Q&A: NY Confidential

Q Our co-op has a board member who shared a confidential board decision with the  shareholders and went so far as to initiate and circulate a petition for a  meeting of shareholders to reverse the board decision. Naturally, many  shareholders are happy to have a board member leaking confidential information  to them. How do we handle this unethical behavior? How do we prevent it from  continuing?  

 —Loose Lips  

A “Generally, bylaws of a co-op enable the board of directors to make certain  decisions on behalf of the co-op without shareholder vote or consent,” says attorney Pierre Debbas of Romer Debbas LLC. “Bylaws provide that a certain percentage of directors must affirmatively vote on  a specific matter in order for it to be passed. Under Business Corporation Law  (“BCL”) §717, a member of the board of directors must perform its duties in good faith  and with the degree of care which a prudent person in a like position would use  in a similar circumstance. While BCL or bylaws do not contain a provision  defining confidential material, BCL §717 can be reasonably interpreted to mean that a board member has a duty to  preserve the confidentiality of its decisions which it is authorized to make  under the by-laws and has made in good faith.  

 “If a specific director is concerned that the remaining directors have breached  their fiduciary duty to the co-op in a decision it has made, then that director  should confer with the co-op’s counsel and discuss this matter in confidence. Unless a breach of fiduciary is  established, the director who shared the confidential information with the  shareholders is not acting in good faith or in the best interest of the co-op.  

 “Under BCL §624, shareholders are entitled to examine only the minutes of the proceedings of  its shareholders, board and executive committee. Therefore the decisions made  by the board are provided to the shareholders through the minutes. If the  shareholders are concerned with the decision they discovered in the minutes,  then under the bylaws and BCL, they can call a special meeting with the board  (so long as the requisite number of shares has voted for this meeting and the  purpose of the meeting is made known) and voice their concern.  

 “In order to prevent future board members from releasing confidential information  to shareholders, the current board member at issue should be removed from the  board. Bylaws generally provide that any board member may be removed at any  time, with or without cause, by the affirmative vote of a majority of the then  authorized total number of directors.”  

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  • I disagree. A director is a representative of the shareholders and, with very few exceptions, is entitled to discuss co-op business with shareholders.
  • Had I known how little the Board is required to represent the shareholders consensus I would have picked my co-op a great deal more carefully. Buyers are so nervous about getting approved, we forget we're the ones taking a large financial risk.