A Question of Confidentiality

I serve on the board of directors at my co-op. We recently voted on a proposed flip tax which did not pass. Voting was performed by mail, in person, and by proxy via a house mailbox located in the building’s lobby.

My main question: is the voting process in such a case deemed strictly confidential concerning how the shareholder voted as well as whether they voted at all? We just finished a meeting where I learned that a list of shareholders who did not vote on the proposal was disclosed to one board member who had spearheaded the project.

This board member also had unauthorized access to the above-mentioned mailbox. I questioned the validity of disclosure of this information as well as the access to the proxy votes which the mailbox contained. The argument was that the list would help in efforts to reintroduce the proposal. My argument was that shareholder confidentiality was violated and that this could open doors for obtaining any type of demographic information, i.e., how shareholders voted based on racial background, sex, etc. Sounds far-fetched, but the possibility remains. I also mentioned possible liability.

In searching through the proprietary lease as well as the corporation bylaws, I cannot seem to find any information on shareholder confidentiality. The best I could learn is that state law takes precedence. Can you shed any light on this issue please?

As an initial reaction, it certainly seems reasonable for co-op shareholders to expect confidentiality in their voting on propositions such as a co-op transfer fee (flip tax) as well as their voting in the annual election of board members. As the questioner asserts, one could imagine use of that data for a whole range of improper purposes. I was comforted to read, however, that the questioner concedes that most of such ideas are far-fetched. That is my view, too, with regard to co-op’s misuse of voting data.

After reflection, coupled with observations of some boards’ struggles to increase confidentiality, I submit that it just may not be practical to enhance confidentiality much beyond today’s usual and customary practices – although applicable laws regarding this are both too general and unenforceable to make a difference – and that new laws in this area would need to create protections similar to those governing voting regulated by governmental entities, which after Florida 2000 and Ohio 2004 (and many other places) may not be the best role models. Indeed, in many respects, most co-op shareholders generally should be thrilled if their co-ops are allowed to govern themselves and not be held bound to the restrictions that apply to federal, state, and local governments.

The conduct of co-op board members is governed by the statutes and case law that govern the conduct of the boards of business corporations. From the perspective of a co-op shareholder concerned about confidentiality or the conduct of board members in other regards, short of the criminal, the protections are general, sparse, and honored mostly in their breach.

New York Business Corporation Law (BCL) Article 6 contains numerous provisions governing voting by shareholders but not one word or phrase specifically protecting the confidentiality of ballots, proxies, or other voting records of shareholders. The closest that Article 6 comes to protecting shareholder confidentiality is in the limits placed on requests by fellow shareholders to examine the books and records of a New York corporation.

Under BCL Section 624, a shareholder is entitled to examine only the “minutes of proceedings of shareholders and records of shareholders…” So, a corporation need not disclose voting records to any shareholder. Implicit in that, I believe, is the corollary that a corporation should not disclose – perhaps as part of its fiduciary duty to its shareholders – these voting records unless it is otherwise compelled to do so, as it probably would be, for example, in a lawsuit over a contested election governed by BCL Section 619.

The law’s lack of concern for shareholder confidentiality is especially noteworthy in BCL Section 610, which provides that an inspector of election “before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of the inspector at such meeting with impartiality and according to the best of his ability.”

Strikingly absent from this is the idea that such an inspector – who could be just about anybody off the street so appointed – not disclose the identity of who voted for whom or for what on other matters than one would think should be confidential.

The BCL’s only comfort with regard to this is lukewarm, at best. Article 7 regulates directors and officers, who are usually the custodians (directly or through the management companies they retain) of shareholder voting records. Under the title “Duty of Directors,” BCL Section 717 provides that “A director shall perform his duties as a director…in good faith and with that degree of care of which an ordinary prudent person in a like position would use under the circumstances.”

This could be construed to impose upon directors the duty to preserve the confidentiality of voting records, unless, of course, (a) the director has a good faith basis for disclosing them (for example, to enhance the board’s ability to secure shareholder approval of a particular proposition), or (b) in breaching the confidentiality, the director claims that he did what reasonably could be expected to preserve confidentiality.

Standard co-op bylaws do not provide any more comfort concerning confidentiality than does the BCL. There is generally no statement of standards of conduct for directors. Indeed, there frequently is a provision that the bylaws should not be construed to, for example, “impose any great obligation of responsibility on the Board of Directors than now provided for in the Business Corporation Law.”

(I am aware that some co-op boards, either unilaterally or under shareholder pressure, have considered adopting standards of conduct for their directors, some of which might confront confidentiality concerns with some directness. I am unaware of any of these having left the drawing board. In addition, the standard co-op bylaw provisions regarding inspectors of elections impose no duties beyond the few and vague ones of the BCL.)

