A Fine Way to a Quorum

It's not the worst thing that can happen to a co-op board, but not having a quorum present at the annual meeting is high up on the list of galling events that boards have to face too often. Wouldn't it be nice to be able to command shareholders to be present so that the business of the co-op could get done? Business, after all, that is being carried out in the interest of the very shareholders who don't bother to show up or even fill out a proxy. Although you can't command attendance, one co-op in Brooklyn does the next best thing: it fines members who don't attend the annual meeting or submit their proxy.

Should other boards consider using fines? Some people in the business think it's a great idea and, although it is technically feasible for a co-op to enact a system of fines, many experts and board members are hesitant about instituting what can be seen as a Draconian measure.

At Parkside Association, a 40-unit co-op in the Sunset Park section of Brooklyn (561 41st Street) shareholders are required to come to the meeting or send a proxy — or else pay a fine. "When you interview with the board before your purchase is approved, you are told that you will have certain obligations," says Ruth Ford, a vice president at Parkside who arrived in 1998.

One obligation is to come to the annual meeting. If you don't show up, you are assessed a fine. The fining authority is written into the building's bylaws. The fine for no-shows is $100. Assessing and collecting the fines is not a problem according to Ford, and any fines that go uncollected are taken at the time a unit is sold. "The dollar amount is significant enough to get people's attention," says Ford, "and if you can't be there, you can always avoid the fine by sending in a proxy."

Parkside is in an area of Brooklyn that used to be called "Finntown," and is one of more than a dozen buildings developed by Finnish immigrant organizations for their members and their families. They were built in the 1920s, with much of the labor supplied by the associations' own members who were carpenters, builders, and steelworkers. The objective was to provide affordable housing for members. A great deal of owner cooperation and participation has been part of the fabric of life in these buildings ever since.

"The demographics of our building have changed with the neighborhood," notes Ford. "It used to be heavily Scandinavian. Now it is Russian, Polish, Chinese, and Hispanic." Despite the change in ethnicity, this building, with its one- and two-bedroom apartments, is still a magnet for young families, older people, and others for whom this is their entry into the world of homeownership. As it was under the original plan, the building still does not allow units to be mortgaged. "We do allow sellers to finance a sale, and you can borrow money to make your purchase, but we don't want banks involved. There is too big a risk that someone with a mortgage will default, the bank will take over the apartment, and then force us to accept a new owner whom we wouldn't choose to join our association," explains Ford.

Adhering to the old discipline of the building seems to be a strength that current owners continue to support. The property has no managing agent, and there are two workdays a year when owners perform repair and maintenance tasks (owners who don't show up for workdays are fined also). One of the other obligations of owners is to serve on the board. The board service policy isn't always fully implemented.

"We try to be practical and if board service just isn't right for someone we don't push it," says Ford. Language barriers and age are often the reasons for shareholders being excused from service. "It works out so that at least half of the shareholders participate," explains Ford, who is in her second non-successive term.

With an average of one to two apartments selling to new owners every year, there is a steady influx of new candidates for the board. "I like the fact that we have such a high level of participation on the board and the building doesn't end up being run by a small clique," she says.

Would fines work in other buildings, especially those that don't have the long history of sharing the workload among tenants? "As long as it's legal, I think it's a great idea, and it would be relatively simple to implement," says Steve Greenbaum, director of management at Mark Greenberg Real Estate. "In all of our communications regarding the annual meeting, we include language reminding shareholders that the strength of their co-op and the value of their investment depends on everyone's participation, but that has no teeth and people simply ignore it. We all know that if everything is going smoothly and there are no big issues in the building, nobody shows up."

Many boards go to great lengths and significant expense to get people to come to the meeting or submit a proxy. "In some of our buildings, we send out a meeting notice along with a proxy, then a follow-up proxy with a postage paid envelope. But even that is often not enough to get the required level of participation," says Greenbaum.

He, like many managing agents and board officers, has more than once tried to open an annual meeting, only to find that a quorum is not present. "You end up sending the super door to door for proxies. It's not a very efficient way to run a meeting."

To combat anticipated apathy, some buildings even resort to the old trick of sending out a pre-meeting agenda with the item "discussion of maintenance increase," just to be sure enough shareholders — albeit irate and indignant — show up.

Implementing a schedule of fines in a building that doesn't already include them in its bylaws would require amending them. "The procedure to amend the bylaws is relatively simple," says attorney Aaron Shmulewitz, a partner in Reed Smith. "In most buildings, the board has the power to amend the bylaws. The shareholders always have that power, so if the board doesn't have the power, it can still be done by building-wide vote.

"In my opinion, though," he adds, "compelling people to vote or send a proxy is oppressive. Not voting is just as important an act as voting. We are not living in a communist dictatorship, and there are other ways to solve the problem. One is to lower the level needed for a quorum if it is too high."

Marci Waterman Murray, a partner with the law firm of Deutsch Tane Waterman & Wurtzel, agrees. "You can lower the level needed for a quorum down to a third of the shareholders, so if a quorum is a problem, solve it that way." She, too, finds the idea of compelling people to vote to be offensive.

"In some of our buildings, we have lowered the number of shares for a quorum from 75 percent and 66 percent down to 51 percent," notes Greenbaum, "but to do that you still need the original quorum and you need to convince the shareholders to agree to it."

Fines raise other problems, as well. "I don't think they would be enforceable under the law," says Murray. And Shmulewitz asks: "What happens if you get 95 percent participation and the other five percent don't vote or send a proxy? Do you still fine the five percent? You have your quorum, do you still punish the people who exercised their right not to vote?"

There are potential pitfalls, too. "Suppose one year you don't fine the people who didn't vote or send a proxy," notes Shmulewitz. "Then the next year you do fine those who didn't vote or send a proxy. You now have the problem of having selectively enforced the rule, which will create a whole new set of problems for the co-op."

"I've never heard of bylaws with rules for fining shareholders for not coming to a meeting," says Milton Norman, a lawyer and one of the original tenants who converted Manhattan's 99-unit 50 Riverside Drive to cooperative ownership in the late 1970s and then served several terms as president. "The concept is wrong, and I don't think it's enforceable."

Bud Johnson, president at Chesapeake House, a 253-unit building at 201 East 28th Street, says: "I would have to think very seriously about instituting such a program. When you put in fines, you run the risk of looking like you are just raising revenue without calling it that. You are trying to build your treasury. It's like what Mayor [Michael] Bloomberg is doing now with fees and fines. They are really taxes, but they just don't want to call them that.

"There are many other ways to approach the problem of meeting attendance that are better ways to handle it than fining," he adds. "Also, there are lots of other more important problems for which you might want to use fines, and it trivializes them if you use them to punish people for skipping meetings."

Should boards fine shareholders for not showing up at annual meetings or sending a proxy? It can be done, but like any other issue relating to governing a co-op, it is not a simple matter. There are other routes to take to get more participation from shareholders. In the end, however, if all else fails, slapping fines on truants is a tempting option.