Business Corporation Law A Few Things Every Board Should Know

The Business Corporation Law, or BCL, is one of the primary statutes regulating operation of cooperative housing corporations. The BCL was implemented over a century ago, and remained more or less unchanged until it was overhauled in 1998. The BCL provides a template for managing the board election process and protecting shareholders’ rights, and outlines legal methods of corporate governance. The following is a summary of some of the key points in the BCL impacting cooperative apartment corporations—things every board member and managing agent should be aware of, plus some points that should be of interest to shareholders themselves. (It should be noted, however, that these items apply to co-ops’ bylaws and Certificates of Incorporation, not their proprietary leases.)

Corporate Governance

Enactment of Bylaw Amendments: Prior to the changes in 1998, approval from holders of at least two-thirds of all outstanding shares was required to effect an amendment to a co-op’s bylaws. Currently, approval of only a bare majority of all outstanding shares is required. A bill that passed the state legislature shortly after the 1998 overhaul further reduced the requisite vote for amending co-op bylaws to a bare majority of the votes cast at a shareholder’s meeting at which a quorum is present. (As indicted below, under certain circumstances, bylaws amendments may now also be enacted without the formality of a meeting.)

In addition, a resolution by the board (without shareholder approval) to the extent authorized in the co-op’s bylaws or its Certificate of Incorporation may also amend bylaws. However, any such board-enacted bylaw is subject to repeal by vote of the shareholders. By switching from the super-majority requirement to the more flexible requirements in effect today, the BCL greatly enhances boards’ ability to effect necessary governing document revision. It also facilitates more shareholder initiatives to effect changes—even over opposition from their board.

Shareholder Action without Necessity of Meeting: If the cooperative’s Certificate of Incorporation so provides, shareholder action may be taken by less than unanimous (but not less than majority) written consent. Notice of any action taken in this fashion must be provided to those shareholders that did not issue their written consent. This BCL provision requires that all consents must be signed within 60 days.

Boards may wish to take advantage of this aspect of the law—which obviously facilitates the shareholder approval process—by enacting the appropriate amendment to their Certificate of Incorporation; such an amendment requires approval by both the board an the shareholders.

Convening and Conducting Shareholder Meetings: The BCL does not deal explicitly with issues such as who presides during meetings, what parliamentary rules govern, nominating procedures, proper format for committee reports, the method and timing of notices, the format of proxies, or methods by which questions from the floor are fielded. The absence of clear-cut guidelines regulating the precise manner in which shareholder meetings are noticed and conducted often lead to confusion and sometimes rancor at shareholder meetings. This is particularly the case when insurgent shareholders perceive that the rules are being arbitrarily applied for the sole benefit of the incumbent board. The BCL explicitly permits (but does not require) boards to amend their bylaws to establish such administrative guidelines, which would then be binding upon all subsequent meetings.

The statute requires that any such regulations be circulated to shareholders “In a manner reasonably calculated to provide [them] with sufficient time to respond prior to such meeting,” (i.e. to mobilize a proxy fight in accordance with the new rules.)

Participation in Board Meetings: A decade ago, board members were not legally able to participate (i.e. be deemed legally present for quorum or voting purposes) in board meetings via conference call unless such participation was expressly authorized in either the building’s Certificate of Incorporation or its bylaws. Under the BCL, participation of this nature is permitted unless otherwise prohibited in the co-op’s governing documents, though the conference call facility must be of such a nature that “All persons participating in the meeting…[are able to] hear each other at the same time.” Dual Official Capacity and Committees of the Board: In the past, the BCL also prohibited the same person from serving as both the President and Secretary of their co-op. Now, such dual service is permitted. It’s also permissible for board committees to be comprised of as few as one board member. Changes in the Election Process The Record Date: Boards are permitted to establish, by resolution, a date of up to 60 days in advance of the shareholder meeting (the Record Date) for determining which shareholders are entitled to notice of the meeting and voting privileges thereat. Any shareholder acquiring his stock subsequent to the Record Date is not eligible for notice of or participation in the next shareholders’ meeting.

