Proxy Chronicles

Draconian proxy rules, unscrupulous board members, vicious lawsuits, too few/too many proxies – these are just some of the challenges board members have encountered when voting is required at their meetings. If you’ve ever served on your board, you may, unfortunately, be no stranger to proxy skirmishes, proxy wars, or in some cases (!) proxy apathy. In the following section, expert attorneys, managers, and board members relate their firsthand experiences with the power of the proxy.

Geoffrey Mazel
Attorney
Partner, Hankin, Handwerker & Mazel
A recent challenge I had with election proxies occurred when a board member solicited proxies from many of the shareholders in the building. He had another year left on his term and was not running in this particular election. He was at odds with the board members running for reelection and found two other shareholders willing to run for their seats. He was trying to take control of the board. Most of the shareholders were happy with the current board, however, and believed that, by giving this board member their proxy, they were voting for the incumbents, including the sitting president of many years. It was not until after the election that the shareholders realized that this dissident board member had voted his own slate for his own purposes. The shareholders were outraged that the incumbents had been voted out of office and felt they had been misled. Fortunately, the two new board members resigned and the ousted incumbents were appointed to their positions.

What did the board learn? When preparing the notice of meeting and proxy package, it would be useful to have a proxy statement and/or a detailed letter of explanation to the shareholders explaining the power the proxy gives the proxy-holder. Another approach would be to include the ballot on the proxy, so the shareholder can direct the proxy-holder for which candidates to vote.

David Wineberg
President, The Franconia
150 units
Central Park West, Manhattan
We have not had a controversial issue so much as a critical need for proxies. As the sponsor’s shares decrease, the odds of getting a quorum at our annual meeting dwindle. We have to work harder and harder every year just to fulfill our legal obligation to have a meeting. A cheer goes up at the meeting when the management company tallies the shares of those present plus proxies, and lets us know that we have a quorum and haven’t just wasted an evening waiting for the count. So far so good, but it’s been tight. In my experience and in the experience of other directors who I know around town, the bigger issue is not getting a majority, it’s getting a quorum. There is tremendous disinterest – and I take that as a compliment. We run a good building. People know that and don’t think they need to waste an evening at an annual general meeting. We haven’t had an issue that required a super-majority since we revised the proprietary lease. But I’ll tell you, just getting people to a general meeting is more of an effort. The proxies are critical. We spend more time in the newsletters, in pieces from me, and from the managing agent, which is AKAM, just exhorting people to attend, saying, “Just let us hold the meeting legally. We’re very, very close to not having enough proxies.” Every year, the sponsor sells off more units so he has less of a block to throw our way.

We campaign for proxies every year. At the next board meeting, we will plan for our annual meeting in April. I will put out a newsletter, as I do quarterly. I will ask the owners to return their proxies after they have been distributed. Then we’ll distribute the proxies a few weeks later, and then the managing agent will send another letter asking people to please return the proxies, and then I’ll send another letter saying, “Please, if you’re not going to come, send your proxy.” So, we’re going to hit them up a number of times. So far, that’s been good enough. They can sign them off to someone who’s going to be there. And I’m going to be there, so if you like what’s going on in the building, sign them over to me.

It’s all about communication. I started a quarterly newsletter to let them know what’s going on in the building, what projects are contemplated, and also the sales that are going on in the building. The more people know, the more cooperation you’ll get.

Steve Anderson
Attorney
Partner, Anderson & Ochs
Proxy fights against entrenched boards are hard. A number of years ago, a dozen or so individuals living in a cooperative with 5,000 residents came to me to run a proxy campaign. They said that proxies had not even been allowed in the past at this property, and that they were not sure what type of proxies would be permitted in the upcoming election scheduled for May of that year. After extensive stonewalling by management and corporate counsel, we brought a lawsuit to obtain the right to submit proxies as was, of course, permitted under state statute.

After the board of directors changed the election date from May to October (seeking, we thought, to delay the inevitable), we did, ultimately, obtain a court order permitting shareholders to submit proxies; although the judge acceded to the board’s request (for reasons unknown in law) that proxies be notarized. This requirement would mandate anyone soliciting proxies to either be a notary or bring a notary with them, as it were.

Notwithstanding this obstacle, and rather than appeal, leading to more delay, my slate obtained many notarized proxies and we appeared at the annual meeting scheduled to take place in an auditorium one evening in October. Then, a fire alarm literally went off (surprise, surprise) so that all shareholders, many well advanced in age, were forced to stand out in the street in the freezing cold until, lo and behold, it was determined there was no fire. The votes were submitted that night, counted the next day, and even though our slate had won, the board “disqualified” many of our proxies on the grounds that the notarized proxies that were submitted were notarized by a member of the board (whose seat was not up for election that year) aligned with the insurgents, and thus allegedly “interested” in the election. (Who wasn’t?) We then brought a second lawsuit in which a court ordered our proxies counted, as well as the seating of our slate of four individuals, thus giving us effective control of the new board.

This exercise played out over a period exceeding six months and required many hundreds of hours of time on behalf of unit-owners and counsel, making clear the power of incumbents to control the process. Fortunately, they failed to prevent a fair election.

Lewis Montana
Attorney
Partner, Levine & Montana
In my experience, the issues that have arisen the most are determining the validity of proxies, and the arguments that ensue when purported proxy-holders deliver them at the meeting of unit-owners. For example, some proxies do not have the name of the proxy-holder filled in or are not filled in completely. Sometimes the same unit-owner will sign more than one proxy form and name different proxy-holders, and the forms are even dated on the same date. It then has to be determined which, if either, of the competing forms will be recognized as effective.

