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Ruling the Roost
Modernizing Cooperative Bylaws
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The bylaws provide the guidelines for the relationship between the corporation, its board of directors and the shareholders. Conversely, the proprietary lease or occupancy agreement deals with the landlord-tenant relationship between the corporation as landlord, and the shareholders as tenants. Although the proprietary lease or occupancy agreement gets a great deal of attention because they deal with the operation of the building and the resident’s homes, the bylaws are just as important. They establish the board of directors and provide it with the power to manage the corporation’s affairs. It is the bylaws that provide the corporation with its directors and establishes their authority.
It should be noted that there are other documents that are also considered “governing” instruments—including the Articles of Incorporation and, in some cases, the Regulatory Agreement with HUD. While these should be examined for applicability, this article focuses on the bylaws, which contain the most relevance in terms of the day-to-day operation of the cooperative.
It is also important to note that HUD-assisted or insured cooperatives or those with bylaws mandated by a lending institution or others may not have the right to amend their bylaws without the approval of HUD or another institution. Nevertheless, boards of cooperatives whose actions are limited should still review this article for ideas for improving their operations, as well as changes they can make after their financing is repaid.
Avoiding Litigation
Over the last decade, we have seen an escalation of litigation involving the operation of cooperative corporations in areas covered by their bylaws; litigation that could be avoided with properly written bylaws that are carefully followed by the board of directors. Areas of frequent litigation include such issues as the process of electing and removing a board of directors; the power of the president and other corporate officers; how and when annual and special shareholder meetings are to be called; the ability of a board to allocate the corporation’s shares; the indemnification of officers and directors by the corporation; the right to impose special assessments; the right to terminate resident or equity status, and Fair Housing Act issues.
Because bylaws are so important, it is imperative that they be reviewed periodically. This is to make sure that they comply with changes in state and federal legislation relating to the operation of a corporation, that they are consistent with court decisions, and that they provide the appropriate framework for the operation of the corporation. Since the bylaws are based on the corporate law of the state in which the corporation was formed, they could be affected by legislation and decisions that have nothing whatsoever to do with housing cooperatives. That is, your co-op building could be affected by decisions and laws targeted for other types of corporations.
It is incumbent on the board of directors of a cooperative housing corporation to periodically examine its bylaws to make sure they make sense in light of the co-op’s actual business practices. Examine how your cooperative is actually operating compared to what is called for in the bylaws. If there are discrepancies, perhaps amendments are necessary.
Moreover, because members of the board may not be aware of changes in the law and developing case law, the board should request that corporate counsel either keep them regularly informed of changes in the law. Counsel should also examine the bylaws and advise the board of what actions they should take in order to avoid problems in the future. This should be an ongoing process, undertaken at least every five years, if not annually.
Updating Your Bylaws
It is difficult to generalize as to the areas of the bylaws that could require updating because that would depend on the age of the existing bylaws and whether there have been significant court decisions or legislation since they were enacted or were last reviewed. The other area of concern is that most bylaws were written by the sponsor’s counsel and reflects the sponsor’s concerns, rather than issues that would facilitate the orderly operation of the co-op. It is therefore particularly important for the board of a new cooperative to undertake this review and revision as soon as the sponsor transfers control of the corporation.
One of the problems with the bylaws used by many cooperative apartment corporations is that they have simply been adapted from corporate documents and may not deal with the kind of problems that a residential co-op would encounter. In that regard, reviewing the bylaws is not so much an issue of modernizing them as customizing them to the appropriate use. Unlike other corporations, every decision a board of co-op directors makes will have an effect on the lives of its shareholders.
In modernizing its bylaws, a co-op should pay particular attention to the indemnification of officers and directors in order to make certain that the board has the maximum protection available. As a result of litigation against boards of directors during the last ten or 15 years, various state legislators have increased the available protection for board members. This protection should be incorporated into the cooperative’s bylaws.
In addition, modernizing bylaws can also help a board take advantage of changes in technology that could improve building operations. For instance, in most states board meetings can be held by telephone conference call and shareholder proxies can be faxed—two options which were not available in the past. In the future, we may see authorization of board meetings by e-mail, and bylaws would have to be updated to permit that.
Other aspects of bylaws that frequently require review and updating relate to things like mandatory insurance, actual meeting dates, board election procedures and quorum requirements for shareholder meetings.
The Amendment Process
The process of amending a building’s bylaws varies, based upon the co-op’s particular incorporating documents, the amending procedures contained in the existing bylaws, and state law. Generally, however, most bylaws can be amended with the vote of two-thirds of the shareholders. In some cooperatives, bylaws can also be amended by the board—as long as the board does not change a provision originally enacted by the shareholders. Although this later option provides the board with a great deal of latitude, it can be tempered by limiting the bylaws that the board can amend to just those that relate to administrative issues.
Occasionally, bylaws become so outdated that it is easier to just enact an entirely new set rather than go through the laborious task of incorporating all of the required changes into the old set. In another common situation, a cooperative formed under a particular government program was given the boilerplate bylaws used by the government agency at the time of formation when the shareholders’ and boards’ rights were limited, and it has since become inadequate or irrelevant.
Operating a cooperative corporation is a complex procedure requiring a Board to stay on top of numerous details. A well-written and respected set of bylaws will provide the board with a roadmap of how to do its job properly and avoid aggravation and litigation.
Stuart M. Saft heads the real estate law department at the Manhattan-based law firm of Wolf Haldenstein Adler Freeman & Herz LLP. This column and the accompanying sidebar originally appeared in the May/June 2000 issue of the NAHC’s Cooperative Housing Bulletin.
