When owners want to meet, you shouldn’t take it lightly.
Right, wrong, or indifferent – when shareholders become dissatisfied with the co-op’s board of directors, the shareholders’ popular choice to deal with the issue is to seek the removal of the board members. In that regard, most co-op bylaws afford the shareholders a right to seek a special meeting of the shareholders for purposes of requesting the removal of the board. This right may also be contained in the co-op’s certificate of incorporation.
It is important to note, however, that one angry shareholder cannot accomplish the removal of the directors or even request the special meeting of shareholders to do so. Most bylaws require a petition to be signed by at least 25 percent of the co-op shares (not 25 percent of the shareholders). As such, when the board or the managing agent receives a petition for a special meeting of shareholders, you should first determine how many shares each person who signed owns and then make sure the requisite number of shares is there.
You should also carefully examine the signatures. Indeed, I have personally witnessed alleged forgeries and petitions that contain signatures of people not authorized to sign (i.e., a signature of a subtenant instead of tenant-shareholder). Depending on the circumstance, there may be a justification to reject the petition. Recognize that once those who spearheaded the petition find out what the problem is, they are entitled to and will probably start the process all over again.
The document also must state the relief sought. A petition simply containing sheets of paper with signatures without an indication that it is being submitted for the purpose of conducting a special meeting to seek the removal of the board or particular members thereof may cause the petition to be invalidated. Similarly, it should contain a description of the relief being sought on each page containing signatures. This will ensure that all shareholders signing the petition were advised and aware of what they were supporting by signing.
You may say to yourselves, “We didn’t do anything wrong. Does the meeting have to be called?” Most co-op bylaws require the petition be delivered to the secretary. If the petition is proper and has been received by the proper officer, the meeting must be called. It is important to note that most bylaws permit the shareholders to remove a director (or all directors) regardless of whether there is cause. (One exception to this is the removal of the directors who are appointed by the holder of unsold shares – the sponsor; usually there must be cause.) As such, once a proper petition is received, a special meeting of shareholders must be called.
Notices must be sent announcing the meeting. They must be in accordance with the provisions of the bylaws. Make sure the correct number of days’ notice is given and that the notice is sent in the manner required. A meeting called on short notice (fewer days than required) will not be valid. While you may not care if the meeting is invalidated or never held, certainly the shareholders will be further angered if another meeting is required because the board or its managing agent failed to send out proper notices.
Just because a special meeting is requested does not mean that it will actually ever occur.
First of all, there must be a quorum (the number of shareholders required to conduct business). Most bylaws require the shareholders holding a majority of the shares be present in person or by proxy to establish a quorum. Likewise, most bylaws require a vote of the majority of the shares present at the meeting. For example, if 75 percent of the shares are present in person and proxy, a vote of more than 37.5 percent is required to remove each director. Even if the petition seeks the removal of the entire board, there should never be a vote to remove everyone in one vote. There should be a separate vote for the removal of each director. Certain directors may be removed and others may remain. At the meeting, each director should be given an opportunity to be heard. Once the discussion is complete, the vote should occur.
Most shareholders do not realize that if they do not seek and/or are not successful in removing the entire board, the remaining board member(s) will fill the vacancies created by the removal of any directors. Only when the entire board is removed will the shareholders be entitled to vote for the replacements. However, the bylaws may not provide for such a vote. Prudent practice dictates that the governing documents should be carefully read to determine the process of filling the vacancies created if all board members are removed.
Communication with shareholders is the best way to avoid removal. Even if the shareholders submit a petition that is defective, in most instances, the board should hold an informational meeting to advise the shareholders about the issues that caused the petition to be generated. For instance, if certain shareholders are upset about a major maintenance increase, let them know why it occurred. Remember, this will be your opportunity to demonstrate to the shareholders that the board is acting in the best interests of the property. This opportunity is given without the shareholders having a right to vote to remove the board. This “rap session” hopefully will deter shareholders from signing another petition for the special meeting of shareholders to remain the directors.
The other option is to generate a letter to all petitioning shareholders rejecting the notice as void, indicating that the governing documents of the co-op were not followed. There is no duty on the part of the board or the agent of a co-op to inform a shareholder how to start a special meeting to remove board members. That information is contained in every co-op’s bylaws.
If the special meeting is not called after a proper petition for such relief is received by the proper officer of the co-op, the shareholders can seek the court’s intervention. The shareholders can seek an order of the court compelling the meeting be held. In addition, certain shareholders are entitled to begin an action in the court to seek the removal of the board. However, such an action can only seek the removal of the directors “for cause,” which must directly relate to a fiduciary breach such as self-dealing, waste, or failure to adhere to the governing documents.
For more on this subject, see “Truth and Consequences,” on pages 48-52.
Marc H. Schneider is an attorney in private practice.