Three voting procedures – and all you need to know about them.
Cooperative corporations and condominium associations can exist for years with annual owners’ meetings so poorly attended that quorums are unrealistic fantasies and owners must be begged to run just to fill vacant seats. Then, someone suggests a lobby renovation, or the board proposes a change in the pet policy, or it is discovered that the managing agent is taking kickbacks and the agent’s bookkeeper has embezzled the reserve funds. At that point, someone starts a campaign to oust the entire board.
It quickly becomes a not-so-civil war, pitting neighbor against neighbor: the red lobby party versus the earthy tone party; the new economics (spend-and-leverage) party versus the fiscal conservative (or financial-Neanderthal) party; the new purchasers who want more services to justify overpaying for their apartments versus the long-time residents who think a three percent maintenance increase is reckless. No one is allowed to be neutral. Doormen, superintendents, and managing agents are recruited for the cause. Letter-writing campaigns allege all sorts of outrageous conduct. Lawsuits are threatened. Personal visits are paid to every owner by both sides.
Oh, the joy of a closely contested election for the board!
It is chaos, an adrenalin rush, vicious character assassinations, and democracy all rolled into one. But rarely does anyone stop to think about how the votes are actually cast or how many votes are needed for victory or even how to effectively vote to maximize the number of successful candidates on a slate. In the world of cooperative housing corporations, there are three major methods by which shareholders vote. Anyone interested in engaging in a contested election should first learn the type that is required by his or her building.
The first, and least common, is one apartment/one vote. This procedure for voting is extremely simple: each shareholder can cast one vote for each seat on the board of directors, regardless of the size of the shareholder’s apartment or the number of shares held by him or her. This procedure is common in older cooperatives created under the Cooperative Corporation Law and the Not-for-Profit Corporation Law and in various government-financed housing cooperatives. The Business Corporation Law (BCL), Sections 501 and 614, also sanction it, provided it is specified in the certificate of incorporation. Most modern (post-1970) private housing cooperatives were created under the BCL. The corporate documents for these corporations rarely specify one apartment/one vote as a method for electing directors.
More commonly, the BCL requires that each shareholder have one vote for each share he or she owns. Furthermore, virtually all private cooperative housing corporations are created to comply with Section 216 of the Internal Revenue Code in order that tax benefits and deductions for interest payments on mortgages and real estate tax payments flow through to the shareholders. One of the requirements of Section 216 is that all issued and outstanding shares of the corporation be of the same “class.” When private cooperative housing corporations are created, the sponsors of the offering plan anticipate owning apartments for a long time after the initial closing. Therefore, they often retain special rights for themselves and their successors, which may include the right to designate one or more directors. Many, but not all, of the offering plans also give the sponsor and other “holders of unsold shares” the right to participate in the voting for other directors. Early cases held that such special rights were enforceable and did not create two classes of shares.
Recent cases, however, have voided certain of these special rights as a violation of BCL 501. Whether or not the courts will continue this trend and eliminate special sponsor voting rights – particularly ones that are not referred to in the certificate of incorporation – is open to question. However, any cooperative with a significant number of unsold apartments should carefully review all applicable corporate documents, including the offering plan, certificate of incorporation, bylaws, and proprietary lease, and consult with experienced counsel to determine whether the sponsor correctly created enforceable rights and what the impact will be of any alleged rights on the voting.
Aside from these possible special sponsor rights, all shareholders in a cooperative corporation created under the BCL have the same rights when voting for the board of directors. Generally, the shares of a BCL- created corporation are voted for members of the board of directors in one of two ways: non-cumulatively or cumulatively.
In non-cumulative voting, each shareholder may cast his or her shares for any number of candidates. However, the shareholder may not cast more than the number of shares he or she holds for any one candidate. BCL Section 614 specifies that this method of voting is required, unless the certificate of incorporation requires another method. This often creates a problem if the sponsor specified cumulative voting in the offering plan or bylaws but forgot to put it in the certificate of incorporation. This sort of voting gives the right to elect the entire board to the holder of a majority (or plurality) of the shares.
In contrast, cumulative voting permits a minority of shareholders to elect one or more directors by stacking their votes on one or two candidates. The shareholders are each given a pool of votes that equal the number of shares held by the shareholder multiplied by the number of seats on the board being filled. This pool of votes can be divided equally or unequally among one, two, three, or more candidates, as each shareholder deems appropriate. Thus, in the standard seven-person board election, the holders of 12.6 percent of the shares, casting all of their votes for one candidate, can guarantee that their candidate is elected, even if all of the other shareholders attend the meeting in person or by proxy and vote for seven other candidates. The math changes dramatically if the turnout at the meeting is light. If only 60 percent of the shareholders attend and vote, one candidate can be elected cumulatively by the vote of 7.51 percent of the issued and outstanding shares as long as all of the shares are only voted for one candidate.
Cumulative voting is popular in New York cooperatives because it permits dissidents the opportunity to secure representation on the governing body. However, BCL Section 614 requires cumulative voting to be specified in the certificate of incorporation. When it is only in the bylaws or the 20-year-old offering plan, the cooperative faces the risk of an expensive litigation between the majority and minority shareholders. So be warned: vote the right way and you’ll avoid a lot of headaches.
James Samson is a partner in Samson, Fink & Dubow.