Serving on the Board Graduating to the Head of the Class

With annual meeting season upon us lots of shareholders contemplate leaving the sidelines behind to join the ruling class. Before you decide to cross over, be forewarned that the grass isn't always greener on the other side. To help you make an informed decision, I offer the following crash course in director basics culled from The New York Co-op Bible (where you can go for a more advanced degree).

On the positive side, elevation to the board brings power -- lots of it. The fix comes from the Business Judgment Rule (established in the landmark decision, Levandusky v. One Fifth Apartment Corp., 75 N.Y.2d 530 (1990)), that allows board members of co-ops and condos to act virtually unchallenged on most everything that affects the lives and pocketbooks of their constituents, from dictating rules on mundane matters to determining which would-be owners make it past the palace gates. Since then courts have expanded the scope of the (golden) rule, most recently granting directors the ultimate power to send shareholders packing for engaging in objectionable conduct. In the much heralded Pullman decision the ouster was voted upon by the board and nearly 75 percent of all outstanding shares (40 West 67th St. Corp v. Pullman, 100 N.Y.2d 147 (2003)). A lower court went further, permitting board members on their own to terminate a shareholder who, among other transgressions, went to the compactor room wearing only a shirt and a sock and had unauthorized sex in the shower of the co-op's health club (London Terrace Towers, Inc. v. Davis, 2004 WL 2827658 (N.Y. Civ. Ct. 2004)). Right now, board power, along with apartment prices, is at an all-time high, though whether directors should be able to bypass judicial forums and boot objectionable owners is a different question.

It's not a one way street. With power comes responsibility -- and potential liability. You owe your constituents so-called fiduciary duties -- the obligation to put their interest before your own (a concept that doesn't necessarily come naturally, especially when there's no other compensation). That means you can't get anything they don't, you have to treat everyone equally, you can't act out (or, as the law would say, engage in bad faith), and, at the very least, you must disclose any conflicts of interest, though you'd be safer to avoid them altogether.

Righting the Wrongs

As a board member you're a lightning rod for any building-related wrong, real or imagined, brought by insiders or outsiders. A prospective purchaser complains you shouldn't have turned down his application and takes you to court, the roof contractor says you didn't pay him what he's due, a shareholder claims you didn't fix the leak and now he's living in a flood plain. That's why just as important as your looking after the building's shareholder flock is the building protecting you.

Check out the bylaws to be sure the co-op or condo will indemnify any board member who by reason of carrying out his or her responsibilities is named a party to an action. Remember that indemnification is like the morning-after pill; it only affords after-the-fact relief. Before it kicks in you might have to foot the substantial bill yourself. Better would be a requirement that your building pays upfront -- and if that's not what the bylaws say you should consider amending them once you're on board.

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2 Comments

  • Are the actual shareholders and the managing agents allowed to read the votes at an annual election. These ballots have the shareholders name and number of shares?
  • when are new canidate allow to get proxies to canvas there shareholders for there vote is 30 days pryer to the annual meeting or 10 days 20daywhat is the legal law