Q&A: Convicted Director?

Q “I live in a co-op in Queens that still has a small percentage of apartments held by the sponsor. Last year the sponsor was voted off the board (they held 2 seats). This year only one person was nominated and seconded by two people who attend the annual meeting from the sponsor’s office. The nominee was not present nor was there a letter of acceptance presented of his acceptance. He is sitting on the board but we became aware of the fact that he was cited by the SEC and convicted with three others of bank fraud a couple of years ago. He paid his dues along with the others he was involved with. Do you think that it is ethical for this person to be sitting on our board?”

—Questioning in Queens

A “As a purely legal matter, no law limits the right of a felon to serve on the board of a co-op or vote in its elections, says attorney Dennis H. Greenstein, a partner with the Manhattan-based law firm of Seyfarth Shaw LLP. New York’s felon-disenfranchisement laws apply only to public elections, and only to convicted felons incarcerated or on parole.

“Under the New York Business Corporation Law, the sole statutory qualification of a director of a corporation including cooperative corporations is that a director be at least 18 years of age. The co-op bylaws may impose additional requirements such as ownership of stock in the co-op, residence in the building, or any other reasonable qualifications for a director.

“In the distant past, bylaws of other states could include the requirement that all directors be of good moral character. In theory this may be done today, but such a bylaw provision may be seen by a court as targeted to prevent a specific person’s candidacy, which is unequal treatment of shareholders by the board, and therefore a violation of the board's fiduciary duty. As an example, a New York court enjoined a board from the enforcement of an amended bylaw requiring directors to hold a baccalaureate degree, on grounds that amendment was targeted to prevent a specific unit-owner’s candidacy.

“Regarding the ethics of the matter, it is ethical for a released prisoner to re-enter society and participate where he may, and for employers and neighbors to assist him in doing so. However, a candidate for a position of trust may not intentionally conceal information that would be considered relevant to his trustworthiness. The letter writer states that only recently he became aware of this director’s past conviction of fraud. If he misrepresented his qualifications before the election, that could lead to his dismissal for cause. The bylaws of the letter writer's co-op should provide for the method of removal of a director which typically provides for the shareholders to remove any director with or without cause. If, however, he advised the shareholders of his conviction, then the shareholders would not have a basis for his removal for cause, however, as stated above, the bylaws likely contain the right of the shareholders to call a special meeting of the shareholders and to remove a director with or without cause.

“Additionally, the bylaws and the offering plan of the co-op should be reviewed to determine if the sponsor's nomination and voting for the director was permissible. Some offering plans and/or bylaws restrict the right of the sponsor to vote and take such other action in support of non-sponsor candidates. If the sponsor violated such provisions, the election could be set aside and a new election called. In such event, it may be that in the absence of sponsor voting its unsold shares the director in question may not be elected.”

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