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Coop Board Election Results Vacated on Court Stipulation Governing Rights of Holders of Unsold Shares

The results of a cooperative board election have been set aside because a holder of unsold shares voted his shares in violation of the proprietary lease and a court-approved stipulation. Matter of Tiemann Place Realty, LLC v. 55 Tiemann Owners Corp., 2016 N.Y. App. LEXIS 3866, 2016 N.Y. Slip Op. 4007 (1st Dep’t May 24, 2016).

The Cooperative was involved in prior litigation involving its mortgage, which was resolved in a court-approved stipulation.  The stipulation assigned the mortgage to an entity that became the successor Sponsor and was recognized as the holder of unsold shares.  The stipulation also provided that Sponsor had the right to sell or sublease its apartments and that the corresponding shares would remain unsold shares “until any such apartment is sold to a purchaser who is not an investor and who intends the apartment to be occupied by himself or a family member as a residence.”  The stipulation provided that “holders of unsold shares shall be entitled to elect one less than a majority of the members of the board of directors.”  The terms of the stipulation were incorporated into the offering plan and proprietary lease.

Four days before the 2014 annual meeting, Sponsor assigned an apartment and its allocated shares to George Johnson, who did not reside or intend to reside in the apartment. At the annual meeting, Johnson voted all his shares for himself as a director.  Johnson and the Sponsor’s two designees were elected giving holders of unsold shares control of the Board.  Shareholders disputing this result then convened a special shareholder meeting, at which a new election of directors was held and Johnson was not elected.

Sponsor and Johnson filed a lawsuit asking the Court to uphold the election of directors, including Johnson, at the annual meeting. The Cooperative filed a counterclaim, seeking to set aside the annual meeting results because Johnson, as a holder of unsold shares, was bound by the stipulation that holders of unsold shares would not take voting control of the Board.  A lower court dismissed the litigation, reasoning that because Johnson had not signed the stipulation, he was not bound by its terms.

The appellate court disagreed and held that Johnson was a holder of unsold shares and bound by the stipulation. The court concluded that the documents, including Johnson’s express agreement to take his shares “subject to the provisions of the proprietary lease, which incorporated the stipulation, ma[de] clear that he was [a holder of unsold shares] and was bound by the stipulation’s provisions, including the election restriction.”  Moreover, Sponsor “should not be permitted to frustrate its obligations under the offering plan or stipulation by transferring its shares to puppet entities to syphon votes away from resident shareholder candidates in order to control the board well beyond the period contemplated by the Attorney General.”

Finally, the appellate court rejected Sponsor’s argument that treating holders of unsold shares differently from other shareholders would create two classes of shareholders in violation of Business Corporation Law § 501(c). The court recognized that holders of unsold shares do “effectively constitute a separate class of shareholders,” and that offering plans treating them differently from other shareholders “have been held not to impair the equality of voting rights of shares.”