Special Meetings, Special Rules

Until a petition began circulating last summer, few California voters would have guessed that they had the power to recall the governor. Likewise, cooperative or condominium owners might be surprised to learn that they can recall directors using a little-known clause in the bylaws regarding special meetings.

Most co-op and condo bylaws follow the state business corporation law, which gives shareholders the option to call a special meeting. “The bylaws have been standardized,” says attorney Ronald Gold, a partner in Wagner, Davis & Gold. “They copy standard provisions out of the business corporation laws. We’ve seen petitions for all kinds of purposes.”

“Lightning-rod issues” are usually what prompt special meetings: major capital improvements or changes to the sublet or pet policies, says Gold. “It’s usually where there’s a special issue, lack of information, or disagreement with the direction the board has taken.” Most are called to obtain information. “We see that a lot – where people feel out of the loop.”

Although the specifics vary from organization to organization, Gold explains, most corporations require that at least 25 percent of the owners request the special meeting and that the purpose be clearly stated in the petition and in the subsequent notice of the gathering. Once that has been submitted, the secretary of the board has between 10 and 40 days to schedule it. Decisions made outside of the defined issues are not valid. To transact business, a quorum is necessary. A roll call must also be made and the existence of the quorum verified. To get a valid outcome, petitions must require a vote and that, too, must be specified in the announcement.

For board members confronted with a mob of angry shareholders wielding a petition for a special meeting, all is not lost. “The first decision the board has to make is, ‘Do we play hardball, or do we recognize that there is a communication problem?’ ” says attorney Bruce Cholst, a partner at Rosen & Livingston.

A board can often crush a revolt through technicalities. For instance, owners – not subtenants or relatives – must sign petitions for special meetings. “Very often, you can reject a petition on that basis,” Cholst notes. The names on the petition should also be checked against the number of shares they represent. Some bylaws require a majority of shares be represented by the names on the petition. “The whole ballgame is how the meeting is defined in the petition,” says Cholst.

But be warned, there is a potential price to pay if you play rough. Eventually the shareholders are going to fulfill the requirements, and they will probably be angry about your obstructionism when they finally confront you.

Once a special meeting has been successfully petitioned, there is a great deal that board members can do to guide the outcome. The board can narrowly define the meeting agenda to disallow a vote, or it can turn it into an informational meeting by bringing in experts to explain issues.

Special meetings are sometimes used to topple sponsor-controlled boards when a sponsor has ignored its obligations under the incorporation plan. Four years ago, attorney James Samson, a partner at Bangser, Klein, Rocca & Blum, represented the shareholders in two 10-unit buildings on West 47th Street in Manhattan. Leonard Franzblau had converted the buildings from rentals to a co-op in 1991, sold two of the units, and sat on the rest. Capital repair issues in the building were ignored, and the two shareholders feared their investment was lost.

Joseph Vuotto was one of those shareholders. “The sponsor treated us like [rental] tenants,” he says. “And no bank is going to finance you with only two of twenty units sold.”

So Vuotto and his fellow shareholder, Scott Levine, used the special meetings clause. “We just decided to call a meeting and do it,” he recalls. “[The sponsor] never showed, but two of the three shareholders were there. Scott and I proceeded to hire a management company.”

Franzblau, the sponsor who was also the manager of the co-op, initially ignored the shareholder action. Later, he brought the dissident shareholders to court, where a judge upheld the outcomes of the special meeting and ordered Franzblau to begin selling apartments.

“Now we have a [bona fide] co-op,” Vuotto said. “We have a meeting every month. We made repairs, fixed the roof, and the board is viable.” The sponsor still owns six units and has yet to attend a meeting of the board.

“Special meetings are, unfortunately, very contentious,” admits attorney Stuart Saft, a partner at Wolf, Haldenstein, Adler, Freeman & Herz. “Usually the board does not get kicked out.” Indeed: since board members generally serve only one-year terms, dissatisfied shareholders will typically wait for the annual election rather than call a special meeting to remove them. Gold has been practicing co-op law for over 25 years and has seen only three successful recalls in that time. “In most buildings, the whole board is elected every year so the necessity for a recall is very small.”

“It’s not that they’re trying to get control; shareholders usually want to get an issue addressed,” adds Allen Turek, a co-op attorney in private practice. Owners get apprehensive when boards fail to communicate. “Do a little public relations,” Gold advises his board clients. “I tell them to err on the side of being communicative.”

Nonetheless, Saft notes that he has seen recall “situations that go right down to the wire.” Last year, for example, Saft was hired by the board of a 50-unit building on the Upper East Side to offer advice in a special meeting showdown. An unhappy group of shareholders had gathered enough signatures for a special meeting to amend the bylaws and vote in a new board.

“It was the most brutal battle I’ve seen,” Saft admits. “They walked in with enough proxies, but during the meeting enough people changed their minds so that the dissidents were not able to change the board.” The vote went through seven recounts, and two weeks after the meeting the angry shareholders sued. The lawsuit is still pending.

“The most important thing is to keep the level of anger down,” Saft says. “Because after it’s over, you have to live with these people.”