Limits of Shareholder Involvement

Seyfarth Shaw
Dennis H. Greenstein,
Partner

Recently, several boards of directors of cooperative corporations that we represent have received petitions from shareholders to call special meetings. The purpose of these was to discuss and, in some instances, vote to overturn, decisions of the board. Some of the issues related to the enactment of assessments, hiring and firing of staff, building repairs, and decorative improvements decided by the board. Typically, the bylaws of cooperative corporations provide that written petitions containing at least 25 percent of the outstanding shares of the cooperative can demand that a special meeting of the shareholders be called by the board for the purposes set forth in the petition. Some of the petitions received did not contain the signatures of at least 25 percent or more of the outstanding shares of the cooperative corporation. Others had called for a discussion but no other action. Further, the bylaws and Business Corporation Law state that the only business that can be conducted is that which is stated in the notice of the meeting. Further, shareholders may be demanding that they vote on matters at the special meeting upon which only the board has the authority to act. There are certain powers of the board that should not or cannot be delegated. Boards cannot delegate the financial decisions of the building, such as voting on the operating budget. While shareholders are free to express their views to the boards, board members are elected and given authority and the fiduciary obligation to make decisions that they deem best for the building.

Legal Lesson

Boards must evaluate when and what information to provide shareholders of actions that will be taken and, in some instances, why they are taking those actions, and how some or all of the apartment owners will be affected. For example, if contractors are to begin exterior work on the property, the residents should be notified of the approximate duration and how it will affect them. However, it is important that the board not permit the shareholders to usurp its authority or its powers in matters relating to, among others, financing and operating the building. There also may be situations where confidentiality is necessary in order to protect the board from personal liability and the information demanded by the shareholders cannot be provided. Board members must accept that some decisions will be difficult and unpopular. The building’s attorney should assist in the preparation of written communications to the owners of the building and where necessary meet with the shareholders to provide an objective viewpoint of the reasoning for certain board actions.

Making calm and sensible decisions about what information to provide will go a long way in most instances. This will, hopefully, avoid needless controversy and the consumption of a significant amount of board time that could be better spent in dealing with the matters necessary to operating the building. (This advice is also applicable to condominiums.)