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Q&A: Sponsor Hold on Board

Q. I have been a shareholder for close to 20 years in a building that went co-op in the late 80s and whose bylaws and governance are still dictated in most part by the original offering plan/proprietary lease that was standard issue at the time. During my time here an ongoing concern of resident shareholders has been the fairly static ratio of sponsor units vs. individually owned units. That ratio has hovered around the 50/50 mark, with non-sponsor shareholders holding a slight edge in overall shares.

The board theoretically is comprised of seven seats with the sponsor holding three in abstention. However, of the four non-sponsor seats, one has been held for decades by an ‘original’ shareholder-owner who happens to have a long-term relationship with the sponsor (i.e., this individual has been the primary rental agent for the sponsor’s units). This board member also acts as the sponsor’s proxy at election time, ultimately responsible for a disproportionate number of voting shares, which has been a big reason for this person’s continued tenure on the board and their influence over who else gets elected. (We stagger two-year terms.)

Over the years, other shareholders have questioned the legality and/or ethics of all this and wonder if this situation constitutes ‘sponsor control of the board.’ Also questioned is whether the sponsor’s votes at election time are even allowed to be used to determine non-sponsor directors (when their three seats are never voted upon). Is this appropriate? The legacy co-op documents do state that ‘the holders of unsold shares are entitled to vote at all elections,’ but also states the sponsor cannot have control of the board after five years. Please advise just what voting power the sponsor should have at election time, and whether they still have undue influence on the composition of our board as described above. Lastly, there is also the question as to when does the sponsor relinquish one of their director positions as the owner ratio increases?

                                 —Baffled in Brooklyn

A. “The sponsor’s authority in the management of a co-op is a function of the offering plan and governing documents, since it is a contractual (and fiduciary) relationship with the residential owners,” says Christopher Tumulty, partner at law firm Tarter Krinsky & Drogin LLP, with offices in New York City and Princeton, New Jersey. “In addition, the courts and the attorney general have imposed obligations on a sponsor to sell off enough units and transfer control of the building to the residential board so as to create a viable co-op. Generally, sponsors have the obligation to sell apartments unless specifically limited in the plan. Based on the question, the five-year control period in the governing documents has expired and the sponsor still holds approximately 50% of the units. This may run afoul of the sponsor’s obligations. In addition, depending on the governing documents, the failure to turn over the three sponsor-held board seats may also be problematic and/or the resident shareholders may have recourse. I would advise the resident shareholders to retain counsel to review their rights based on the governing documents.” 

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