How to Handle Problems with a Co-Op's
Board of Directors
Questions and Answers
G. Oliver Koppell
Attorney General
New York State
Department Of Law
August 1994
Attorney General's
Information & Complaint Line: 1-800-771-7755
Sometimes owning a co-op apartment can present problems. Not only
can your neighboring shareholders cause you concern, but the
Board of Directors can be difficult to deal with too. This
pamphlet is intended to address the questions most frequently
asked of the Attorney General's office by New Yorkers who live in
cooperatives regarding problems with their Boards of Directors.
Q. I'm confused about how much power the Board of Directors of
my co-op has. What can it do and what can't it do? Are there
any legal standards it must meet?
A. Boards of Directors in cooperatives have two basic legal
obligations. The Board must follow the co-op's internal
rules (as set forth in the by-laws, the proprietary lease,
the certificate of incorporation and the house rules). It
must also exercise prudent business judgment in making
decisions, just like any other corporate board.
Q. Where can I find the co-op's internal rules?
A. Copies of the original by-laws and proprietary lease (plus
house rules, if any) can be found in the offering plan that
was distributed when the building first converted.
Q. What if there have been changes in the rules since then?
A. Any changes should be contained in amendments to the
offering plan. But if there are no unsold shares in the
building, it's possible that the offering plan is not
current and might not contain an updated version of the co-
op's documents.
Q. If I can't find an offering plan, where ›an I find the
bylaws and proprietary lease?
A. A member of the Board of Directors or your managing agent
may provide you with them. If not, another shareholder may
have a copy to give you.
Q. What kind of information is contained in these documents?
A. The by-laws and proprietary lease will set forth the
following:
- When annual shareholder meetings and elections to the board
of directors are held, and how notice is given.
- How many seats the sponsor can have on the board of
directors and when the sponsor must give up control.
- Whether shareholders have the right to call extra or special
meetings (a very valuable right if you wish to ask the board
to focus on particular matters).
- The procedure for amending the by-laws.
- The quorum for voting and whether cumulative voting is
allowed. (Cumulative voting allows a shareholder to vote all
his/her votes for only one director instead of apportioning
the votes among the number of vacancies.)
- Sublet provisions.
Q. If something isn't specifically addressed in these
documents, can the board do whatever it wants?
A. No, there are legal restrictions. The Business Corporation
Law (BCL) is the main New York State law which governs how
co-op corporations must operate. The decisions made by
courts in cases involving BCL provisions are the case law
which interprets the statute.
Q. Where can I find a copy of the BCL?
A. The BCL is published as volume 6 of McKinney's Consolidated
Laws of New York Annotated ("McKinney's") which can be found
in law libraries, many lawyer's offices and in certain
public libraries.
Q. What does the BCL provide?
A. Important provisions of the BCL, and the sections in which
they are found include the following:
- There must be an annual meeting of shareholders at which an
election for directors is held. (BCL Section 602).
- Shareholders must be allowed to vote by "proxy" (or
substitute) if they do not attend the shareholders meeting.
(BCL Section 609).
- Any shareholder may demand that an election inspector be
appointed in order to insure the fairness of the election.
(BCL Section 610).
- Upon request, any shareholder is entitled to receive a list
of all the shareholders, with the addresses of the
nonresidents. (BCL Section 607).
- The corporation must keep minutes of shareholder meetings
and correct, complete records of names and addresses of
shareholders which it must make available for inspection by
a shareholder or the shareholder's agent or attorney. (BCL
Section 624). There is no requirement, however, that minutes
of board meetings be made available.
- Any shareholder may, upon request, receive an annual balance
sheet and profit and loss statement for the past fiscal
year. (BCL Section 624). Be aware that these are frequently
not prepared until several months after the end of a fiscal
year. Also, offering plans should contain a commitment by
the sponsor to prepare annual certified financial statements
and distribute them to all shareholders as long as the
sponsor is in control of the board. If the sponsor continues
to sell, it must include such statements in amendments to
the offering plan.
- Any director may be removed for cause (that is, a good
reason). If the certificate of incorporation or by-laws so
provide, a director may also be removed without cause. (BCL
Section 706).
- If a director has a substantial financial interest in a
contract or transaction, this must be disclosed to the
board. Usually that director cannot vote on that contract or
transaction. (BCL Section 713).
