Cooperatives and Condominiums Must Disclose Conflicts of Interest7/11/18 | By: Marc J. Luxemburg, Esq. | GDB Summer Newsletter
Section 727 of the Business Corporation Law (“BCL”), as enacted last year and recently amended, requires that every cooperative housing corporation incorporated under the BCL and every condominium must report to its shareholders or condo unit owners at least once a year of transactions voted on by the board where one or more of the directors is an interested party pursuant to Section 713 of the BCL. If there is no such transaction, the report must state specifically that no such transaction occurred.
In order to comply with this new law, you need to do the following:Once a year, preferably at a board meeting, a copy of Section 713 of the BCL must be given to each director.
- The minutes can recite that this was done but it would be better to have each director sign an acknowledgment of receipt. A form for such acknowledgment is available from our office.
The annual report concerning interested party transactions must include (i) information on the contract recipient, contract amount, and the purpose of entering into the contract, and (ii) a record of each meeting where the contract was voted upon, including which directors attended, what the vote was, and how each director voted on each contract.
- The statute does not state when during the year it should be done or the year to be covered by the report. The statute does not expressly state that it must be for a calendar year, so apparently the board can select another date as a starting date. Presumably, there must be a report during the year 2018, before December 31, 2018, so this would involve the board selecting a starting date in 2017, one year before the date of the report. We recommend having the report cover the same calendar or fiscal year covered by the financial statement.
- For sponsors, or holders of unsold shares, where any of the sponsor or holder’s personnel are on the board, there should be included in the report all the agreements between the sponsor/holder, or any affiliate, and the coop.
- This would include the management agreement, insurance brokerage agreement, mortgage brokerage agreement, any contract for repairs or services provided by any sponsor/holder affiliate, or any other contract in which principals of the sponsor/holder have an interest.
- For board members who have contracted to sell or sublease their apartments in the building or are brokers involved in sales or subleases of apartments in the building, technically the statute does not expressly cover the giving of consent to (a) a transaction between a board member-shareholder and a purchaser or sublessee where the cooperative is not a party to the contract, or (b) a transaction between non-board member shareholders and a purchaser or sublessee where the board member broker will receive a commission if the transaction is approved, but neither the cooperative nor the broker is one of the parties to the contract. However, in our opinion such transactions do involve a conflict and it is possible a court would interpret the statute broadly to require a report of such transactions.
- If there is a change in the members of the board during the year covered by the report, our opinion is that both the former and current members of the board during the relevant period must sign the report.
- We suggest that the report be attached to one of the other required communications to shareholders, such as the annual window guard form, or the annual financial statement.
- Forms for the required reports are available from our office.
- Note that condominiums are not otherwise subject to the BCL and the statute does not state that BCL Section 713 now applies to the conduct of a condominium board of managers, beyond the making of the report, although it would be prudent to assume that it does.
Please call us if you have any other questions concerning this new requirement.