Three issues here: First - I don't think you have the right to create two classes of shareholders by creating an artificial division between resident and non-resident shareholders. That would be the equivalent of creating two separate classes of stock, which I am sure wasn't done as part of your offering plan. Therefore, they are not two different classes of stock. If it is an issue it should be decided by voting at elections. Let people make their case for representation. Some of your best, most qualified, or willing shareholders might not be in residence. Second: the rewriting and creation of new Bylaws - all bylaws I have ever heard of require a 2/3 vote of all shares, and some even require a 2/3 vote count both on the shares and # of units participating, to achieve a change to the bylaws. I believe that the Board can only propose and write if they care to, though any shareholder in good standing can initiate the process, but not cause a change. A special meeting has to be called and held for the vote, for that specific pre-notified purpose, and the vote meeting needs to be held within 30 days of the meeting notice to all shareholders. The rationale by some Lawyers claiming the standard Corporation Board practice allows for the re-writing of Bylaws at will by the Board (and if the shareholders don't approve they can always vote it down later) is in direct conflict with the approved Bylaw revision process language by the Attorney General's office when approving the Offering plan. Why would there be a 2/3 Rule if it could be at Board will? I think it's specious reasoning, but I am not a Lawyer. There is a third issue that some Bylaws only actually require that the Board President has to be a shareholder and you can have non-shareholder members of the Board of Directors. Just to keep it interesting...

Attorney Stuart Saft rewrote portions of our by-laws to do some of what you're proposing, so he obviously believes that a residency requirement is legal. Here's how Stuart rewrote the relevant section of our by-laws: "Each Director of the Corporation shall be a shareholder or the spouse of a shareholder. Directors shall be residents of the apartment building owned by the Corporation."

You'll need to check your own by-laws for the amendment procedure. Ours are based on a commonly used template from the early 1980s that allows the board to amend the by-laws without a shareholder vote. Yours may be different.

Note that this is very different from attempting to rescind the *voting* rights of non-resident shareholders. That would be illegal under NY Business Corporation Law (BCL). But serving on the board is not the same. Among other things, there's no legal requirement that board members be shareholders, as countless sponsor appointees can tell you. Conversely, being a shareholder does not convey any legal right to run for (or serve on) the board.

I agree with Carl's assessment of having the requirement that the co-op must be the shareholder's primary residence does not go against any city or state laws or regulations. This requirement is the same as shareholders of any corporation requiring that individuals who sit on the board of the corporation own a certain level of equity (shares of stock, options, etc) in the corporation. This is done to "align" the interests of the board members with the rest of the shareholders.

In the case of a cooperative residence corporation, the equity being required is physical residence. Sponsors and investors may not have the same affinity for the co-op community and its needs as full-time residents. The full-time residency requirement encourages better alignment between the board members and the community at large.

The two classes of shareholders mentioned by dsi1 have to do with voting rights based on any share class differentiation. This differentiation is clearly not permitted.

Thanks to Steve, Carl, and DSI for your input.

May I ask about the second proposed amendment making a resident shareholder ineligible for the board if his/her unit is for sale?

Steve's point about physical residence being required to "align" the interests of the board member with the rest of the shareholders seems to be satisfied in this case as long as the building is still the shareholder's primary residence.

Or, would a legal point of view be that the expectation of becoming a non-shareholder at some point in the future throws the wanna-be board candidate out of "alignment" with the rest of the shareholders thereby justifying that shareholder's ineligibility for the board?

That reasoning, though, seems to be a bit of a slippery slope since 1) putting a unit up for sale does not imply any certainty that it will sell, and 2) many shareholders - including many that currently sit on many coop boards - can reasonably be believed to have an expectation of someday selling.

Finally, it just occurred to us here to ask what definition of resident is being used. Must the shareholder's apartment be his/her primary resident for the shareholder to be considered a resident? What about the case of a shareholder whose primary residence is somewhere else, but who resides in the coop apartment - and is the only person to ever reside in the apartment - when convenient for business?

Any thoughts?

Thanks in advance.

