If the Majority Doesn’t Rule

Stroock & Stroock & Lavan
Dale J. Degenshein,
Special Counsel

We often see situations where the residential board members hold minority positions. Since sponsors can – and regularly do – control boards for a period of years regardless of whether they own many (or sometimes any) units, there is often the question of whether the residential owners are adequately represented. There are many buildings in which apartments are owned by sponsors/investors so that they have a sufficient number of votes to elect people to the board. There are some buildings (including those that are hotel co-ops or condos) that were designed to allow a sponsor to hold a majority of seats on the board. We often encourage majority board members to abstain from voting when the issues affect only the residential owners, e.g., alteration-related issues from which the sponsor is exempt. At the other end of the spectrum, there are those issues for which a sponsor/investor is undeniably “interested” in the matter, such as whether the board should hire an architect to investigate construction defect complaints. But for the myriad situations where majority board members may not be “interested” as defined by law – but whose decision may be challenged – we suggest that the majority members not vote. In at least one instance involving approval of contract where the sponsor was an interested party, we had the minority directors obtain independent legal advice so that the building attorney – who is hired by the full board – was not conflicted and could continue to take direction from the “board.”

Legal Lesson

In order to determine whether directors are interested, and more to the point whether they can vote even if they are interested, one can look to Business Corporation Law, Section 713 (and possibly the bylaws) for cooperatives and the bylaws for condominiums. Unfortunately, however, these provisions are often difficult to navigate and do not address every issue.

We believe that the most important thing board members can do is acknowledge the potential conflict, look at the issue from a common sense point of view, and remember that a contract approved by interested directors could be voidable. Its members should then work together to make a practical decision as to whether a vote of disinterested directors could be obtained.