Q&A: Conflict of Interest Issue

Q I’m a board member of co-op building. We have one member of the board who is a real estate broker. He brought one issue to our attention. Our co-op is an owner of a very small piece of land that is adjacent to another building near ours. The owner of this building, through our board member who is a real estate broker, wants to rent this piece of land from our co-op. He will pay commission to this broker and monthly rent to the co-op. Some members of the board think that we have a conflict of interest between client, customer and a broker and some think that it’s unethical for a member of the board to make such business. We have to make a decision and we’re not sure what would be the right thing to do. Any advice? —Conflicted Board Member

A Dennis H. Greenstein, a Manhattan co-op and condominium attorney, and a partner of Seyfarth Shaw, LLP, advises that, “The issues relating to interested directors raised by the letter writer are addressed in the New York State Business Corporation Law (BCL), and the cooperative’s certificate of incorporation, and its bylaws may provide guidance as well. The broker board member has disclosed to the board that he or she is acting as real estate broker and is seeking financial consideration from the owner of the other building and therefore is an ‘interested’ director.

“Section 713(a) of the BCL provides in part, that NO contract or other transaction between a corporation and one of its directors, shall be either void or voidable for this reason alone or by reason alone that such director is present at the meeting of the board, or of a committee which authorizes such contract or transaction, or that his or their votes are counted for such purpose if, i) the material facts of such director’s interests are disclosed in good faith or known to the board or committee which authorizes such contract or transaction by a vote without counting the vote or votes of such interested director, or ii) if the material facts as to such director’s interests are disclosed in good faith or known to the members entitled to vote thereon, and such contract or transaction is authorized by a vote of such members.

“Section 713(b) of the BCL states if such good faith disclosure of the material facts as to the director’s interests is made to the directors or known to the board or committee authorizing such contact or transaction as provided in paragraph (a), the contract or transaction may not be avoided for the reasons set forth in paragraph (a). However, if there was no such disclosure or knowledge, or if the vote of such interested director was necessary to authorize the contract or transaction, the corporation may avoid the contract unless it is established that the contract was fair and reasonable at the time it was authorized by the board.

“Section 713 further provides that the cooperative’s certificate of incorporation may contain additional restrictions on transactions between a corporation and it its directors and if they violate such restrictions may be void or avoidable.

“In addition to following the BCL provisions, the letter writer should have the cooperative’s counsel review the bylaws and certificate of incorporation to see if they contain any provisions dealing with interested directors. My view of best practices is that the broker board member should recuse him or herself from any discussion or vote by the board regarding whether or not the cooperative wishes to rent the land owned by the cooperative. While the broker board member’s presence may be counted toward a quorum if the board proceeds with the transaction, the broker board member’s vote should not be counted in the tabulation.

“I suggest that the board enact a policy which among other things, prohibits an interested director from discussing or voting on any matter involving the cooperative in which he or she has a financial interest. Lastly, every board member must discharge his or her duties as a board member in good faith. It is not clear in the letter if the broker board member acted on his own initiative to offer the cooperative’s land for rent. While the end result may benefit the cooperative which would receive rental income from the transaction, a board member and particularly a member who has a financial interest in the matter should not unilaterally solicit third parties without specific authority of the board. If a member is deemed to have acted in bad faith, such member may not be protected from liability by the indemnification provisions of the cooperative’s governing documents or directors and officers liability insurance.”

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