Steve's point about aligning the interests of board members with the best interests of the corporation (co-op or otherwise) is well stated. This may well be a motivating factor in the laws allowing restrictive criteria to be set for board membership. But Steve isn't saying that alignment of interests is a requirement. Just the contrary; pretty much every co-op's original by-laws were written to allow the sponsor to elect non-shareholder puppet members to the board. These people will vote Yes to anything the sponsor proposes, regardless of whether it's good for the co-op.

I'm not a lawyer, but it seems likely that the Business Judgment Rule would be the guiding factor here. Unless you choose criteria in bad faith or in a way that clearly doesn't further the purposes of the co-op, you would seem to be on firm ground. For example, if the guy in 47A insults your Abraham Lincoln costume at the building's Halloween party, and you then pass a requirement that no one in Apt. 47A may serve on the board, that's bad faith and is unlikely to survive a legal challenge.

You should consult your co-op's attorney before making any changes to your by-laws, especially if you have any doubts about whether the criteria you're choosing for board membership are legal.

On the second proposed amendment, what if the apartment is in Contract already and the shareholder just waiting for closing date?

An interesting conversation, from reading everyone's comments the presumption seems to be that if you are no longer resident, or not resident you can't possibly have interests as 'aligned' as a resident shareholder does. There is nothing to support that proposition qualitatively nor can that be objectively proven. Therefore residency becomes the overriding criteria for alignment and capability, and not one's actual capability, objectivity, and the interest to protect and ensure the viability of one's investment let alone give up a considerable amount of time to contribute to the common good of the enterprise, not withstanding. Secondly, the spouse of a shareholder, therefore not being a shareholder, is viewed by their residency to be inherently more aligned than a shareholder who is a true stakeholder in the corporate property. Third the assumption is that a non-resident shareholder is either s sponsor's puppet or an investor/owner and disallows for other scenarios including retirement, various life script scenario changes, and income generation from subleasing etc.
I think this all strays from the real need and purpose of the Board which is to manage and administer the property in a skilled, fair and intelligent, forward looking manner. We have to manage it's assets and it's staff and Management Company, along with the professional services it has contracted for such as a Manager, auditors, investments, Lawyers, and Certiorari Attorneys etc. Aside from knowing if the elevator is out today, or someone's pup had an accident in the hallway yesterday, you are looking for real interest, skills and balance - not easy to find in the workplace let alone your Coop, and, trying to find Board members who don't have an agenda is difficult enough.
The fact that Mr. Saft re-wrote a Bylaw the way he did says to me that he was doing work-for-hire according to the whims of his Board who obviously had an agenda and sought to exclude someone, or some group from being on, or gaining control of a Board in opposition to those who caused it to be written. He wrote it in a manner such that he hoped would make it through a court challenge if someone decided to fight it. You can't make assumptions about his opinion or beliefs, only his skill in carrying out his assignment. You do not know from this if he disagreed with the Board or not.
I think open election Q&A Board meetings, if it is a large building with many units then maybe a bio and 'why I am running' paper released 2 weeks before annual elections for those interested in running should have sufficient exposure to enable the shareholders to choose who they best felt represented their interests. If the problem is a sponsor who owns too many shares, then there are other, bigger issues to contend with.
Personally, I think a Coop should be inclusive and not exclusive when it comes to Boards. It takes a few years for a newbie, if they have the capabilities and interest to learn how, to be a good Board member, and learn to think from the POV of the Coop first, even if it is not what their personal choice might be - not so easy. The absolute rarest and hardest thing to find when looking for new Board members is a reasonably intelligent, mature adult, with common sense, the ability to hear what is really being said, a sense of fair play, and the awareness that you can't really hear with your mouth open. Done properly it is a truly humbling service proposition that you can be proud of, understanding that your authority is on loan from the shareholders and not something you should be wielding. The kind of shareholder issues that land on the table at times can be truly stunning. The ability to deal, have a bit of compassion and empathy, and to say no, because it is the right thing, or yes because it is the appropriate thing is often tough. I think you need to look at the intent of all of this exclusionary 'stuff', the implied assumptions, and to me, the fallacy of the underlying proposition. I think that some Boards/people make too many rules. You need to make only those rules necessary to manage situations, not start writing rules to control people. All shareholders should be equally entitled.
If it is an issue with absentee investor owners then stop selling to investor/owners or make the subletting clause allowable only after 3-5 years of residency. Having to eat 3-5 years of NYC maintenance charges before you can sublease should have a chilling affect on non-resident purchasers. Don't penalize your neighbors, it builds resentment and causes muttering cliques to form. keep it all as transparent as possible, a simple newsletter after every Board meeting should suffice - this is what we worked on, this is what's coming up to deal with, this is what we decided-because...etc.
This desire to exclude non-residents is also dealable if you have a rule about missing X# of Board meetings get's you removed. You can have a resident Board member who is out of town too much due to business, or retirement to the south etc. that they miss half the years meetings, what use is that to a hard working Board? So, a non-resident who can always be there, or a resident who can't, which one helps the building? Your first priority should be good people who are willing to work hard to make it a financially stable, good place to live, and are fair-minded.
I hardly see most of my neighbors, it's no different living there or not for that matter. If there are building issues the Manager or Super will call or send an email to alert you. As a Board member, 99% of what occurs in the building we are informed of, as opposed to experience because we live there. Decision-making on taxes, finance, DOB filings, Local Law 11 work, bills, a new laundry room, elevators, uniforms, raises, vetting contracts - what does any of this really have to do with living there, as opposed to the experience of living and the need to make sound decisions?
Sorry for the long speech!

