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Habitat Magazine Business of Management 2021

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ARCHIVE ARTICLE

Election Dispute

At a meeting of co-op shareholders to elect directors, may the inspectors of election determine the qualifications of the candidates for election? The answer was “no” in Matter of Schapira vs. Grunberg where the court said that the inspectors were authorized only to determine the qualifications of voters.

In this case, petitioner Whitehall Tenants Corp. was a large residential co-op that owned 3333 Henry Hudson Parkway in Riverdale. The co-op sought a determination that the board consisted of five persons elected by shareholders other than the sponsor, Whitehall Realty Co. Those five were the petitioners Ruth Schapira and Jeff Moerdler and the respondents Fred Grunberg, Horace Bullard, and Ludwig Bravmann. The petitioners sought a further determination that the co-op’s officers were Schapira as president, Moerdler as vice president, and nonparties Ted Phillips, Gene Staudt, and Sharon Steinfeld as secretary, assistant secretary, and treasurer, respectively. The petitioners claimed that the respondents had assumed control of the board unlawfully, inconsistent with the above composition of the board and identified officers. Consequently, the petitioners sought to set aside and enjoin all past and future actions by the respondents as the co-op’s board.

More specifically, the petitioners alleged that the co-op shareholders elected Schapira and Moerdler as board members on June 28, 2005. Shortly afterward, the board elected Schapira president and Moerdler vice president. The respondents refused to acknowledge Schapira as a board member, claiming that under the co-op’s bylaws, a board member must be a shareholder, and Schapira was not because the shares allocated to Apartment 17S, where she resided, were held in trust.

On June 29, 2005, respondent Scher, the inspector of elections, certified the vote count on June 28, 2005, by which Schapira was elected to the board. The five candidates for the board elected by the non-sponsor shareholders and receiving the most votes, in order, were Jeffrey Moerdler, Ruth Schapira, Ludwig Bravmann, Horace Bullard, and Fred Grunberg. Joseph Sternberg received the sixth most votes. The parties did not dispute this vote count.

The undisputed document certifying the vote count notes: “The undersigned, duly appointed to act as inspector at the annual meeting of the Shareholders’ [sic] of WHITEHALL TENANTS CORP. held on the 28th day of June, 2005 … certify [sic]” both that she has taken and signed the oath of office prescribed by New York Business Corporation Law (BCL), Section 610, and the following results of the vote. The inspector certified the number of “shares entitled to vote” present, in person, or by proxy, at the meeting; that this number constituted a “quorum of the shares entitled to vote,” and the results from counting the votes, as set forth above. These items were the precise contents of BCL, Section 611(a)’s prescriptions as to what an inspector “shall determine” and, only upon request, actually “report” and “execute a certificate.”

Upon a request by Grunberg and Bravmann three weeks after the election, Scher disqualified Schapira based on an interpretation of the bylaws requiring a board member to be a shareholder and a determination that Schapira was not one. This written “restating” of the election results was in response to the respondents’ request, albeit tardy, yet was neither certified nor executed under oath. The parties did not dispute that Scher had found no new facts bearing on the shares entitled to vote at the election, in person or by proxy. Since then, Grunberg was elected as board president, Bravmann as vice president, Bullard as secretary, and Sternberg as treasurer.

Schapira originally purchased the shares allocated to apartment 17S in her individual capacity in 1999 and resided in that apartment ever since. In 2000, with the co-op’s consent, she transferred her shares into a trust previously established under her deceased husband’s will. Under the trust, she is a beneficiary for life and had the exclusive right to reside in Apartment 17S, the obligation to pay all expenses attributable to the apartment, and the right to repurchase the shares or to compel their sale and direct reinvestment of the proceeds.

In consenting to the transfer, the co-op, through Bullard, its president in 2000, and Schapira executed an “Occupancy and Use Agreement.” That undisputed document provided that the shares allocated to Apartment 17S “shall be voted by Ruth Schapira,” and transferable only according to the bylaws and the proprietary lease. The undisputed lease and admitted verified answer required that the co-op board ordinarily approve a transfer.

