corporation Law entitles a minority group of shareholders, provided they own at least ten (10%) percent of the corporation’s stock, to cause the secretary of the corporation to call a special shareholders’ meeting for the purpose of electing directors,” says attorney Eliot H. Zuckerman, a partner with Hartman & Craven, LLP in Manhattan.

“If the secretary fails to give notice of such a meeting, any one of the shareholders in the group may then give the meeting notice to all shareholders. In either event, an election of directors may be held at that meeting even if a quorum is not present.

“One or more shareholders collectively owning less than ten (10%) percent of the corporation’s stock cannot rely on Section 603, but they may commence a court proceeding seeking to compel the board to fulfill its presumptive obligations under the corporation’s bylaws to call annual meetings and conduct elections. However, without the availability of Section 603, if the stockholders present do not constitute a quorum, there is no basis for compelling the holding of an election at such a meeting. In the absence of an election, it is typical for bylaws to give the remaining board members the right to appoint new directors to fill any vacancies.

“The regulations of the Attorney General’s office prohibit the sponsor, either acting alone or together with affiliated shareholders (i.e. ‘holders of unsold shares’) from controlling the board after a certain period of time elapses (typically five years) after the closing of the cooperative conversion of the property. If that time period has expired and the sponsor (with its affiliates) has not given up control, such failure could also be challenged with a court action, and possibly with a complaint to the Attorney General’s office.”

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