The established Record Date cannot be less than 10 days prior to the shareholders’ meeting. When a shareholders’ meeting is adjourned but still held within 60 days of the original Record Date, a new Record Date need not be established.

Notice Date Regarding Shareholder Meetings: The BCL permits notices to be served as early as 60 days in advance of a shareholders’ meeting. Notices cannot be served later than 10 days in advance of the shareholders’ meeting, however. Form of Proxies: Giving of proxies by facsimile, telegram, or other means of electronic transmission is explicitly permitted, provided that such a proxy contains or is accompanied by an explicit authorization by the shareholder with regard to transmission of the instrument in this fashion. In validating this kind of proxy, the Inspectors of Election are required to set forth in writing the nature of the evidence upon which they relied to determine the existence of such authorization. (We recommend that the requisite authorization language be written into the proxy form.)

Finally, copies of a proxy are deemed to constitute acceptable substitutes for the original document…“Provided that such a copy…shall be a complete reproduction of the entire original writing or transmission.”

Inspectors of Election: Before the 1998 BCL overhaul, boards were permitted to ignore any bylaw provision requiring appointment of inspectors of election—so long as no shareholder demanded such an appointment. Currently, if such a provision exists in the building’s bylaws or Certificate of Incorporation (which is usually the case), compliance is mandatory.

In determining the validity of proxies and ballots, inspectors are limited to a review of the document itself, any envelope in which it may have been submitted, and the stock book of the corporation. However, in the event that any ballot or proxy reflects more shares than the quantity of shares reflected in the stock book, the inspectors may consider “other reliable information” for the limited purpose of reconciling the conflicting share allocation. In their written report, inspectors are required to detail the precise nature of the “other reliable information” utilized for the purposes of reconciliation—including the person from whom they obtained the information, when the information was obtained, the means by which it was obtained, and the basis for their belief as to its reliability.

Treatment of Abstentions: In the past, some boards treated abstentions by those shareholders who were present (either in person or by proxy) at the meeting as votes cast for purposes of achieving the requisite majority to validate a resolution. This practice had the effect of substantially raising the minimum number of actual votes in favor of the subject resolution necessary to achieve its passage. Now, except as otherwise provided in the Certificate of Incorporation or a bylaw enacted by shareholders, an abstention may not constitute a vote cast. Shareholder RightsInspection of Books and Records: Under the BCL, any shareholder has standing to review certain important building documents—such as financial statements, shareholder lists, or the minutes from shareholder meetings. Shareholders may also make extracts from said documents, provided the review be for “Any purpose reasonably related to such person’s interest as a shareholder.”

Shareholders also have the right under case law to review the corporation’s other books and records, so long as the inspection is sought in good faith and for a purpose consistent with the shareholder’s right to monitor his investment in the corporation.

Bruce Cholst is an attorney and a partner with the Manhattan-based law firm of Rosen & Livingston.

