Q&A: Transparency of Board Operations
Q “A number of shareholders have raised questions about the management of the our co-op corporation. The board has been largely in place for 10 years, the managing agent for 20, and the board retains an attorney, who also served the enterprise for 20 years. The major issues involve a lack of transparency.
“The board guards the co-op’s information citing the business judgment rule as a justification. The reasons for the questioning include the citing of fuel increases as a justification for assessments, surcharges, and maintenance increases and preferable treatment toward a group of shareholders that are friendly with the board president. You cannot even get basic access to financial documents, aside from the bare-bones year-end audit.
“My questions are: first, what is the role, responsibility and relationship of the retained attorney in terms of the shareholder? He spends a lion’s share of his time developing defenses for the board’s actions and excess. Second, does the New York State Freedom of Information Law (FOIL) provisions provide shareholders with the right to request such information—albeit in its raw, non-analytic form?”
A “The situation described is not uncommon- a well-entrenched board giving its shareholders the bare minimum of information it is obligated to provide,” says attorney Stewart W. Wurtzel, with the Manhattan-based law firm of Deutsch Tane Waterman & Wurtzel, P.C. “Shareholders desirous of more information find it difficult, expensive and/or impossible to obtain voluntarily. Shareholders sometimes believe they have the right to call the building’s attorney or management directly for answers because they believe these individuals ‘work for the shareholder.’
“However, the legal rights and relationships are not that succinct. The co-op’s attorney and managing agent work for and on behalf of the corporation, a legal entity distinct from the shareholders and the individual board members. The corporation acts through its board of directors and both management and counsel report directly to and serve at the pleasure of the board. There is no obligation—and in fact, would be a breach of the attorney/client privilege—for the building’s attorney to divulge information directly to a shareholder without board approval. The attorneys’ job is to advise and counsel the board of directors to ensure that its actions comply with law, not only federal, state and local laws, which affect the operation and maintenance of the building, but the corporations’ internal ‘laws’ such as the bylaws and the certificate of incorporation. The counsels’ duty is to advise the board of the propriety or impropriety of their actions; it does not extend to advising shareholders of the same information.
Further, the Freedom of Information Law does not apply to cooperatives or condominiums and applies only to governmental entities. There is no obligation to provide a shareholder with any information pursuant to a FOIL request. This does not mean that a shareholder in a cooperative is not without legal recourse to examine books and records. The Business Corporation Law requires the cooperative to keep books and records and shareholder lists. Pursuant to statute, the shareholder lists are available for inspection by shareholders for a proper corporate purpose. But shareholders also have a common law right to inspect the ‘books and records’ of the cooperative at management’s office, though there is no clear cut definition as to what is encompassed by the phrase ‘books and records.’ Many buildings will allow shareholders an opportunity to schedule an appointment to inspect the records, which may well include bills received from vendors. If the building refuses to allow such an inspection, the shareholder does have the right to go to court to get an order compelling the cooperative to give access to the books and records.
“The problems described in the question are often caused by what shareholders perceive to be a lack of information coming from the board. At many meetings, shareholders ask for a newsletter or for the board to distribute information. Many do. Shareholders must recognize, however, that many boards are already overtaxed with the amount of work they need to do on behalf of the building and that time to do an additional monthly newsletter is unavailable. Often, a newsletter committee is able to assist the board in preparing and distributing a newsletter allowing necessary and relevant information to flow to the shareholders. And while the board is legally correct—the business judgment rule would generally shield them from any challenge as to the amount of information they choose to give to shareholders—most boards want the shareholders to know what they are doing on their behalf.”