Co-op Board’s Authority to Amend Bylaws?

Co-op Board’s Authority to Amend Bylaws?

BBCA: Our co-op’s bylaws provide that they can be amended by a two-thirds share vote or two-thirds vote of the board. The provision expressly prevents the board from amending the provision concerning board compensation.

Are there any implicit limitations on the board’s ability to amend the bylaws? Can the board amend the bylaws to establish fines for violating the house rules? Can the board amend the provision in the bylaws which states that the form of proprietary lease can be amended [by a vote of] three-fourths of shares? Can the board amend the bylaws to give itself the right to amend the proprietary lease?

Ned in Toronto, Canada: You just said that they can be amended by a two-thirds share vote or two-thirds vote of the board (excluding board compensation) so it appears they can be unless there are other bylaws, such as board compensation that you mention, to prevent the board from amending without a share vote.

If your bylaws allow for the board to amend bylaws, then they have the authority to do so including establishing fines for violating house rules.

There is nothing wrong with them amending the proprietary lease if it is in the best interest of the co-op.

Carl Tait: Somewhat surprisingly, our attorney told us that the board cannot vote to impose monetary fines, whether by altering the bylaws or otherwise. Such a fine would be considered a material term of the proprietary lease, and most leases can only be modified by a supermajority vote of shareholders (two-thirds of shares, in most cases).

Your proprietary lease may be atypical, but it would be very unusual for the board to have the power to amend the lease in any way. And they certainly can’t vote to give themselves a power they don’t have! The bylaws, however, can typically be amended by the board alone, but not if the changes exceed the scope of the board’s authority.

CondoGuy1: Your lawyer is right and wrong.

It is time consuming to do a two-thirds vote, and then to update your bylaws requires legal fees and a trip to Albany. Meanwhile, 90 percent of time it is not necessary. Your lawyer is splitting hairs. You can set up “house rules” – the question of whether legally you can enforce them is a different matter.

Carl Tait: CondoGuy1, a board might get away with instituting a fine that can’t be legally enforced. But it looks really bad if the board gets caught exceeding their authority, especially if they knew they had no right to impose those fines.

There have been numerous cases where boards passed seemingly reasonable fines in good faith, and had to back down when they were challenged. This doesn’t instill confidence in the board, and undermines shareholders’ perceptions of the fairness and competence of the board.

I agree that token fines for objectively clear misdeeds aren’t going to raise many hackles in practice. The problem is imposing larger fines, or enacting fines for more problematic areas such as violations of house rules.

BBCA: I’m familiar with the North Broadway Estates decision holding that a board may not amend house rules to create fines. But have other courts reached the same decision? Did this rule survive [the] Levandusky [ruling]?

Also – in my case, the board would not be using its authority to amend the house rules, but the authority to amend the bylaws. It’s one thing to say that a board’s authorization to amend house rules is not sufficient to allow the board to impose fines. But the bylaws are core governing documents. If the board is given the authority to amend it, why can’t it exercise that authority under the Business Judgment Rule to impose reasonable fines?

Carl Tait: No, [the] Levandusky [ruling] doesn’t give the board the authority to impose fines. One of the prongs of Levandusky is that the Business Judgment Rule only protects the board’s actions if they are acting within the scope of their authority.

The bylaws are a core governing document, but they don’t trump the lease. A board can’t change any material term of the proprietary lease. That can only be done by shareholder vote, in most cases.

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Some of the responses have been edited for clarity. Opinions expressed in Board Talk do not reflect the opinions of Habitat.

Want to participate? http://www.habitatmag.com/Board-Talk

Some of the responses have been edited for clarity. Opinions expressed in Board Talk do not reflect the opinions of Habitat.