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19 Comments

  • You state that shareholders have the right under case law to review the corp's other books and records. (a) What are those books and records (e.g. board meetings, records of dispursments and receipts, contracts for service, etc..) (b) can you site the case law. My email address is e_landlord@yahoo.com
  • after annual voting for directors, winners were disqualified. Does this mean the persons whom shareholders did not want to serve - serve by default for a full 3-year term, or is a new election called for?
  • i am a fixed income retired man who is working to understand the cooperative system we live under. the board, managaing agent, and legal advisor to the board have been in place for many years. there is so much to tallk about,, fior now it is enough to learn about proxies at the annual meeting that seem rigged to ensure this board cannot lose an election -- giving the confusion of the language of the offering plan on voting and proxies and of the actual proxy form and procedures themselves. I have never seen one that mixes up people more. for example, on voting ia proxy, it llists in bold print choose either (names the president by name and title) or it follows with a dim blank line. The presiident simply gets the proxies since not many peeople attend the meeting-- casts votes for himself and his entire board (the offering plan says plurality, but (?) seems like you vote for 7 people who get your number of shares each (not cumulative). Of course a floor nomination is useless -- proxies in and attendance is sparse. I am 71 years old, poor but honest, and i would appreciate any help and advice plus an abilility to see samples of proxy forms. If reasonalble in cost, I would love to join your membrship so i can keep abreast. can you help regards warren
  • How can majority of board members decide to change the Management company for their bad performance and mismanagement?
  • Can the Board pass a resoluton without asking for a vote from the cooperators?
  • I am to understand that if the Board enacts a bylaw that a majority of shareholders do not agree with, the shareholders can vote to overturn this new "bylaw"?? Can it be done by petitioning the shareholders? Thank you.
  • Can shareholders make copies of the corp records/book ,corp accounting info etc to further review with an attorney or an accountant?
  • Can a sponser's vote be disallowed at a general meeting? The sponsor does not hold majority shares but has two permanent seats on the board.
  • Can a sponsor vote be disallowed at a general meeting? he has majority shares but management agent who runs the elections is partly owned by him in our past election the sponsors vote at the last second overturned the results by giving his votes to persons not wanted by the resident shareholders. Can he do this? can we demand a recount? Should spnsor who already has 2 seats representing him cast votes to overturn elections to put in his yes people? is this a conflict of interest? Thank You !
  • Concerned Shareholder on Wednesday, July 14, 2010 6:41 PM
    At an annual meeting of shockholders, if a quorum is not met, does the current sitting bd have 60 days to have another election? if so where is this listed in the BCL?
  • I have the same problem that the elderly gentleman has wih respect to a board that seems to use proxies as a means to insure victory. We have asked the board to provide us with a list of the voted shares, the shares that were absent and how those votes were applied to the current board and the nominees. The Board appointed an election monitor who is a neighbor and friend of the board member. If there were any issues raised with the proxies the board did not permit those issues to surface and the shareholders are left wondering if voting does any good when all the board has to say is we win and we are not telling you how because the individual we appointed says so. Can an election be contested.
  • You state that shareholders have the right under case law to review the corp's other books and records. (a) What are those books and records (e.g. board meetings, records of dispursments and receipts, contracts for service, etc..) (b) can you site the case law?
  • I am a shareholder residing in a "cooperative building". I would like to know what are the reporting agencies when the board has made the decision that it will not comply with the prescribed by-laws of the corporation. Thank you. I look forward to hearing from you.
  • I am purchasing a co op that has a terrace enclosure "grandfathered in". The managing board informed me that when the terraces are redone, NYS/NYC law states that a terrace cannot be closed in on 3 sides and the enclosure must be removed. Is that the law??
  • There is a total of 5 shareholders 2 of which are concerned about the future of our building we recently found out that the Treasurer has withdrawn cash from atm with buildings bank card from the period of 2008-2011 totaling over 25k and checks written to her son which we were never inform was working for the building over $14k in checks, President was self managing no meetings no financial reports and no Elections for 3yrs we informed UHAB non profit organization contracted by city to intervene to tell Treasurer to step down from her postion until further investigation but nothing was done about it aNd Treasurer is still in control of the buildings money we owe over4 300k in taxes we want to know how can we make this shareholder release her rights as a shareholder and pay all monies taken back to the corporation , Who can assist us where do we go ? who do we make our complaint to? Thank YOu
  • If there is an official election can the sponsor who did not vote elect to secretary of the coop. Are all the shareholders and the Board member must be notified of an election in advanced.
  • What is books and records included
  • Asking the same question as Mr. Stovel: You state that shareholders have the right under case law to review the corp's other books and records. (a) What are those books and records (e.g. board meetings, records of dispursments and receipts, contracts for service, etc..) (b) can you site the case law. Thanks
  • when will reverse mortgage be used for co-op owners /