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Reminder: Board Face Year-End Deadline for Disclosure to Owners Regarding Interested Contracts

We have reported in previous issues of this Client Advisory on New York State legislation, adopted in 2017 and amended earlier this year, requiring cooperative and condominium boards to report annually to their shareholders or unit owners on certain contracts approved by the board.  The law took effect on January 1, 2018 and hence the first disclosure report required by the new law will be due by December 31, 2018.

Section 713 of the Business Corporation Law governs transactions in which a corporation (including a cooperative) contracts with a director of the corporation, or with a company in which a director has a substantial financial interest.  (A few non-profit cooperatives are governed by similar provisions in Section 715 of the Not-for-Profit Corporation Law.)  Under the new law, every cooperative must provide each of its directors with a copy of Section 713, which sets forth special requirements for board approval of any such transaction.  Condominiums are now also required to provide the members of the board of managers with a copy of Section 713.  (Although the Business Corporation Law does not directly govern condominiums, it appears that the Legislature intended for Section 713’s definition of interested contracts to apply to them.)

The board is required to report to the shareholders or unit owners annually on any contracts that the board has approved during the past year in which a board member has a financial interest as defined in Section 713.  For each contract reported, the report must identify the other contracting party and set forth the amount, purpose, and term of the contract.  The report must also record the dates of all board meetings at which the board voted on such contracts, including who was present and how each director voted.  If there are no contracts on which the Board is required to provide information, the report must state that fact.

The annual report must be signed by all board members (not just the board president or managing agent). The statute does not state whether this requires a physical signature or whether an authorized electronic signature is sufficient.  The new statute does not contain any specific enforcement provisions or penalties for violations of the reporting requirements, but a shareholder could use any violation to support claims under existing law.  There is some ambiguity in the wording of the legislation and room for interpretation as to which types of contracts or transactions need to be reported.  Therefore, boards should consult with their legal counsel in determining what transactions, if any, must be included in their annual report and in preparing the language of the report.