How Do We Deflate Disputes? Dealing with Election Challenges

There are a number of methods you can use to limit the fallout from a ballot battle.

Your board election is approaching and the politics are already heating up. It is going to be a contentious contest this year and your building cannot politically or monetarily afford a challenge to the legality of the results. Maintenance is already being raised for other reasons. Do you let the process take its course and hope for the best, or is there anything that can be done to limit the possibility of a disputed election?

If done honestly and according to the rules, the voting can result in strong and effective leadership. If challenged – and, much worse, reversed – the election can leave in its wake a divided community, unproductive leaders, and high legal bills.

If your co-op or condo has suffered an election challenge, then you know what I mean. If not, just reflect back to the George W. Bush-Al Gore battle, when Florida and “pregnant chads” were the center of attention, rather than the important domestic and international issues facing this country. The legal fees incurred by both sides were tremendous and it was not until the courts were involved that the dispute was resolved. Although they exist on a much smaller scale, co-op and condo election challenges have comparable negative effects.

Election disputes should not happen in co-ops and condos, but they do. Let’s face it, if people are concerned and have the wherewithal to lodge a challenge, you will not be able to stop them from doing so, no matter how hard you try. The goal should be to make sure, in advance, that there is no basis for a complaint.

The first place to start is making sure that you understand and are following your co-op’s or condo’s election rules. The bylaws usually cover various aspects of the process. Some bylaws cover the notice of the meeting, the appointment of inspectors of election, proxies, and voting. Others are silent on those issues. In those cases, you need to know what the applicable statutes and courts say about those topics.

It is where the rules are not followed that shareholders immediately lose faith in the process and challenge the vote. The provisions may be unclear or replete with legal jargon, yet it is critical for boards and management to thoroughly understand them and make sure that they are followed.

Make sure the election documents are proper and perfect. Many co-ops and condos rely on management to prepare such election material as the meeting notices, proxies, and ballots. Some boards ask counsel to review those to assure compliance with the governing documents and laws. Experienced management and counsel should be able to work as a team to assure that the election documents are proper, perfect, and never a source of contention.

Sometimes, however, mistakes happen. Even though the error may be legally insignificant, the best course of action is to correct the documents before the voting. Shareholders who notice the error may be concerned that there are more that have gone undetected. Once again, the perception of propriety and honesty builds confidence in the process and avoids election challenges.

I remember one contentious co-op election for which the manager made a minor typographical error in the proxy form sent to shareholders. The board saw the mistake and questioned whether the proxy form was legally acceptable. Although it was, the board and management decided to send out a corrected one, but did not give an explanation. By that time, however, the political factions had vigorously solicited proxies using both the first and second forms. When they realized that the forms were different, panic ensued because they were not sure which was acceptable. A simple note to shareholders explaining the situation did the trick. The election proceeded without a hitch. When mistakes happen, fix and explain them upfront. It is the ignored or unexplained incidents that leave shareholders or unit-owners questioning the results and considering challenges.

The process for nominating candidates must be fair. An area that is not covered in many bylaws is the nomination of candidates for the board. Many send a mailing prior to the vote asking who wants to run for a board seat; people are then nominated before the gathering. At the meeting, some boards ask for nominations from the floor.

One condo’s bylaws provided that meetings were to be governed by the current edition of Robert’s Rules of Order or any other rules acceptable to the majority of owners present at a meeting. The Condominium Act requires that the bylaws provide for the nomination of a board of managers, but this condo’s bylaws did not contain a specific rule on that. At the meeting, the condo usually asked for nominations from the floor. A group of losing candidates brought a lawsuit claiming that the nomination of candidates was defective and that the bylaw provision was invalid. The lower court agreed with the challengers, but the appellate court reversed and upheld the bylaw provision and the nomination process employed by the condo. Massive legal fees were incurred. Had the condo realized that their bylaws were unclear on the nomination process, perhaps they could have tackled the issue well before the election and avoided the expensive court battle.
As long as the nomination process is perceived as fair, you should not have a problem. At one co-op’s annual meeting, someone wanted to be included as a candidate. Unlike the other would-be office-holders, that person had not submitted his name in advance. The bylaws were silent with regard to nominations, but historically the board had not allowed them from the floor. It was decided, however, that the fair thing to do was to allow the person to be added and that person was overwhelmingly elected. By being fair, the co-op dodged a bullet: the person happened to be an attorney and he later explained that he would have challenged the election had he not been allowed to run.

Consider the political landscape when deciding on inspectors of election. Inspectors of election are typically appointed by the board to examine proxies, assure that there is a quorum, and tabulate votes. In contentious elections, challenges may be avoided by appointing persons from each political camp to serve as inspectors. If all of the inspectors are from one side and the other side loses, the losing side may challenge on the ground that they do not believe that the inspectors acted correctly and honestly. The losing side will have difficulty with that argument if a person from their side has served.

One co-op endured contentious elections for years. Several of their elections were challenged in the courts. The shareholders just did not trust each other or the process. The amount of legal fees spent on challenges was incredible. When we started representing the co-op, we suggested that they use an outside balloting company to help create an air of confidence and honesty in the election process that they had so desperately lacked in the past. Those companies come at a cost, but are neutral, independent, and avoid the perception of a rigged or dishonest election. In this case, the president, who had historically run the meetings himself, allowed counsel to do so. We adhered to a specific agenda and ran a session that the shareholders perceived as fair. All of the political factions were allowed to present their positions in an orderly fashion. There have been no challenges since.

Proxy examination and vote tabulation must be understood and carried out correctly and honestly. One of the most fertile areas for election battles is over proxies and whether they are correctly accepted or rejected. The bylaws may contain specific rules about proxies and who may serve as the proxy-holder. In almost every election, proxies are an issue. For example, someone may give a proxy without designating who will be the proxy-holder. In that case, the proxy should be rejected. To avoid that situation, we suggest stating in the proxy form that, if left blank, the proxy-holder shall be deemed to be a specific person, such as the managing agent. It is instances where inspectors look the other way or allow inappropriate changes to proxies that lead to challenges.

In addition to this, the inspectors of elections must count the votes and certify the results. This can be complicated depending on the applicable voting method. Some co-ops have “straight voting” (one vote for each share owned) and others have “cumulative voting” (the shareholder has votes equal to the number of shares owned multiplied by the number of board members to be elected). The voting methods are not difficult when explained correctly. However, the methods may sound like a foreign language to a person who has never served as an inspector. It is important that inspectors understand how the applicable voting method works.

Also, always make sure that the correct voting method is applied. For years, one co-op thought that cumulative voting applied because its bylaws provided for cumulative voting. It didn’t. The board was lucky that prior elections were not challenged. In the end, correctness and honesty are the policies that help to avoid challenged elections.

Joseph G. Colbert is a partner in Kagan, Lubic, Lepper, Lewis, Gold & Colbert.