- Any officer may be removed with or without cause (BCL
Section 716).
- Directors must act in good faith and with prudence. They
are, however, entitled to rely on information, reports and
financial statements which are prepared by officers,
committees, employees or outside professionals (like
accountants or lawyers). (BCL Section 717).
- Directors must act for the good of the corporation, with
undivided loyalty, not for their personal profit. (BCL
Section 720).
- Shareholders may sue directors and officers for misconduct.
(BCL Section 720).
Q. What's the best approach when the Board of Directors is not
complying with either the BCL or the co-op's internal rules?
A. A shareholder should tactfully point out this lack of
compliance to the Board, expressing the expectation that the
matter will be corrected. Sometimes this is all that is
needed to solve a problem.
Q. What if the Board won't respond to an oral request?
A. You should write a letter to the Board. It should be
factual, brief and not hostile. Keep copies of any letters
that you send, and notes of telephone conversations (date,
time, who called whom, and the gist of the conversation) in
case the matter is not quickly resolved.
Q. Should I do this on my own or get together with other
shareholders?
A. An attempt to influence the board is always more persuasive
if it is presented by a significant number of shareholders.
If your problem is one that will affect others too, it is
worth organizing the other shareholders. If you do, and the
attempt to change the situation is not successful, the
organized group can always seek to elect new directors at
the next annual meeting.
Q. What if the Board still doesn't respond to my complaint.
Should I hire a lawyer?
A. If the situation is serious enough, you may want to retain a
private attorney. However, keep in mind the following:
- It is a good idea to select someone with experience in
handling co-op shareholders' problems. You could begin
looking for an attorney by talking with shareholders in your
co-op or other co-ops or with attorneys in other specialty
areas. If this fails, you may wish to contact a local Bar
Association for referrals.
- Some lawyers will not charge for a single initial
consultation or will charge only a minimal fee.
- Most lawyers will attempt to resolve any matter through
negotiation before considering litigation, as litigation is
costly and usually lengthy. Litigating against the Board of
a co-op, people with whom one lives, can also be very
unpleasant.
Q. How long can a sponsor control the Board of Directors?
A. Co-ops are generally established by a sponsor which files an
offering plan with the Attorney General's office and then
can sell co-op shares to the public. When the co-op becomes
effective (established), the sponsor usually owns most of
the shares and thus controls the Board of Directors. In most
cases the Attorney General requires sponsors to promise, in
the offering plan, that they will give up their control of
the Board if Directors after they sell over fifty percent of
the shares, or after five years have passed since the
closing, whichever comes first.
Q. What does giving up control of the Board of Directors
actually mean?
A. It means that the sponsor cannot designate or nominate the
majority of the directors. But a sponsor is not prevented
from voting its shares for shareholders who have similar
views, as long as the shareholders are not on the sponsor's
payroll or otherwise given money by the sponsor.
Q. How can the Attorney General's office help me?
A. The Attorney General's office regulates the offer and sale
of real estate securities (which includes shares in co-ops)
by the sponsor. If the sponsor of the co-op is still
controlling the Board of Directors or is not keeping the
commitments which it made in the offering plan, the Attorney
General's office may intervene on your behalf.
Q. Does that mean that the Attorney General's office cannot
help me unless I'm having a problem with the sponsor?
A. Not necessarily. If a bank is threatening to foreclose on an
underlying mortgage, for instance, the Attorney General's
office may be able to intervene whether or not the sponsor
is involved.
Q. How should I contact the Attorney General's office?
A. Send a letter to: Real Estate Financing Bureau, New York
State Department of Law, 120 Broadway (23rd floor), New
York, New York 10271.
We hope that the above answers have been helpful in figuring out
solutions to problems with a co-op's Board of Directors. However,
keep in mind that if serious problems arise, which the Board is
not addressing, such as a bank threatening to foreclose on an
underlying mortgage or a sponsor failing to pay maintenance on
unsold shares, it is important to act swiftly. Often such
problems can be resolved, relatively simply, if shareholders
organize and act right away.
Remember that members of co-op boards are usually other
shareholders who are serving without pay. They generally want to
resolve problems and keep peace in the building.
Good luck!
G. OLIVER KOPPELL
Attorney General of the State of New York
August 1994
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