In early 2004, a midterm vacancy opened up on the board. Bullard, still president, asked Schapira to fill this vacancy, to which she agreed. On April 21, 2004, the board selected her. She served until the next regular election on June 28, 2005, when the shareholders selected her.

The co-op’s bylaws set forth the qualifications for its board of directors: “At least one director shall be a resident of the State of New York. All directors shall be at least 18 years of age.” Schapira indisputably met these requirements, both in April 2004 and in June 2005. Neither the bylaws nor any other provision of law required that a director be a shareholder.

The co-op’s bylaws did provide that once elected, “a director who ceases to be a shareholder or whose spouse ceases to be a shareholder, as the case may be, shall be deemed to have resigned as a director.” Nothing prohibited directors who had resigned, because of their assumption of non-shareholder status, from being elected again in their new status. The automatic resignation simply gave the voting shareholders an opportunity to consider whether they wanted to elect a director who was not a shareholder as permitted by the bylaws.

To the extent that Schapira, by being a trustee of the trust to which she had sold her shares, was not a shareholder, she already had assumed that status years before she was elected a director, first by the board in 2004, and then by the shareholders in 2005. The record disclosed no misrepresentation of her status to directors or shareholders that may have misled them to vote for her, let alone any indication that the election results might have been different if more accurate or complete information had been circulated. The directors in 2004 and the shareholders in 2005 had the opportunity to consider her status before electing her. The respondents had the opportunity to communicate with other directors and shareholders, persuade the voters that they did not want to elect such a director, solicit proxies, and offer an alternative candidate for Schapira or a slate other than the five elected by the non-sponsor shareholders on June 28, 2005.

Neither the bylaws nor any other provision of law requires that the notice to shareholders of an annual meeting communicate any information regarding candidates for the board or any other office. Even the notice to shareholders of a special meeting need only add the purpose of the meeting and the person calling it. Each of these requirements is fully consistent with BCL Section 605(a). The requirements for notice of board meetings are similar, except that neither “the business to be transacted at, nor the purpose of any regular or special meeting of the board of directors need be specified in the notice.”

The respondents also relied on the sponsor’s offering plan when the Whitehall Building was converted to a co-op. An offering plan may be both an interpretive tool in construing the cooperative’s bylaws, and an independent enforceable contract between the sponsor and the shareholders and proprietary lessees.

Here, however, the bylaws’ qualifications for directors were not ambiguous. These provisions were clear, complete, and capable of application without considering outside evidence. The rules for construing contracts apply equally to a co-op’s bylaws. Therefore, the court said that it could not resort to evidence outside the bylaws themselves regarding qualifications for directors.

In any event, were the court to find grounds to look to the offering plan to interpret the bylaws’ qualifications for directors, it did not support the respondents’ interpretation.

The respondents alleged that the co-op’s attorney “drafted rules for the disputed June 28, 2005 election,” which provided that: “The Election Officer shall designate as a candidate any Shareholder or spouse of a Shareholder …” Consistent with the respondents’ allegation, these “rules” were only a “draft” and never “adopted by the board of directors.” Nor had the rules been revised to comport with the bylaws. As drafted, they were inconsistent with the governing bylaws, which authorize the board of directors only to: “adopt such rules and regulations for the conduct of their meetings … and the management of the affairs of the corporation as they may deem proper, provided same are not inconsistent with … these bylaws.”

In fact, Grunberg and Bullard, as board members and officers in May 2005, immediately rejected the draft, so that the rules were never even circulated to the board as a whole.

The duties of inspectors of elections at corporate shareholders’ meetings are limited. In the court’s view, inspectors are to determine the shares’ voting power, the shares represented at a meeting, whether a quorum is present, the validity of proxies, and questions concerning voting rights. The inspector is then to receive and count the votes and determine the result. Thus, the inspector is authorized to determine the qualifications of voters, but not of candidates. The co-op’s bylaws conferred no greater or different authority.