Just one follow-up comment --

dsi1 wrote:
>The fact that Mr. Saft re-wrote a Bylaw the way he did says to me
>that he was doing work-for-hire according to the whims of his Board
>who obviously had an agenda and sought to exclude someone [...]

No, that's simply not true. Exactly the opposite is the case: Stuart Saft recommended that we have him review our by-laws and proprietary lease to get his advice on whether anything should be changed. He prepared a 22-page memo (!) that was chock full of suggestions, and then he edited our by-laws to conform to that memo. The restrictions on board membership were entirely his idea; we liked them and voted to adopt them, following his wording exactly.

Well,now we know what Mr. Saft did, but are lacking any real info as to why he would recommend the total disenfranchisement of a class of owners, who certainly lacked any awareness or imagined that this possibility was in the offing, when contemplating their purchase. As to the 'on the ground' make up of the shareholder mix, and therefore the real issues this Coop, or Rob's was/is facing, or what has motivated this movement amongst some of Rob's Board members, we are left only with the reportage of the attitudes and the proposed fix. As to Mr. Saft: We do not know why he has proposed such a rewrite of the by-laws of that Coop. Is there a particular circumstance in that building that precipitated such a rewrite of that rule? Or is it his personal prejudice? For general principles of balanced function and capability, along with an inclusive sense of enfranchisement I find such rulings, lacking any info to the contrary, to be deficient in this matter for the previously stated reasons. There is no empirical or logical, or even common sense evidence to support such a position lacking some particular overriding circumstance. There are, I am sure, all manner of localized examples, if a particular Coop has a compound issue situation of Sponsor patsies, or multiple investor owners where their Sponsor has sold blocks of apartments to investors, then in that kind of individual scenario radical, excisement of electoral protocols might be in order. However, lacking any before-the-fact info for this discussion, to extrapolate a normal mix scenario of shareholders, a small percentage of non-resident owners, some sponsor holdovers someone really has to show cause for revamping the elections to an exclusionary basis that doesn't smack of intentional disenfranchisement. Since there are a variety of possible solutions to cope with particular scenarios a blanket disenfranchisement of a class of owners who are just as entitled to representation as any other shareholder is questionable practice. Particularly troublesome is the implied presumption of malignant self-interest on the part of the non-resident Board member(s) but a magnanimous and expansive attribution of bon homie judgement attributed to the resident shareholders. So my one question is to Carl is was it the Board that voted to change the Bylaws, or a 2/3 majority of the shares that were voted to approve the change in the Bylaws?
From my experience after 24 years serving on Boards in various capacities I can assure you this is not the defacto case. It comes down to the agenda, intent and capacity of the individual Board member, which means you have to vote wisely. I suspect that those buildings that have sponsors who sold off blocks of units to investors, Sponsors who hold blocks of units, are sometimes against anything that will serve to raise the maintenance, or buildings that allowed sales to a large number of non-resident foreign investors who only come into town a few times a year and like to loan out their units, which should be against the rules. Lacking any info that lays claim to any of these scenarios, a normal Coop mix should not proceed in this direction. It smacks of a control issue and not a governance issue.
If you and your shareholders have tweaked your Bylaws to prevent as much as possible: pied a terres, hidden Investors, college kids, and loaners, have let your real estate agents know that you are really only interested in resident shareholders, you might stand a chance of minimizing some of these scenarios. Ultimately, when all is said and done, and you go through the purchase application, vet everything etc., and you are ready for the interview, what you are really doing, is shopping for good neighbors. Good luck!

