A shareholders agreement among tenant-shareholders of a four-unit cooperative provides that each shareholder is entitled to serve on the board of directors. The By-laws provide that the number of directors will be between three and seven, as determined by the shareholders. Could the shareholders vote to increase the size of the Board from four to five, thus eliminating the equality of shareholder representation that had previously existed? “Yes” was the court’s answer in Akasa Holdings, LLC v. Sweet, 2014 N.Y. Slip Op. 01822 (1st Dep’t Mar. 20, 2014).
For many years, the cooperative board was comprised of four directors, with each apartment represented by one director. In 2009, the shareholders voted to elect five directors. In 2011, a dispute arose as to whether the proper number of directors was four or five. The court held that the plain language of the shareholders’ agreement allowed the shareholders, by majority vote of the outstanding shares, to change the number of directors. The court emphasized that the shareholders’ agreement “gives each shareholder (or its designee) the right to be a director; however, it does not limit each shareholder to one director.”
In seeking to have the size of the board restored to four directors, defendants argued that the board had consisted of four members from the inception of the cooperative until 2009 and that the parties’ intent in the shareholders’ agreement was to provide for equal representation. The court responded that “[i]t would have been easy enough for the shareholders’ agreement or the by-laws to provide, ‘There shall be only one director per shareholder.’ However, they do not so provide, and we will not add this term.”
Addressing procedural issues in the litigation, the court held that plaintiff tenant-shareholder had properly brought the lawsuit as an individual rather than a derivative action because it was “seeking to vindicate its right as a shareholder to elect directors.” In addition, “Plaintiff’s claims [were] not barred by the business judgment rule, which applies to decisions made by a board of directors, not by fellow shareholders.” Similarly, the defendants were not entitled to indemnification because they were sued in their capacity as shareholders, not as directors.