Hence, the court said that Scher’s determination that Schapira was unqualified to be elected as a director and consequent discarding of all votes for her was not only inconsistent with the bylaws’ qualifications for directors, but also outside the inspector’s powers. Moreover, in the court’s view, whatever the grounds were for overturning the result of the votes on June 28, 2005, the inspector lacked any authority to do so. The BCL conferred that authority on the court.

The respondents moved to dismiss this proceeding, brought under Article 78 of the Civil Practice Law Rules, on the grounds that it sought to review a corporate election, reviewable exclusively under BCL, Section 619. The court said that BCL, Section 619, authorized the court to hear the petition of shareholders aggrieved by a corporate election at a shareholders’ meeting and “confirm the election, order a new election, or take such other action as justice may require.” Here, if the original June 28 election was the focus, the relief the shareholder petitioners were seeking may be tantamount to confirming that election. If Scher’s later disqualification of Schapira as a director was the focus, the relief the respondents were seeking in their first counterclaim is to confirm that election.

The court noted that the petitioners pursued an alternative course, as was their right. They claimed to be aggrieved not by the June 28 election but by Schapira’s disqualification that left Sternberg instead of Schapira among the five candidates with the highest vote count. They requested review of that decision because it was based on an error under the governing law and had violated procedure. They sought to test the validity of her subsequent disqualification as a director and invalidate this later action. The BCL did not specifically authorize this relief.

The court said that a proceeding under BCL Section 619, may challenge only the validity of elections at corporate shareholder meetings, not the validity of other actions, such as candidates’ disqualification, either at a shareholder meeting or afterward. While a determination of voters’ shareholder status or voting power and a qualification or disqualification of their votes may be a predicate to confirming an election or ordering a new one, this proceeding concerned a candidate’s qualification or disqualification as a corporate director.

Nor did the petitioners seek a new election. If the court granted their request, reversed Schapira’s disqualification, and enjoined Sternberg, the candidate with the sixth highest vote count, from supplanting Schapira, the candidate with the second highest vote count, the original election would remain in place. Such a choice would be superfluous, said the court.

Moreover, to the extent the petition could be construed as claiming the shareholder petitioners to be aggrieved by the respondents’ alleged unlawful election, the remedy would be simply to convert the claim to a special proceeding. While the BCL dictates that only the shareholder petitioners could seek relief under that section, the corporate petitioner named here sought no distinct relief. Therefore, the court denied the respondents’ motion to dismiss this proceeding because it was brought under Civil Practice Law Rules, Article 78, not the BCL, Section 619.

The respondents Grunberg, Bullard, Bravmann, and Sternberg, on the other hand, did seek, by their first counterclaim, to “confirm the election” of those five candidates remaining with the highest vote count after Schapira’s disqualification. Therefore, the court determined those respondents’ first counterclaim and the shareholder petitioners’ claim, insofar as the petitioners may be aggrieved by the five remaining candidates’ election, under the BCL.

The second counterclaim by the same four respondents sought an inspection by them or, although they make no cross-claim against respondent Scher, a re-inspection by her of the election records, including the ballots voted in person and by proxy and the proxies. The BCL, Section 624(b), entitles corporate shareholders, five days after their written demand, to examine the corporation’s “minutes of the proceedings of its shareholders and record of shareholders.” Upon the corporation refusing such a demand, the demanding shareholders could have started a proceeding under BCL, Section 624(d), to compel the inspection.

The respondents did not seek, however, to inspect the minutes of a shareholder meeting or of another shareholder proceeding. Thus, the court determined that the respondents’ second counterclaim was outside the scope of the BCL, Section 624.

On July 27, 2005, the respondents other than Scher sent the co-op a written demand to inspect the June 2005 election records, to which the respondents received no response aside from the petitioners’ position on the issue in this proceeding. As the reason for the request, the respondents claimed “improprieties” regarding the proxy ballots. The respondents “were given proxy ballots by certain shareholders, and the Schapira group appeared with what they claimed were later proxies from the same shareholders, purportedly superseding the proxies given to … the respondents.” Signatures on the latter proxies “appeared questionable.”

