What Your Board Must Disclose – Shareholder Rights | HOA Board Election Rules: Ensuring A Fair & Successful Election | HOAM

Whenever a resident, board member or building owner gets frustrated by inaction or the process of wading through the bureaucratic red tape of board politics, it’s hard to know where to turn for a solution.

Hostility accomplishes little, however, and lawsuits are expensive; in matters of 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 Michael Horwitz, a principal with Horwitz & Zim Law Group, PC in Manhattan. “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.”

Even those less-litigious options might not even need to be explored if both board members and shareholder/owners are made aware of the primary state statute that spells out the finer points of running a fair, functional, and financially transparent building. That statute is New York State’s Business Corporation Law, or BCL.

Understand Your Governing DocumentsThe first step to understanding the intersections between board operations and shareholder/owner rights is to understand that the decisions a board makes are guided by a hierarchy of governing documents that includes the building’s Certificate of Incorporation, its proprietary lease, its house rules, and its bylaws. This interlinking web of papers and protocols must in turn comply with the BCL, which lays out the duties and responsibilities of directors and officers and outlines shareholder/owners’ rights to information and participation in the running of their building.

In today’s climate of corporate shadiness and financial mismanagement, practicing disclosure and fairness can foster open, productive communication between boards and residents and save both parties a lot of potential legal headaches – regardless of whether your building has 14 units or 414.

At a GlanceThe BCL, according to the state Attorney General’s office, 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.

Typically, the bylaws and proprietary lease will let residents and board members know when annual shareholder meetings and elections to the board of directors are held, and how notice is given; the rules governing sponsors and how many seats they may be allotted on the board of directors; when a special meeting can be called; the specific procedures for amending the bylaws; the quorum for voting and holding a proper meeting; and sublet provisions. The BCL also spells out provisions for holding annual meetings; voting by proxy; allowing shareholders the right to view copies of balance and loss statements and other financial documents; and removing directors with or without cause.

The BCL, as should the co-op’s governing documents, require that at least one annual shareholder meeting should be conducted, even if no one complains. 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. According to Horwitz, 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.”

And residents should protect their interest by using a proxy, according to Marc Schneider, of counsel to the law firm of Rosenberg & Fortuna, LLP 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.”

The board is also responsible to keep and maintain an updated master list of all shareholders’ names and addresses. According to Horwitz, a co-op board is no different from the board of a regular corporation. “Shareholders are entitled to a list because they’re shareholders,” he says. “If residents are concerned about privacy and security, affidavits can be drawn up to protect their privacy.”

Keeping MinutesIt’s also a board’s responsibility to keep accurate, complete minutes of shareholder meetings, which, under BCL Section 624, boards must “make available for inspection by a shareholder or the shareholder’s agent or attorney.” It’s important to realize, however, that there’s a distinction between shareholder meetings and board meetings; while records of shareholder meetings must be kept and disclosed, the BCL makes no such requirement for the minutes taken during closed board meetings. However, this does not prevent the co-op’s bylaws from requiring such minutes. More often than not, board meeting 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 – and it’s a disservice to shareholders.”

Bad BoardsThe BCL also provides for removal of an inefficient or inept board of directors. But, of course, things have to deteriorate pretty badly before full-blown litigation or the removal of an entire board becomes a serious consideration. Any reputable attorney will nearly always advise diplomacy and mediation before recommending that a suit be filed.

Schneider urges disgruntled shareholders to remember that “boards have to abide by bylaws, and the BCL, but they don’t have to do everything you ask. Make sure you’re familiar with your lease, your bylaws, 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 building has any idea what kind of financial shape their co-op or condo 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? New York State Attorney General Elliot Spitzer’s office recommends the simplest approach first: a tactful verbal mention of a board’s non-compliance with its bylaws, proprietary lease, the BCL or other governing documents is often enough to do the trick – sometimes the problem is 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, united shareholder/owners 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 requests 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.

If a building-related issue goes beyond the friendly-conversation phase, it’s a good idea to keep copies of any letters sent – as well as records of phone conversations – with the date, time, involved parties, and general thrust of the communication spelled out, in case the issue isn’t dealt with immediately and past efforts to correct it need to be referenced.

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 and shareholders to avoid them in the first place by familiarizing themselves with their bylaws and offering plan, 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.”