Propriety of Board Officers Soliciting Business from Fellow Share Holders
August 1, 2012
Jay B. Itkowitz answered a reader’s question on the propriety of board officers soliciting business from fellow share holders in the April 2007 edition of The Cooperator, the Co-op & Condo Monthly.
QUESTION:
I am the president of a coop board in Gramercy Park. One of our directors has recently become a licensed salesperson. When announcing this to the board, he indicated that he would be recusing himself going forward from interviewing any potential buyers.
At the time, this seemed adequate to ward off the semblance of any conflict of interest. Recently, however, the issue has become a bit more complicated.
The director has done a mailing to all shareholders announcing his association with a particular brokerage firm. This has raised more than a few eyebrows in the building. For starters, the director is also the treasurer. Consequently, he is in a position to influence the budget and ultimately maintenance. Further, he is an aggressive proponent of refinancing our mortgage (three years from it’s conclusion!).
Things get more interesting at this point. We lived for years under a didactic and shady board president who was, no doubt, involved in the sale of real estate in the building through his sister. There was no question among the residents that they had better use her or else! We are quite happy that those days are behind us. Now this. I am in a bad position, as the director in question is a close personal friend. However, I have an obligation to the shareholders to lead a board without even the slightest hint of impropriety.
What say ye?
ANSWER OF JAY B. ITKOWITZ:
In terms of legal advice, there is nothing inherently illegal in a board officer soliciting business from fellow shareholders. The Courts grant coop boards and officers and directors wide latitude to conduct business under the “business judgment rule.” Under such rule, actions of a board are presumed to be legitimate and proper in the absence of evidence of “bad faith” and/or “self-dealing”. The Court of Appeals in the famous case of 40 W. 67th St. v. Pullman, a case which upheld a cooperative’s termination of a proprietary lease, held that the “business judgment rule” requires the courts to “exercise restraint and defer to good faith decisions made by boards of directors in business settings.”
To challenge a decision by a board, a shareholder-tenant must show that the board acted (1) outside the scope of its authority, (2) in a way that did not legitimately further the corporate purpose or (3) in bad faith. Of the many types of decisions that boards make, the passing on an application for the sale of an apartment is the most frequent and potentially controversial decision that will impact on shareholder-tenants. Turning down an application can have a significant impact on a shareholder-tenant and engender tremendous hostility and fear among cooperators. Under such circumstances, I share your concern that such decisions should not even have the “appearance of impropriety.” When a board member or officer is engaged in brokerage in the very building in which he or she lives, it tends to suggest impliedly that tenant-shareholders seeking approval of such transactions would have a “leg up” by utilizing such broker/director/officer. Such an impression, even if not true, can adversely affect the reputation of the cooperative board and/or the cooperative. Read more…
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