Well,now we know what Mr. Saft did, but are lacking any real info as to why he would recommend the total disenfranchisement of a class of owners, who certainly lacked any awareness or imagined that this possibility was in the offing, when contemplating their purchase. As to the 'on the ground' make up of the shareholder mix, and therefore the real issues this Coop, or Rob's was/is facing, or what has motivated this movement amongst some of Rob's Board members, we are left only with the reportage of the attitudes and the proposed fix. As to Mr. Saft: We do not know why he has proposed such a rewrite of the by-laws of that Coop. Is there a particular circumstance in that building that precipitated such a rewrite of that rule? Or is it his personal prejudice? For general principles of balanced function and capability, along with an inclusive sense of enfranchisement I find such rulings, lacking any info to the contrary, to be deficient in this matter for the previously stated reasons. There is no empirical or logical, or even common sense evidence to support such a position lacking some particular overriding circumstance. There are, I am sure, all manner of localized examples, if a particular Coop has a compound issue situation of Sponsor patsies, or multiple investor owners where their Sponsor has sold blocks of apartments to investors, then in that kind of individual scenario radical, excisement of electoral protocols might be in order. However, lacking any before-the-fact info for this discussion, to extrapolate a normal mix scenario of shareholders, a small percentage of non-resident owners, some sponsor holdovers someone really has to show cause for revamping the elections to an exclusionary basis that doesn't smack of intentional disenfranchisement. Since there are a variety of possible solutions to cope with particular scenarios a blanket disenfranchisement of a class of owners who are just as entitled to representation as any other shareholder is questionable practice. Particularly troublesome is the implied presumption of malignant self-interest on the part of the non-resident Board member(s) but a magnanimous and expansive attribution of bon homie judgement attributed to the resident shareholders. So my one question is to Carl is was it the Board that voted to change the Bylaws, or a 2/3 majority of the shares that were voted to approve the change in the Bylaws?
From my experience after 24 years serving on Boards in various capacities I can assure you this is not the defacto case. It comes down to the agenda, intent and capacity of the individual Board member, which means you have to vote wisely. I suspect that those buildings that have sponsors who sold off blocks of units to investors, Sponsors who hold blocks of units, are sometimes against anything that will serve to raise the maintenance, or buildings that allowed sales to a large number of non-resident foreign investors who only come into town a few times a year and like to loan out their units, which should be against the rules. Lacking any info that lays claim to any of these scenarios, a normal Coop mix should not proceed in this direction. It smacks of a control issue and not a governance issue.
If you and your shareholders have tweaked your Bylaws to prevent as much as possible: pied a terres, hidden Investors, college kids, and loaners, have let your real estate agents know that you are really only interested in resident shareholders, you might stand a chance of minimizing some of these scenarios. Ultimately, when all is said and done, and you go through the purchase application, vet everything etc., and you are ready for the interview, what you are really doing, is shopping for good neighbors. Good luck!