Consequently, boards are encouraged to ask unit-owners to submit proxies in advance of the meeting so that suitable review of the submitted form may be made, and thus not cause time delays at the meeting. In addition, the selection of impartial inspectors of election, and educating them as to their duties, has been helpful. The statutes define the inspectors’ duties and the formalities that should be followed. Once the inspectors determine the validity of a proxy in particular, and certify the results of an election of directors in general, it is less likely the election results will be subject to challenge.

Marianne Ciccantelli
Property Manager
Kenilworth Equities
We recently had a problem where candidates used mock proxies for their campaign in an attempt to get people involved and to get votes. Candidates went door-to-door prior to the election with blank proxies, and the result was that shareholders gave out multiple proxies! Of course, many of those votes had to be voided. I strongly recommend the use of a ballot company for larger buildings, particularly when the election is controversial.

Paul Hachmeyer
Treasurer, 7201 Owners Corp.
86 units
Bay Ridge, Brooklyn
We had a situation several years back in which a board member was trying to hold onto his seat. He solicited several proxies from owners unable to attend the meeting. However, some of the proxies were not originals but were faxed to him, and initially the individual running the election did not want to accept the faxed proxies. Things got a little heated. The board decided to accept them under the condition that they would be verified after the election if the voting were close. Since board member candidates are usually in short supply, it turned out that there were no new candidates nominated, and the existing board remained in place. We learned that one needs to use common sense when dealing with modern technology and with bylaws that are over 20 years old.

David Byrne
Attorney
Partner, Stark & Stark
A client of mine is burdened by a master deed, which obligates proxies to be notarized. The client never achieves a quorum, because no member will take the time to actually get his/her proxy notarized so that only those attending the meeting in person ever vote, and there are never enough in attendance. At another property, a board member’s brother’s company enjoyed four separate contracts, which generated over $200,000 in income for the brother each year. The owners seemed to want to put an end to that. Various owners went door-to-door for signatures and proxies for the pending election and were successful. The lesson is that owners, when motivated, can exercise their votes and rights, and bring about change. Proxies can help.

Tom Smith
Attorney
Partner, Smith, Buss & Jacobs
All nine managers on a condominium board had been appointed by the other board members to fill vacancies. They had not been elected because of Draconian proxy rules, which prevented the achievement of a quorum at annual meetings. For example, although the bylaws permitted owners to designate proxy-holders, the board refused to recognize proxies from corporate, trust, and sovereign entity owners that were not accompanied by (a) an incumbency certificate identifying the entity’s officers, (b) a certified resolution of the entity’s governance body authorizing the execution of the proxy, and (c) either a certificate of good standing of the entity or an opinion letter issued by a New York licensed attorney.

In 2003, unit-owners formed the Concerned Owners Association and hired counsel to demand an election of all nine managers and to represent its interests at the annual meeting. The board called for an election of only three managers and imposed the same disputed proxy rules. Nevertheless, the Concerned Owners logged in hundreds of hours soliciting enough proxies which complied with the board’s rules to achieve quorum.

The inspectors of election certified the election of the Concerned Owners’ slate. However, the defeated managers (who included the president of the board) caused the condominium to hire special counsel to review the proxies submitted by the Concerned Owners. Special counsel determined that many of the proxies, including several signed by the Consul General of the Nation of Kuwait, should be disqualified under the current rules. Therefore, the board refused to recognize the newly elected managers.

The Concerned Owners filed a petition requesting that the court direct the board to recognize the Concerned Owners’ slate as managers. The court ruled that the bylaws constitute a contract between all unit-owners and that the board was not authorized to unilaterally impose proxy rules not contained in the bylaws. In addition, the court ordered that a second election be held for the six remaining seats on the board, holding that the terms of the appointed members expired at the succeeding annual meeting, at which time the Concerned Owners were entitled to elect their successors.

Elliott Meisel
Attorney
Partner, Brill & Meisel
My favorite “proxy chronicle” arose out of our representing a Forest Hills co-op that Fred Trump had converted and tried to continue to control, notwithstanding the lapse of five years and the attorney general regulations concerning sponsor control. Upon our having mounted a successful proxy campaign and defeating him at the annual meeting, he promptly sued me personally for $350 million for having caused him nervous anxiety and mental anguish. He claimed to be rendered incapable of renting, selling, or managing his vast real estate empire and moved to disqualify me from representing the co-op in his efforts to regain control. Although my office is in Manhattan and the co-op is in Queens, I was sued before a friendly-to-Trump Brooklyn judge who refused to dismiss this frivolous case until I got this bullying tactic written up in the “Intelligencer” column of New York Magazine. Although that happened years ago, I recently read that his grandson has similar inclinations. What we learned is that the power of the press provided more protection than the law.

Another proxy battle involved seeking a shareholder vote to overturn a board’s rejection of an existing shareholder’s effort to acquire an adjacent apartment when expecting a baby. After exhausting every procedural device to avoid and, failing that, to delay the special meeting, and despite our client shareholder’s impeccable personal and financial record and the board’s history of permitting the connection of adjacent apartments, the board told the shareholders that it had confidential information from a confidential source that led it to reject the application.

At the special shareholders’ meeting called to seek approval, our client publicly stated that he was willing to have any such information made public, even if the source was not, so he could respond. The board refused, but despite its McCarthyesque tactics, it was able to persuade a sufficient number of shareholders to give proxies to defeat the application. In that case, we learned that boards have enormous power that can be exercised arbitrarily and capriciously to solicit proxies and to rig meetings and votes to defeat insurgent efforts.