All too often boards of co-ops and condos find themselves at the mercy of the conversion sponsor. Wielding his influence over the building and all its affairs, the sponsor's goals are frequently in contrast with those of the board and building: He wants to sell his units quickly and make a profit, while the board wants to enhance the quality of life and financial stability of the corporation. With knowledge of the building's governing documents and constant planning, however, boards can move out from under the sponsor's thumb.
Failure to do so can lead to serious damage to the building's finances and affect the quality of life of all residents. In one Nassau County complex, for example, the sponsor voted to keep monthly maintenance levels artificially low in order to spur the sales of his units. Since the co-op was deprived of necessary operating income, the building sank into disrepair. Three years later, after the sponsor had sold all his units, the new board was forced to increase maintenance fees by 30 percent to cover the cost of necessary repairs. In another example, a Manhattan co-op's sponsor used his influence to veto a security system it deemed too expensive, even though every tenant-shareholder in the building was willing to be assessed to have the system installed.
Staying in Power
The main way sponsors continue to influence decisions is by maintaining representation on the board. This is accomplished long before the conversion, when their attorneys first draft the offering plan and bylaws. Virtually every set of bylaws contains a section which describes the qualifications for board membership. Most sponsor's attorneys are careful enough to provide that non-residents (i.e., absentee investor sponsors) may serve as directors. In addition, most qualification provisions state that board members need not be shareholders, thus permitting a sponsor's employees to serve as his representatives on the board.
Many bylaw provisions and offering plans contain legal devices specifically designed to enhance the sponsor's voting power. While in straight voting, each shareholder is entitled to cast only one vote per share per director, devices such as cumulative voting provisions and designation rights enable the sponsor to cast more than one vote per share for each contested board position.Cumulative voting allows the sponsor (and any other shareholder or unit owner) to concentrate all of his voting power on a small number of candidates rather than forcing him to dilute it among the entire slate of candidates, thus enabling him to target candidates of his choice. The typical designation provision allows the sponsor (and only the sponsor) to appoint a specified number of board members irrespective of his actual voting power. For example, he has the right to appoint or designate three out of seven directors so long as he retains a 35 percent equity interest, two directors so long as he retains a 25 percent equity interest and one director so long as he continues to own at least one unit. The sponsor is thus assured board representation vastly out of proportion to his voting power.Sponsors almost invariably protect themselves against the possibility that these safeguards will be amended out of existence by a resident majority by providing that any by-law amendment which is prejudicial to their interest requires their written consent before taking effect.
Limits of Sponsor Control
While the building sponsor may use legal loopholes to keep his position on the board and thereby exert his influence, board members should be aware that their hands are not tied in limiting the sponsor's voting power.