Every year, the shareholders of co-op apartments gather together—in their building's community room, or even in the basement in the shadow of the laundry machines, on flimsy chairs that are only used once a year—to discuss their mutual investment. The board is there, and the managing agent, and the accountant. Many of the neighbors materialize, but not that nice couple next door, because they rent. If the stars are in perfect alignment, the phantom sponsor—the guy who owns half the shares in the building but who you've never seen—will make an appearance (although usually he sends a proxy). The board president bangs on the table with her gavel—a stapler, actually—and calls for order…
This is the annual shareholder meeting, that magical event where you learn that maintenance is going up because of property tax hikes, that it's too expensive to refinance the building's mortgage, and that the affable gentleman you see in the elevator every morning, who always seemed perfectly normal, is actually a little bit nuts.
But what are the rules governing the annual meeting? What is discussed? How can board members and shareholders both prepare? Why do we have annual meetings, anyway … and what are the legal ramifications if we don't bother? Let's take a look.
The Fine Print
The state of New York is the governing authority that mandates the annual shareholder meeting for co-op buildings. Because cooperatives are, legally speaking, corporations, they are subject to the same state business corporation law that compels, say, Viacom to hold annual shareholder meetings.
The buck might stop with the state Attorney General, but it doesn't begin there. "It's also reflected in the bylaws of incorporation and the corporate charter," says Stephen O'Connell, a partner with the law firm of Hartman & Craven in Manhattan.
Condominiums don't require shareholder meetings, for the simple reason that condos have outright owners, not shareholders, and are thus not subject to the state's business corporation law. This doesn't mean that condo owners don't meet, however.
"Condos are governed by the condo declaration and the bylaws," O'Connell says, "and the bylaws usually do mandate an annual meeting."
In New Jersey, the rules governing co-ops are slightly different.
"There's no statutory framework in New Jersey," says Ronald Perl, a partner with Hill Wallack Attorneys at Law in Princeton, "but the non-profit corporation act does cover co-ops."
As in New York, it is the proprietary lease and the bylaws that mandate an annual shareholder meeting. These documents also spell out what the annual meeting involves, beginning with when to notify the shareholders that the meeting will take place.
"In the bylaws, there are provisions which talk about what notices are to be given the shareholders," O'Connell says. "Usually it's between 10 and 40 days. For a special meeting, it could be less than that."
Sometimes, the notification period is even longer.
"I've seen up to 60," Perl says, "but very few are shorter than 10."
Notification must be given in writing, typically to the address on record with the managing agent. If the shareholder lives in the building, this is simple enough; if not, the mailing address can pose problems.
"It's important to note that the burden is on the shareholder or the unit owner to keep the organization apprised of the current address," Perl says.
When is a Meeting Not a Meeting?
In order for a shareholder meeting to be official, a quorum must be present.
"A quorum is usually north of 50 percent of outstanding shares, in person or proxy," O'Connell says.
If a shareholder cannot attend the meeting for some reason - work obligations, a wedding in Istanbul, a new episode of American Idol, or something even more intriguing—he or she can appoint a proxy to vote on their behalf.
"A proxy is akin to an attorney in fact," O'Connell says. "They can vote in your absence. You can also limit their power by specifying that 'so-and-so is to attend and vote on as follows.'"
Sometimes the proxy is a relative or friend. Proxies are automatically revoked if the shareholder attends the meeting, and proxy power can always be taken back. More often than not, however, someone on the board serves as proxy. There is no limit to the number of proxies one person can hold, so, in theory, the board president can be the proxy for everyone in the building—although that defeats the purpose of the meeting.
When annual meetings are not held, the usual reason is apathy—shareholders don't attend, or don't bother appointing proxies. A quorum cannot be reached, so the meeting is adjourned, or takes place unofficially. This is hardly ideal, but at least the board did its job and attempted to hold a meeting.
But what happens if a board knowingly refrains from calling the annual meeting?
"Sometimes boards don't want to relinquish power so quickly," O'Connell says, "so they won't have a meeting."
In other cases, an issue might come up at the meeting—the subletting policy, say—that the board knows will be changed by vote. They forestall the meeting to prevent the crucial vote, sort of like a filibuster of silence. This does not make for happy shareholders.
"It gets ugly," O'Connell says.
What happens when a board brazenly defies the law of the land in this way? Do jackbooted police arrive with nightsticks raised, and haul the guilty parties to the Tombs? Quite the contrary. For obvious reasons, the Attorney General's office has better things to do than enforce annual shareholder meetings for every co-op in the city. In fact, the onus is on the shareholders to complain—and that onus is onerous.
"There isn't really a penalty for not holding a meeting," O'Connell says, "but if a meeting isn't held on or about the date specified in the bylaws, you can go to court to compel a meeting of shareholders."
"The remedy," Perl says, "is an application for a court injunction for an annual meeting."
Such legal wrangling is laborious and expensive. Going to court requires hiring an attorney and paying legal fees, so shareholders generally won't do so unless there are major issues that need resolution.
In New Jersey, Perl notes, you can contact the Division of Consumer Affairs, who will informally (read: inexpensively) require the board to convene a meeting. New York has no such provision.
Fortunately, most boards don't run elections like the Politburo. When meetings don't happen, it is usually because of apathy on the part of the shareholders, or because a sponsor who owns a majority of the shares doesn't attend. In both cases, the board continues to operate.
"A board could hide from its members," Perl says, "but I haven't seen too many cases of that."
The business of the annual meeting is set forth in the bylaws. Generally, the meeting begins with a roll call, to establish quorum. Next, the minutes from the last meeting are read—although this is usually waived.
Then comes the meat of the meeting: the officers' reports. "The president gives his marketing pitch," O'Connell says. The discussions revolve around projects that are underway, projects that have been completed, and projects that will be undertaken in the coming year. Then the treasurer or the accountant runs through the financials, explaining what all the fine print means. Finally, the floor is opened to questions.
How can board members and shareholders prepare for the once-a-year meeting?
"Create an agenda in advance," advises Andrew Wagner, a senior associate with the Manhattan-based law firm of Rosen & Livingston, "and circulate it to the shareholders."
This way, everyone will know what to expect at the meeting.
"Especially in larger buildings, these meetings can be loud and boisterous," Wagner says. "Circulating the agenda ahead of time will make sure the meeting is well-run and well-organized."
The pre-meeting communication works both ways.
"If there are any specific issues you [as a shareholder] want raised," Wagner says, "write to the board and have them add it to the agenda, so the board is prepared to handle it."
All three attorneys stress both communication and transparency.
"You want to keep the shareholders in the loop," Wagner says. "Let them know how the money was spent."
"Because shareholders are apathetic by nature—it's where they live; it's not their business—it's up to the board to communicate to the shareholders," says O'Connell. Regular newsletters are a good idea, he says, or, if that is not feasible, a broad description of what will be discussed at the meeting, distributed well in advance.
"Sometimes boards become entrenched, and operate in the dark," Perl says, noting that recent New Jersey law requires boards to shine light on their business.
It is in the best interest of board and shareholder alike to operate transparently. "Disclosure," O'Connell says, "will set the board free."
Greg Olear is a freelance writer and a frequent contributor to The Cooperator.