Understanding the Business Corporation Law
A Co-op's Base Line
If you live in a co-op, as opposed to a condo, in New York State, chances are that your co-op has been organized under the designation of the Business Corporation Law, or BCL.
But what is the BCL? The BCL, which has been in force for more than a century, is basically a law governing corporations chartered within the state. And since co-ops are corporations, over time it began to be applied to co-ops.
Among the topics it covers are boards of directors, shareholders' rights and obligations, board meetings, elections, certificates of incorporations, filings, fiduciary responsibility and more. Much of the law can be found online at http://law.onecle.com/new-york/business-corporation/index.html.
"Most of the co-op housing corporations in New York State were organized under the BCL," says attorney Richard Siegler of Stroock & Stroock & Lavan LLP. "If you file a charter under the BCL, you submit yourself to that law."
Bruce Cholst, an attorney with Manhattan-based Rosen & Livingston, added, "The BCL is an integral law, and should be side by side with your bylaws and your certificate of incorporation. They all act together.
"There are two aspects to a co-op: its existence as a legal entity, and the fact that it's basically a landlord," he says. The BCL, bylaws and certificate of incorporation all deal with the co-op's first aspect, whereas the propriety lease applies to the second.
When did the Business Corporation Law begin to be applied to co-ops? Those interviewed for this article didn't provide a precise date, but all agreed that this has been the case for a long time. Attorney Theresa Racht of the New York law firm of Racht & Taffae LLP, says, "Its application to co-ops has been applied since I started working with co-ops in 1979."
Attorney Steven Wagner of Wagner Davis PC cautioned that some earlier co-ops were formed under another law, the Cooperative Corporations Law. "That law was enacted for agricultural cooperatives," he says, "but because it has that name, they used that law."
One difference involves cumulative voting (designed by Investorwords as a voting system that gives minority shareholders more power, by allowing them to cast all of their votes in a board election for a single candidate, as opposed to regular or statutory voting, in which shareholders must vote for a different candidate for each available seat) vs. straight voting. Under the BCL you need an amendment to the certificate of operation authorizing cumulative voting, while in Cooperative Corporations Law, cumulative voting applies by stature, Wagner says.
All in all, however, the percentage of co-ops under the jurisdiction of the BCL "is in the high 90s," says Wagner. By the way, Mitchell-Lama co-ops and certain formed pursuant to different statutes, but even there, he says, there is in some instances a limited applicability of the BCL. "In the absence of other language, you go to the BCL."
The BCL and Your Co-op
Now that we know about the BCL and what it governs, how does it apply to the day-to-day operations of a housing cooperative?
It governs board elections, defines many shareholders' rights and obligations to shareholders, how board meetings should be conducted, how board elections are conducted and even how board members should be removed from office.
Key sections, says Racht, "deal with proxies, conducting annual meetings, special shareholders' meetings, the election of shareholders and officers and amending documents. Other sections that I refer to deal with reviewing documents and the rights of shareholders."
The BCL also comes into play when the co-op gets involved in a lawsuit—although not always.
"It has little impact on third-party claims, or when the co-op is evicting someone for non-payment," says Wagner.
However, when someone sues the co-op or board members for "improper actions" including waste, mismanagement or breach of fiduciary duty, the law comes into play more significantly—both in defining the obligations and rights of the parties, and in insurance and indemnification (a subspecies of compensation under the law).
Racht also says that the type of lawsuit determines whether, and how, the BCL applies. For example, if someone is suing over whether a flip tax, or fee for the sale of a co-op unit, is legal, then the BCL comes into play, she says. Under the BCL, a flip tax, to be valid, has to be mentioned in the bylaws, proprietary documents or offering plan.
The BCL also comes into play in cases of contested elections—questions can include whether enough notice about the election was given under the bylaws, and if proxy voting took place, whether the proxies followed the law's requirements.
"One thing that comes up from time to time is, 'How to you remove a director from a board?' There, you usually refer to the BCL," she says.
Obviously, the Business Corporation Law is a New York State statute. However, according to the attorneys we spoke to, other states all have their equivalents.
Changes in the BCL
Like other laws, the Business Corporation Law has been amended over the years.
Some of these amendments have been made to keep up with changing technology. "For example," says Siegler, "there is now a provision for telephone conference calls. Fifty years ago, they didn't exist. Now, they are absolutely used by co-ops." Similarly, making proxy votes by fax or other forms of electronic transmission is also expressly allowed nowadays.
Wagner says that in his understanding, amendments have been made for two reasons. The first, he said, is "to avoid or correct a situation that has arisen out of court determination."
For example, one court decision held that within a co-op, flip taxes had to be equal, on a per-share basis. In the mid-1980s, the BCL was amended to allow flip taxes to be based on criteria other than the number of shares—such as a percentage of gross sales price.
"This is the only time I'm aware that an amendment was made solely to take into account co-op housing issues," said Siegler.
The second reason amendments have been made, Wagner said, comes about through competition with other states—remember, the BCL applies to corporations in general.
"New York State competes with other states for filing fees and taxes paid by corporations, and New York prides itself as being one of the leaders in commercial leaders," Wagner explains. "Another time we change is to stay competitive where other states have enacted changes in the law."
As an example, he gives the matter of indemnification of officers and directors. In the late 1980s, he says, the law was amended to allow much greater indemnification of boards. In this case, he says, "New York enacted statutes similar to those in Delaware."
Explaining how important this topic is, Racht elaborates: "A co-op is run by volunteers. Many people do not want to serve unless they're sure that if they're sued they will be defended by the corporation, or that the corporation will advance money [if the shareholder or officer elects to hire his or her own lawyer] under the BCL."
An important series of amendments to the BCL (some of which like the one about sending proxies by fax we've already mentioned) were made in 1998.
Cholst recently detailed some of them. For example, before 1998, it was necessary to obtain the approval of the holders of at least two-thirds of outstanding shares to make an amendment to a co-op's bylaws. In 1998, the requirement was changed so that now only a bare majority of the votes cast at a shareholders' meeting where a quorum is present is required to amend the bylaws.
Also, says Cholst, before the overhaul of the BCL in 1998, boards were permitted to ignore any provision in the bylaws requiring the appointment of election inspectors, as long as no shareholder demanded such an appointment. But now, if a co-op has such a provision in its bylaws or certificate of incorporation, the board must comply and appoint election inspectors.
In the past, the same person was prohibited from serving as both president and secretary of a co-op. Now, the same person can serve in both positions.
Consult Your Attorney!
What should board members and managers know about the Business Corporation Law and how it affects their buildings?
Those attorneys interviewed for this article were unanimous: consult an attorney who is familiar with the BCL and its application to co-op operations.
If we're not talking only about the actual Business Corporation Law, the board members and managers can also consult their bylaws and certificate of incorporation.
"Often, the answers to questions I receive are answered directly by the bylaws, and what I do as part of my practice is to not only take them to the section that's applicable, but get them used to looking at the bylaws," says Wagner. "The bylaws were adopted in most cases pursuant to the BCL."
But when it comes to the BCL itself, it's better not to "play lawyer," no matter how intelligent, well-informed and accomplished in other fields you are.
"I have a shareholder in a building I represent who's a podiatrist—he thinks he's a lawyer - who keeps citing sections of the BCL to me, and he's totally wrong," says Racht. "I've seen managing agents do the same things. Leave it to the professionals."
Raanan Geberer is a freelance writer and editor living in New York City.