Resolving Disputes with Shareholders Butting Heads

 Shareholders often find themselves “butting heads” with the board of directors at the co-op buildings in which they live. Often  the disputes, which arise are disagreements over a shareholder’s personal agenda, and a board not allowing them to proceed forward with their  plans.  

 The common subjects of these disputes often involve anything and everything  having to do with renovations. A shareholder may want to undertake an extensive  renovation, and the board may not approve of all or part of what is being  proposed. Often this involves the concept of “wet over dry” construction, where shareholders want to change the layout of their apartments,  by repositioning their kitchens or bathrooms (“wet” areas) over another shareholder’s bedroom or living-room (“dry” areas). In other words, these renovations would result in the installation of plumbing  in locations where none had previously been placed—above a living space dry area, rather than over other wet areas of the unit  below. This can and often does lead to much controversy and subsequently, often  to litigation.  

 The Business Judgment Rule

 Another example would be in situations where shareholders want to plan for  extensive gardens equipped with plumbing on their terraces or penthouses. The  plans they present to the board may not be approved “as is,” and this can also lead to controversy. While there are many other possible  examples of board-shareholder disputes, which can involve completely different  topics—such as home equity loans, generally, the standard of review in most disputes  involving co-op boards is considered to be the “business judgment rule.” The business judgment doctrine “bars judicial inquiry into actions of corporate directors, taken in good faith  and in the exercise of honest judgment in the lawful and legitimate furtherance  of corporation purposes.” Levandusky v. One Fifth Avenue, Apt. Corp., 75 N.Y.2d 530, 538 (1990); Auerbach  v. Bennett, 47 N.Y.2d 619 (1979).  

 However, most proprietary leases have provisions stating that the board’s consent to such alterations cannot be “unreasonably” withheld. Therefore, the “reasonableness” of the board’s refusal to consent to the proposed alterations is subject to review by the  court. The general standard is that if the board’s action or decision is not arbitrary or capricious, and bears some relationship  to the legitimate purposes of the cooperative corporation, then it is not  unreasonable as a matter of law. On a practical level, once a shareholder has  sued the board of directors, there will be depositions and discovery in order  to determine what may or may not have been “reasonable” activity or due diligence by the board of directors. Thus, the co-op’s policy on banning wet-over-dry construction will likely be upheld if it was  imposed after the careful consideration of any sound advice provided by  professionals.  

 At Odds

 Shareholders will often try to show that the board went about the  decision-making process in the “wrong” way. The shareholders will have their own experts and try to create a “battle of the experts.” However, if the decision by the board was not arbitrary and capricious, that  type of argument will not likely prevail.  

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