By-Law Provision That Holder Of Unsold Shares “Will Not Elect A Majority Of The Directors” Constrains Voting Rights
The voting rights of a holder of unsold shares in a cooperative were at issue in 420 W. 206th Street Owners Corp. v. Lorick, NYLJ 1202647183703, at *1 (Sup. Ct. N.Y. Co. Feb. 5, 2014). This was an action brought by a residential cooperative corporation and members of its board of directors. The defendant was the holder of unsold shares representing 31 of the cooperative’s 72 units, or approximately 45% of the total shares.
The parties disputed the holder of unsold shares’ voting rights in the election of the cooperative’s five-member board of directors. The relevant section of the By-Laws provides that that as long as the holder of unsold shares holds proprietary leases for at least 15 units, it may designate two of the five directors. The By-Laws further provide that upon the earlier of (i) three years after the closing of title with the apartment corporation or (ii) the date on which 51% of the shares have been sold to persons other than the holder of unsold shares, the holder or holders “will relinquish control of the Board of Directors if they have such control and will not elect a majority of the Directors of the Apartment Corporation even though the number of shares owned by them may enable them to otherwise do so.” Both of these events took place several years ago.
The Cooperative brought this action seeking a declaration that defendant was a holder of unsold shares and therefore was barred from voting his shares for more than two candidates in the election of directors. Defendant counterclaimed for a declaration that he was entitled to participate in electing all five members of the board.
The court observed that the Attorney General has promulgated regulations governing cooperative conversions and offering plans, which seek to ensure that sponsors and holders of unsold shares will not control cooperative boards of directors indefinitely. Under the regulations, a sponsor must relinquish voting control “not more than five years from closing, or whenever the unsold shares constitute less than 50 percent of the shares, whichever is sooner.” In cases such as Rego Park Gardens Associates v. Rego Park Gardens Owners, Inc., 174 A.D.2d 337, 570 N.Y.S.2d 550 (1st Dep’t 1991), courts interpreting this regulation have “narrowly construed the phrase ‘voting control’ to mean the power to nominate or designate a majority of board members, or to cause members to be elected that are on the sponsor’s payroll or otherwise receive remuneration form the sponsor.” Therefore, a cooperative cannot prevent the sponsor from voting for any director unless it is shown that the candidate is on the sponsor’s slate or receives remuneration from the sponsor. “What constitutes board control by the [sponsor] involves not disenfranchisement of the [sponsor] but rather its inability to designate related parties to fill a majority of the board member seats.”
Here, however, the By-Laws required not only that the sponsor or holder of unsold shares would “relinquish control” of the board, but also that they “will not elect a majority of the Directors.” In its opinion, the court observed that New York court decisions have split on the interpretation of such “will not elect” provisions, with some decisions holding that such a provision restricts the sponsor or holder of unsold shares from voting to fill one less than a majority of the board seats (here, two out of the five seats), with other decisions disagreeing. The court sided with the weight of the decisions holding that this language limited the sponsor’s or holder’s rights, and ruled that the holder of unsold shares was permitted to vote its shares only for the two directors it is entitled to designate.