Co-op Boards Must Navigate Complexities of Share Ownership for Smooth Operations

A co-op's unique structure means buyers become shareholders in a corporation, and as a result, it's important for co-op boards to educate themselves on the legal and financial intricacies of how shares work in a co-op. 

SHARE CERTIFICATES AND LIENS. A share certificate is a formal document representing evidence of co-op ownership. The certificate should show that the co-op has a lien on shares and whether there are any transfer restrictions. The lien, known as a Cooperative Ownership Security Interest (COSI), is automatically in place, meaning the co-op corporation has the first lien over other creditors if a shareholder fails to pay maintenance or assessments. Unlike traditional mortgages for real property, co-ops don’t need to file additional paperwork to establish the COSI lien. It is embedded in the structure of the co-op, ensuring the board’s ability to collect unpaid dues. 

TRANSFERS. When shareholders want to transfer their shares — most often through selling — the proprietary lease usually requires board consent. In some cases, if the board refuses a transfer, the shareholder may seek approval from a majority of the shareholder community. However, this option is rarely exercised, as obtaining board consent remains the preferred and most straightforward route. 

LOST CERTIFICATES. If a shareholder loses their certificate, most co-op bylaws require them to obtain a lost instrument bond — a form of surety bond that protects the corporation in case a third party claims ownership. This bond can be expensive, especially as it’s often tied to the market value of the apartment. Alternatively, some co-ops accept an affidavit from the shareholder indicating the certificate is lost or destroyed, often alongside an indemnification agreement to cover potential risks such as someone falsely claiming ownership. Some co-ops now use what’s called Eagle 9 policies, issued by title insurance companies, which offer a more affordable alternative to traditional surety bonds.

UNSOLD SHARES. Co-ops may also have to deal with holders of unsold shares, who are often designated by sponsors with unique privileges, including the ability to sell or sublet without board approval and being exempt from typical fees like flip taxes. Holders of unsold shares may, however, face obligations, such as updating the offering plan or registering with the Attorney General’s office as a broker dealer. Claims of unsold share status can arise, especially as original sponsors transfer ownership. Boards should carefully verify these claims against the governing documents, the proprietary lease and bylaws. This diligence is critical, as mistakenly granting unsold share privileges can lead to revenue losses.

ISSUING NEW SHARES. Occasionally, boards may consider issuing new shares, especially if unused space in the co-op can be repurposed. Any such decision requires strict adherence to the co-op’s organizational documents and may require shareholder approval, which the co-op’s attorney can advise on.