David L. Berkey, Gallet Dreyer & Berkey

Gallet Dreyer & Berkey, Partner

David L. Berkey

The client’s tale. One of our co-op buildings has an investor who owns more than 50 percent of the outstanding shares, often called “unsold shares.” The co-op and investor agreed that at elections, holders of unsold shares would “elect one less than a majority of the members of the board of directors” – in this case, two members of the five-member board – so they could not take control of the co-op. In an attempt to run the board, the investor sold the shares allocated to two of its apartments to friendly parties. The investor defied the election agreement, and three investor-supporting board members were voted in. The investor was in control of the co-op.

The two resident directors and the resident who was not elected to the board had two options. They could challenge the election in a court, or they could call a special meeting of shareholders and hold another election for a new board, this one with a majority of resident directors. They chose the latter option. At the special meeting, the investor appeared, assuring a quorum. The investor, who had been elected president by the new board, presided at the meeting, called it to order, and declared that only the business set forth in the special meeting notice could be conducted.

The investor claimed that the notice was defective and that the meeting could not happen. Corporate counsel informed the investor that the notice was legitimate and the investor walked out, declaring the quorum broken. However, once a quorum is established, it cannot be broken, so the shareholders were able to continue with the election. A new board of four resident-owners and the investor was elected.

The lawyer’s take. There are many reasons why an investor or holder of unsold shares or units may seek to control a board. He may want to keep expenses and services at minimal levels and avoid changes that would benefit resident-owners. He may wish to control the managing agent and have it manage his unsold units, while resident-owners prefer to have an independent manager for their building. He may also wish to continue to rent his investor apartments rather than sell them, especially when the rents he collects exceed the maintenance and common charges that he pays. The residents may want him to sell his units to increase the percentage of resident-owners, make sales and financing easier, and avoid revolving-door tenancies in the unsold units. Boards should be wary of any effort by an investor or substantial holder of unsold shares to take control of their co-op or condo and should consult with counsel if such actions are occurring or expected.

Case closed. Shareholders, unit-owners, and board members of co-ops and condos should know all of the terms of their bylaws and agreements that govern voting. They should review those agreements with counsel to assure that elections are conducted properly. Corporate counsel should help plan the agenda of and should be present at annual and special meetings so that surprise actions by investors or others, such as attempts to cancel a meeting to avoid a vote, can be dealt with in an orderly, law-abiding manner.