Standard co-op bylaws arguably undermine shareholder-voting confidentiality in at least one respect. Regarding voting at shareholders’ meetings, most co-op bylaws provide something along the lines of the following: “All voting shall be viva voce, except that any qualified voter may demand a ballot vote, in which case the voting shall be by ballot, and each ballot shall state the name of the shareholder voting and the number of shares owned by him, and in addition, the name of the proxy, if such ballot is cast by a proxy.”

Accordingly, the name of the shareholder must be inserted on the ballot even if the shareholder is voting in person rather than by proxy. That effectively means that a shareholder has no practical entitlement to separate his identity from his vote and thereby to avoid the use and disclosure of that information, much less any practical way of avoiding any breach of his confidentiality.

The only exception to this is a voice vote, which is almost never used except in response to an election of board members by acclamation, where the identity of who votes for whom is largely irrelevant. Moreover, a voice vote is far from confidential to the extent those present are able to quickly observe how some shareholders voted.

In practice, this issue of confidentiality arises most frequently in contested board elections, particularly in which a dissident slate threatens to unseat a prevailing majority. In this case, shareholders are acutely aware that the prevailing slate may exact retribution on those voting against them. Likewise, confidentiality concerns can arise when a controversial proposition, such as the adoption of a flip tax, is under consideration. For such elections or propositions, one side or the other might demand confidentiality of the vote, and the other side is often left with no choice but to adopt some protections for confidentiality.

Some of those may include designating the management company’s staff as the sole custodians and tabulators of the vote before, during, and after the vote. This works on some occasions and, of course, is the usual practice when a controversial vote is not involved. But more often then not, dissident shareholders realize that the existing board’s management company might be biased in favor of those who control the existing board and any propositions they are promoting, whether with regard to the tabulation of the vote or the confidentiality of the voting records. At times, this leads to retention of an independent voting tabulator, such as the Honest Ballot Association. This costs money, of course, and also begs the question of what happens to ballots and proxies after the vote. Most boards have no obligation to go that far but some are hard-pressed to resist if the dissidents apply sufficient pressure or, in the extreme, secure a court order directing retention of an independent agency to count votes and even to preserve confidentiality.

Some co-ops have taken steps to allow shareholders to vote with anonymous ballots, as voters entering voting booths for governmental elections. They have instituted comparable procedures in which a shareholder signs in at the beginning of the shareholders’ meeting and is given a ballot upon which the shareholder can vote without inserting his name or apartment number. The sign-in procedure is intended to assure one ballot per apartment.

To avoid stuffing of the ballot box, some co-ops print proxies on some distinguishing type or color of paper, and carefully monitor the production and storage of the blank proxies. Otherwise, with the names and apartment numbers removed, it is essentially impossible, of course, to tell whether multiple ballots are being submitted for the same apartments or for apartments whose shareholders are not voting.

But this is not fail-safe for many reasons, and the vast majority of co-ops do not seem to believe that the confidentiality that this supplies justifies the risks and burdens associated with separating the names from the ballots. For proxies, the safeguards would need to be even more complicated, given that a shareholder can rescind a proxy by voting by ballot at any time before the voting at a shareholders’ meeting is closed.

So, in the end, for better or worse, co-op shareholders have less confidentiality but perhaps more safeguards against ballot stuffing and the like than public citizens voting in governmental elections. And this is consistent with the prevailing view that in choosing the cooperative form of ownership, co-op shareholders at least sacrifice some of the freedoms of ordinary citizens.

This brings me to an aside of critical note regarding the trend to subject co-op board decision-making to the same level of scrutiny – under state and federal constitutions and laws – as governmental agencies (as evidenced by the New York City Council’s recent consideration of legislation implementing heightened scrutiny of co-op board decisions to approve or disapprove sales of apartments).

In a recent “Ask the Attorney” (“Board Power,” Habitat, November 2006), I discussed the February 2006 decision, Committee for a Better Twin Rivers v. Twin Rivers Homeowners Association, in which the New Jersey appellate division held that a homeowners association was similar enough to a municipality for its unit-owners to be entitled to free speech and assembly protections provided under the state constitution.

This was cited throughout the country as a large step in subjecting homeowners association decision-making to constitutional protections generally. In a July 27, 2007, decision, the New Jersey Supreme Court saw the light, reversed the appellate division, and denied the New Jersey constitution First Amendment-type protections to condominium association unit-owners seeking to invalidate association rules limiting posting signs, publishing of articles in the association’s newsletter, and the use of a community room.

Lo and behold, there may be some hope for preserving co-ops and other homeowners associations as entities that can be allowed to dictate for themselves many of the rights and obligations of their members, even if they are not as well-protected, in this regard, as ordinary citizens. And maybe sacrificing confidentiality regarding voting (even though not of constitutional weight) is just another price that co-op shareholders pay for the benefits of membership in the exclusive co-op club.