Q&A: Board Ethics

Q Can the president of the co-op board be in business with the managing agent company’s owner without divulging it to the shareholders or other board members? The board members were recently notified that the owner is one of the board of directors and principal owners of a new bank that the co-op has refinanced through. Our board president who is dealing with the company owner is also an investor in this bank. I think the relationship between the management company’s president/owner has compromised the board president’s fiduciary responsibilities to the shareholders. I do not believe the board president has pursued problems allegedly related to the managing company’s poor performance since he wants to be on the good side of the very wealthy and connected owner. As of this time, the shareholders have not been informed of the board president’s business dealings with the owner of the management company.

—Unethical Relationship

A “It was certainly inappropriate as a matter of corporate governance for the board president to be involved, in the manner you have described, without there being full and prior disclosure to the board,” says attorney Michael T. Manzi, of the Manhattan-based law firm Balber Pickard Maldonado & Van Der Tuin, PC. “Keep in mind that any corporate officer may be removed at any time by vote of the board, with or without cause, and a board may elect to terminate a management agreement before the expiration of its term if the agent has failed in its obligations.

“New York’s Business Corporations Law does not specifically prohibit a co-op’s director or officer from having an interest in an entity with which the co-op transacts business (such as a managing agent or a bank).

“However such transactions must be handled carefully in accordance with section 713 (“Interested Directors”) of the statute. All directors or officers of the cooperative should fully disclose any interest they might have in any entity with which the cooperative intends to do business, and the board should then examine and approve the transaction without the vote of the interested director or officer. If the vote of all the non-interested directors is insufficient under the cooperative’s bylaws to approve the transaction, then the vote of the non-interested directors must be unanimous in order to approve the transaction. The interest of the director or officer need not be divulged to the shareholders, unless a vote of the shareholders is required to approve the transaction under the corporation’s certificate of incorporation or bylaws. However, the board might nonetheless consider announcing the transaction to the shareholders, along with an explanation of why it is advantageous to the cooperative. Compliance with these standards should be noted in the board’s minutes.

“Section 713 of the Business Corporation Law also provides that the cooperative may “void” a transaction if the “material facts” of the director’s interest in the transaction or other company were not disclosed in good faith or were not known by the board and the board approved the transaction by a vote that included, and depended on, the vote of the interested director, unless it can be established that the transaction was “fair and reasonable as to the [coop] at the time it was approved by the board . . . .” Thus, the interests of the president in the managing agent and the bank, in and of themselves, are not enough to void the transactions with the managing agent or the bank unless the transactions were unfair or unreasonable. Please keep in mind that “voiding” a mortgage would be extremely difficult and problematic.

“If a cooperative would like to flatly prohibit in the future any transactions with entities in which a director or officer has an interest, or any transactions directly with a director or officer, the cooperative’s certificate of incorporation should be amended accordingly.”

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