Wow, that's a surprisingly aggressive response to an issue that's not particularly contentious, in my experience. As noted earlier, eligibility for board membership isn't even legally tied to being a shareholder - many boards have non-shareholders as directors. But I can think of at least three clear advantages to limiting the board to shareholders residing in the building:

(1) No puppet members can voted in by the sponsor to form an insurmountable voting block. This is a problem that has plagued co-ops ever since their inception.

(2) I don't believe that any of our non-resident shareholders (two investors and a trustee among them) have ever attended an annual meeting. What are the chances of getting any of them to show up regularly for *monthly* board meetings?

(3) A great many issues that boards deal with are specific to the building at hand and are not just general management problems. Why would you want someone who last set foot in your building in 1997 to be making decisions about the decor of your lobby, the paint in your hallways, the operation of your laundry room, or shareholder-specific issues concerning people who are just random strangers to them?

As it happens, we haven't had a non-resident (shareholder or otherwise) who wanted to run for the board since the 1980s. We adopted the changes that Stuart Saft suggested because we thought they were a good idea, not because they addressed any specific problem we were having. The changes were approved unanimously by the board and distributed to all shareholders, including a redline version that highlighted all the changes. We never received even the slightest complaint about any of the changes.

As a side note, we didn't adopt everything that Stuart suggested. For example, he proposed that we require written notice in advance of the annual meeting from anyone who wanted to run for the board. That's fine for limiting chaos at the annual meeting of a large co-op, but we're a fairly small building (33 units) and we wanted to continuing allowing nominations from the floor. So that's what we did.

Many coops no longer have sponsor units.
Some Boards need to deal with more than paint color.
There is a dearth of applicants for this underappreciated position.
Better to look hard for highly qualified rather than reasons for excluding it.
Those that can offer the most don't necessarily volunteer.

Ano, aside from your comment that "Some Boards need to deal with more than paint color" (which is obviously true of every board on earth), there's a simple answer to the points you raise. If you're having trouble getting people to run for the board, and non-shareholders or non-residents are clamoring to serve, then modify your by-laws (if necessary) to allow them to run. Or allow non-residents but require that they be shareholders, if you like that better. In that case, you'll need to delete the standard sponsor-inserted line that appears in most co-op's original by-laws: "It shall not be necessary for a director of this Corporation to be a shareholder."

Thank you Ano, Carl I certainly didn't mean to offend you. I am sorry of my response seemed aggressive, I think it tries to separate and elucidate the governing issues, and to distinguish between the possible scenarios that can precipitate such actions, along with alternative solutions to what, seems to me the blatant disenfranchisement of a class of owners. The situation is self resolving in that the few shareholders you are excluding obviously have no interest, their lack of attendance reveals their lack of interest to participate; yet you hold up their lack of attendance as a rationale for exclusion.

So, in response to your 3 reasons:
1). I believe there are relatively few mature Coops that still have Sponsor puppet issues such, that impact and control the majority voting process, this can be resolved thru legal channels. If the Sponsor holds a majority of shares in a mature Coop then that is a huge problem for many reasons beyond governance, and it is then obvious that the resident tenant committee at the time of conversion did not succeed in, or failed to raise and negotiate a change in the black book Bylaws regarding a distinctly phased transfer of Board authority over a specified period of time. It has been a problem for some Coops, but not most Coops. This really shouldn't be part of this discussion;
2).So... that's 3 shareholders out of 33? If someone hasn't set foot in the building since 1997, I doubt they would run, or be elected to the Board. Their obvious lack of interest obviates the supposition of interest and involvement. If you have a rule that you cannot miss more that 3 meetings in a year, or two consecutively it should clear up that scenario. What if they live around the corner? They could be in and out of the building daily?
3). All of the issues you state go to the heart of the market viability of their investment, which they have a right to assure themselves of. Decor of the lobby has to do with taste but has a big impact on sales as well. I know of a Board that spent $200K, self-approved, on hideous carpeting and granite lobby tile, all wrong, with no master plan devisement by a qualified designer etc. So everyone is stuck with their awful taste. They never put up display Boards for shareholders to see choices let alone voice an opinion. If the non-resident is a very interested shareholder and happens to be a good prospect, how do you fail to benefit?
Not everyone who runs for a Board, should be on a Board. There are those who should be on a Board and need coaxing to agree. If you read Habitat long enough, you will see a steady stream of horror stories and corruption, incompetence or both, small and large. Should suffice to keep one alert and humble at the same time. I wouldn't exclude anyone based on their residency. I would hope you are able to form a Board out of the most skilled, reasonable and qualified shareholders, which includes being available and present as needed, in order to perform the job appropriately.