Those respondents who were shareholders, namely Grunberg, Bullard, and Bravmann, had a right not only under BCL, Section 624, to inspect the records specified there, but also by virtue of their status, to inspect other corporate records. Both rights are conditioned on the respondents’ showing that their demand is in good faith for a proper purpose.

Scher’s duty as the inspector of the election was to determine the validity of proxies, voting qualifications and power, and any questions concerning voting rights. Therefore, questions as to whether later proxies held by the petitioners or by nonparties superseded earlier proxies for the same shareholders held by the respondents were to have been presented to Scher by June 28, 2005, and determined by her.

Pointedly, the respondents nowhere claimed that she had failed in her statutory duties or otherwise failed to perform a duty required of her, acted in excess of her authority, or made an unlawful or arbitrary determination. If nothing else, the omission of a cross-claim in this regard dictated dismissal of the alternative claim for a reinspection by Scher. In addition, if specific proxies were determined to supersede other proxies, the respondents had not indicated the superseded proxies would even be among the election records. Finally, the respondents had not articulated their basis for questioning signatures on the superseding proxies or a reason to inspect all ballots, when the respondents did not dispute the vote count.

On the other hand, the court said that the respondents’ lateness and lack of evidentiary support aside, inspecting the propriety of proxies or ballots cast at a shareholders’ meeting is a facially valid purpose in the shareholders’ corporate interest. The respondents’ verified answer minimally placed that propriety in controversy. In the court’s view, the respondents’ motives appeared questionable, if not from the respondents’ own allegations and the undisputed vote count, from the petitioners’ showing that the respondents may use the ballot information to badger, scold, or intimidate shareholders who did not vote for the respondents. Nevertheless, where any question is raised, the remedy was a hearing to resolve the counterclaim rather than its summary dismissal.

The respondents’ purpose and any relief granted must be consistent with the assurances to shareholders and proxy-holders by the attorney whom the prior board, controlled by the respondents, appointed to conduct the election and arrange for the ballot count. Those assurances included a repeated promise at the election, without objection then or contradiction now, that the ballots would be secret and sealed from all shareholders and board members. Similarly, the court said that it needed to be assured, before granting any inspection, and must assure further, upon granting one, that it will not be used contrary to the purposes of secret ballots or that the respondents’ purpose for the inspection was more compelling.

Since Schapira’s election was valid, and the respondents had the opportunity to communicate with the other shareholders, in writing or orally, before the election and persuade them not to elect a director who is a co-trustee of a trust that owns the shares allocated to the apartment she resides in, the court held that a new election was unwarranted. It said that nothing requires that the shareholders be notified of any information regarding candidates for the board of directors. Any actions on the co-op’s behalf since June 28, by a board composed differently, or by an officer designated differently, were void, without effect, unless approved or ratified by the board of directors specified by the court.

Given Scher’s undisputed certification of the vote count and the absence of any challenge by the other respondents to the performance of her duties, the court concluded that it was in all shareholders’ interests that the above determination and injunction be effective immediately, to enable the co-op to conduct its business with certitude and confidence, pending any inspection of records. If after a hearing, the court further determined that the inspection revealed that Schapira’s election was invalid, the court would reconsider its determination of the petition and first counterclaim. Otherwise this decision constituted the court’s final order granting the petition to the extent set forth and dismissing the first counterclaim by respondents Grunberg, Bullard, Bravmann, and Sternberg.

Comment: With the spring annual meeting season for most co-op and condominium entities to elect board members now in full bloom, this case provides helpful guidelines where such elections are disputed and sometimes quite contentious. The Whitehall has a long history of political infighting. Among the lessons of the case are: qualifications of directors are determined by the language of the bylaws; the role of the inspectors of election is limited and does not extend to interpreting the bylaws on board qualifications, and courts are reluctant to upset shareholder votes for fear of destabilizing the entity’s proper functioning, especially where it suspects the motives of the party seeking a new election.

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