The best rule of thumb for boards is to act as ethically as possible. That way, shareholders will never have a problem with the decisions the board makes, right? Wrong.
We live in an increasingly litigious society, where shareholders and residents sue co-op and condo boards for decisions the board makes on their behalf. If the decisions turn out well, everybody’s happy. If they don’t go well, resulting in costly expenses to the community, some people might sue, regardless of the good intentions of board members.
One of the most important legal frameworks governing corporation law is called the Business Judgment Rule, which is a court precedent that holds that a judge or court of law will generally not interfere or hold liable the decisions of a cooperative board as long as that board is acting in good faith in the best interest of their shareholders. The article will further explore how co-op boards can protect themselves from liability when administering their community.
Protection from Corporate Liability
The Business Judgment Rule, a court-created rule that pre-dates cooperative corporations themselves, is a common-law doctrine “by which courts exercise restraint and defer to good faith decisions made by boards of directors in business settings.”
“Despite its age, the rule is no less vigorous today,” says Marcie Waterman Murray, an attorney with Deutsch Tane Waterman & Wurtzel, P.C., a Manhattan law firm that specializes in co-op/condo law and litigation. “It creates a presumption of the validity of a decision of a corporate director (and, it is often thought, of officers as well and sometimes even board committees) in the absence of fraud, self-dealing, unconscionability or other misconduct.”