dsi1, thanks for your thoughtful response, which is well-argued. You're right that the issue is simply not an immediate problem for us, since our non-resident shareholders have never expressed the slightest interest in running for the board. On the other hand, we try to be an exceptionally responsive board in a small building, and we've found that personal contact with day-to-day life in the building is a big plus in guiding our decision making.

I think your argument works better for condos than for co-ops. With condos, you have many more sublets, with owners who are basically landlords in many cases. Such owners have a general interest in enhancing the value of their properties to ensure that they can continue to rent out their units profitably. But non-resident shareholders in co-ops are typically investors (or the sponsor) who own rent-regulated apartments and want to pay as little as possible while waiting to take possession of the apartment. There may also be non-resident shareholders who are subletting for a year or two and wouldn't be around to serve on the board, anyway.

Certainly there are complete idiots and jerks on boards who shouldn't be there. The number of bad and illegal board decisions that you hear about is frightening. Conversely, some people who would be good board members need some coaxing to join. (I was in that category myself, a number of years ago.) If we had a shortage of "skilled, reasonable and qualified" people in our building, then we might be willing to broaden the candidate pool to include non-residents and even non-shareholders, as our by-laws used to allow. But the "hands-on" approach has worked well for us and we would greatly prefer an in-house board that has to live with the consequences of its decisions every day.

Carl, your solution may be fine for your "small" coop now with its current residents and Board. It would be wrong to generalize from that to other CIRAs or your coop at another time.

Boards (and similarly "Management") have a way of stagnating, either passively or actively, much as do other "governing" bodies. If things seem fine, others may not challenge incumbents, while things may be changing for the worse and going unnoticed. A Board that wants to stay in place ( a common election promise, "I have time now") has the power of the proxy, access to tools of information in the building, and its own "organization" on its side. Opposition may be at a considerable disadvantage.

Many CIRAs like many other organizations run fine. But when problems arise simply allowing for non-residents in the Bylaws may not be enough. It is short-sighted to assume that only those who both own shares and sleep in the building daily are qualified. Indeed, public corporations gain value from outside directors and one might presume that if eyes were opened, coops and other CIRAs would recognize the potential cost of tight restrictions on Board membership (possibly potentially even greater in a coop with a small number of units).

Hi Steve and Carl,

The discussion that ensued from my original post has been interesting and informative, however, I think some of the specifics of the OP may have gotten lost in the shuffle. (Not a complaint, though, as it has been a helpful exchange for me and, I'm sure, many others.)

If you look again at Carl's first reply, please note that although Steve paraphrases Carl as referring to "the shareholder's primary residence," Carl actually writes, "Here's how Stuart rewrote the relevant section of our by-laws: `Each Director of the Corporation shall be a shareholder or the spouse of a shareholder. Directors shall be residents of the apartment building owned by the Corporation.' " What I'm trying to point out is that the by-laws specifically refer to "residents" not shareholders who occupy their unit as their primary residence.

To Carl: How do you, as a board member intepret the by-law drafted by your attorney and, presumably approved by you as a board member? Does residence mean primary residence? Or, does residing in the unit - and being the only person to reside in the unit - when it is necessary for business - satisfy your board as to qualifying the shareholder as a resident?

To Steve: While DSI makes a compelling case for why prohibiting shareholders from running for the board based on residency is probably not the wisest policy for coops where the sponsor no longer has a presence, we are still hoping for an insight into the legality of doing so in the case of a shareholder who uses the unit as a pied a terre. Or, perhaps from a legal standpoint there is no distinction to be made between between "residence" and "primary residence"?

Again, thanks very much for your time and your thoughts.