The Role of the Corporate Counsel - Dewey & LeBoeuf

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Stuart M. Saft, Partner, Dewey & LeBoeuf. What is the role of the corporation's counsel?

BACKSTORY Earlier this year, I received a call from a member of the board of directors of a postwar, 200-apartment cooperative building in Manhattan. The member told me that the board had approved his purchase of shares that were going to be issued for the roof space outside his second-floor apartment, and that he had agreed to pay my legal fees to have the shares issued for the space and conveyed to him, but that he needed it done right away because of his purchase of the adjoining apartment.

I explained to him that it was not a complicated process, but that we would have to obtain a “No Action Letter” from the Attorney General, which would take a couple of weeks. I questioned him about the space and learned that it was in the front of the building and was basically the eight-foot-wide 20-foot-long setback over the building's entrance. I asked whether any other shareholder would be affected, and he said that there was a third apartment but the owner did not care.

I had an associate start working on the “No Action Letter,” which was the longest lead-time item, and I called the managing agent to confirm the vote. The agent confirmed that the board had approved it, but on further prodding, I learned that the board member had just walked into the board meeting and announced that he was buying the adjoining apartment and wanted to buy the space outside the second-floor apartment for $35,000, which the board immediately approved with the requesting board member present.

I also learned that the board had not inquired about the attitude of the owner of the third second-floor apartment, who would now have his terrace outside her apartment, or how the front of the building would look with a terrace above the entrance. Finally, I asked about the height of the parapet and learned that it was not high enough to accommodate a terrace and would have to be raised, but the requesting board member had not informed the board about what he was going to do to raise it or how it would look.

I then called the board president and learned that she, too, was very upset about the terrace, but she and another board member were outvoted by the requesting member’s friends on the board.

I then wrote to the board members and advised them that they would have to take another vote at a meeting in which the requesting member was not present, and that the board would have to consider all the facts involved. I explained that although the board had a great deal of latitude in dealing with the building’s space, under the Business Judgment Rule, the courts do not look at board decisions unless there is evidence of self-dealing. A board member buying terrace space could be considered self-dealing, so the board had to act carefully. Because the members could not meet prior to the requesting board member’s deadline, we did it by conference call. I arranged for the front of the building to be photographed and included that with the notice of the meeting.

Immediately before this, the managing agent received a letter from an attorney for the owner of the third apartment threatening litigation if a terrace was built outside her apartment window. I did not know how the board was going to vote, but I had detailed minutes of the meeting taken because, if there were litigation, I wanted a record that the board had considered all of the issues without the requesting member present. After a long and, at times, acrimonious discussion, the board voted against the sale.

COMMENT The role of the attorney is to make certain that the co-op or condo makes informed decisions, understands the risks it is taking, and is ready to disagree with the board if it is about to make a mistake. The attorney must also be proactive and make certain that he or she has all of the facts and not just the facts that one or more of the members want the board to hear. In this case, the violation of the Business Judgment Rule, as espoused in Levandusky v. One Fifth Avenue Apt. Corp., was very clear: a board member was getting a benefit and was present during the discussion; this was self-dealing. There would have been nothing wrong with the board’s action had the board member been not present during the discussion of the situation and had the board made a prudent business decision based on the facts.

But the board was acting based on an oral representation of what the board member was going to do and having gotten the other shareholders’ consent to do it. The other troubling fact was that absolutely no consideration was made of the effect the terrace had on the aesthetics of the building’s entrance. Although that was not a legal issue, I wanted the board to at least consider it because it would infuriate shareholders and the requesting board member should have been required to submit a plan on how he would deal with the building’s entrance in order to enable the board to deal with the issue. Finally, the requesting board member also had a fiduciary duty to the other members and the shareholders, and should not have placed the board in a position where the members had to choose between their friendship with him and what was in the best interests of the corporation. Instead of rushing this through before anyone asked any questions, he should have provided detailed information, gotten the written consent of the other shareholders, presented his request, and left the board meeting.

From the Desk of SMS:

I love the Al Pacino horror flick, The Devil’s Advocate, because it metaphorically represents how today’s complex legal system seems to be devised by Satan. It never really runs well and hurts people it is supposed to protect.

10

HOURS

Longest annual meeting length

I was replaced as lawyer for a co-op for refusing to bring a lawsuit that was a sure loser. After the board lost half million dollars when another lawyer filed the suit, I was re-hired by an embarrassed board.