Frank Lovece in Board Operations for HABITAT magazine
A forced election can lead to an unwindable tug of war for co-op and condo boards.
It’s perfectly understandable that some co-ops and condos have postponed their annual meetings and board elections. Amid the upheavals caused by the pandemic – including working from home alongside equally frazzled family members – distracted board directors may not realize that a year has already flown by. Or they may simply want to adhere to the health and safety protocols of avoiding large public gatherings.
But pandemic stress and safety concerns aside, boards can no longer afford to miss their due dates. With a recent change to the Business Corporation Law (BCL) that now allows for virtual annual meetings, buildings that fail to hold theirs in time could find themselves facing not only a revolt from residents but also legal headaches and hefty fines.
“You don’t want to get to the point where people have to force an annual meeting,” says Steve Wagner, a partner at the law firm Wagner, Berkow & Brandt. “That’s like a shot across the bow.”
Essentially, the October 2019 amendment to the BCL allowing virtual meetings gives more teeth to shareholders to demand action. Section 603 of the BCL states that if 13 months have passed without the election of “a sufficient number of directors to conduct the business of the corporation,” the board must call for a special election within two weeks. If it doesn’t, holders of 10% of the shares entitled to vote may demand, in writing, a special meeting to be held not less than 60 or more than 90 days later.
Some co-op bylaws may require that 20% or 25% of shareholders sign the petition, as opposed to 10. But either way, the board secretary has five business days to give notice of the requested meeting. Fail to do so, and the annual meeting can be called by any single person who signed the petition – and the optics aren’t good. “It makes the board look ineffective,” Wagner says. “That’s one reason why, in my experience, anytime I’ve sent a 603 demand, the board has responded promptly.”
As for condos, which are governed under the New York State Condominium Act and not the BCL, their boards aren’t off the hook, either. “I’ve never seen a provision of condo bylaws that didn’t include the right to a special meeting,” Wagner says. “The unit-owners can get together to call for an annual meeting exactly the same way shareholders can.”
There’s another incentive for boards to move quickly: When shareholders convene a meeting, whoever shows up is considered a quorum. One person can constitute a quorum. Even though a Section 603 petition strictly limits shareholders from conducting any business other than holding elections, that alone can be damaging. The last thing any board wants is to be forced by a handful of shareholders to hand over control. It’s an unwindable tug of war that boards should avoid.
“It goes without saying that you don’t want the people you’re fighting with running an election,” Wagner says. “You want it to be orderly, proper and transparent, but if it comes down to a special meeting, you’ve lost control.”