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Clash of the Proxies

Who’s voting? Who’s counting? In close elections,

how you deal with the proxy issue can often tip the balance.




Stuart Saft, a frequent contributor to Habitat, is a partner at Wolf Haldenstein Adler Freeman & Herz.



A scenario from the proxy wars: a very prestigious building, inhabited by some Very Important People. For some reason, their control of this board became the most important thing in their lives. The campaign for office was brutal and the election meeting was intense and contentious. Unfortunately, it was all about personalities, because the actual issue never surfaced. Frequently, such elections are so close that every vote counts. And in such situations, proxies can tip the balance.

Proxy fights can arise over any number of issues. You might be faced with the question of duplicate proxies signed by the same shareholder. That is usually caused by the shareholder not wanting to antagonize his or her friends in the building by refusing to sign a proxy. We are then forced to determine which is the most current proxy, which is easy when they are dated. But that does not always occur. Whenever we are faced with this situation, we count the rest of the proxies and ballots and hope that the questionable proxies will not affect the outcome of the election. However, frequently the elections are so close that every vote counts.

The other situation is that a group will walk into the meeting with more than enough proxies to elect a board, but then lose the election and assume that the vote was rigged when, in fact, they either voted incorrectly, which happens all the time with cumulative voting, or the shareholders who signed the proxy attended the meeting and voted.

Proxy wars – battles between neighbors over who’s got the vote – are happening more and more frequently these days. Several times every year, in fact, we represent co-op or condo boards dealing with proxy fights by groups of friends and neighbors. Sometimes, the issues are serious because the board has made errors of judgment. Other times, the issues are personal, having nothing to do with the board’s operation of the corporation or condominium or the building. Frequently, we scratch our heads and wonder, what are these people fighting about? Regardless of the reason, there are two cardinal principles that we always follow: (1) we attempt to advise the board on how to deal with and win the fight legally, and (2) we do everything in our power to make certain that the fight is fair and the will of the shareholders or unit-owners is obtained and protected.


Give Proxies a Chance

A proxy fight is an attempt by several individuals or groups to obtain enough proxies to elect one or more people to the board, although it is typically aimed at gaining control. Of course, depending upon whose side you are on, a proxy fight is usually intended to either oust an existing board or prevent a group of dissidents from taking over. The most important thing to remember is that the proxy is not important if the shareholder or unit-owner is present at the meeting and votes his/her shares or interests. In fact, the advice I give to boards that are under siege is: “If they are resistant, don’t ask the shareholders or unit-owners to give you their proxies; just ask them to come to the meeting to hear for themselves what is going on.”

Traditionally, when the board sends out the notice of the annual or a special meeting of shareholders or unit-owners, it includes a form of proxy that usually gives the board or a proxy committee or certain named individuals the right to vote the shareholder’s shares or the unit-owner’s interests. This is done to insure that a quorum is present to transact business so that being forced to call a subsequent meeting does not waste time and money. If the proxy is signed but does not indicate the name of a proxy-holder, then it is a worthless piece of paper. In order to avoid this from happening, I usually provide the following: “I hereby designate __ (or if no name is inserted, then the board of directors by majority vote…).” In this way, the failure of the shareholder or unit-owner to insert a name is not a fatal flaw.

It is also important to note that the board should not require that a shareholder or unit-owner only use a certain form of proxy. Any writing that is signed by the shareholder or unit-owner and indicates for whom the shareholder or unit-owner wants to vote his or her shares should be permitted even if it is a faxed copy (although an e-mail proxy is not adequate).

At times, boards will attempt to limit the form of proxy in order to make it more difficult for the dissidents to collect proxies, but that is not fair to shareholders or unit-owners who may want to give their proxy to someone but do not have access to the official form. Shareholders and unit-owners should be permitted to use whatever form they want to expressly designate their proxy-holder. Sometimes, boards want to disallow a proxy because the shareholder crossed out the board’s designee and wrote in someone else’s name. That is not a legitimate reason to disallow. In addition, unless the bylaws state otherwise, the proxy-holder need not be a shareholder.

Walking on Thin Ice

A proxy fight involves each side attempting to obtain proxies from as many shareholders or unit-owners as possible in an attempt to vote the proxies in such a way as to elect certain individuals to the board. However, this is not an exact science. In most instances, each side does not know how many proxies the other side has or which shareholder/unit-owner gave out multiple proxies or who intends to attend the meeting and vote in person.

Shareholders and unit-owners often sign multiple proxies because they do not want to argue with their neighbors or get involved in a confrontation when either group approaches them in the building. The parties to the proxy fight must never forget that their fellow shareholders or unit-owners may not want to take sides because they do not want someone with whom they will be sharing the elevator or the lobby or the laundry room knowing how they voted. Or perhaps they believe that a candidate may be charming but would make a lousy board member, or that the incumbents are competent and should remain in office, although the shareholder or unit-owner may never want to have dinner with them.

Conversely, a shareholder or unit-owner may agree with the dissidents that the board made a mistake or did not properly attend to the building’s affairs but does not want to ruin a friendship as a result of the election. Regardless of the reason, shareholders and unit-owners try to avoid the confrontation by signing every proxy that is placed in front of them. They will then sometimes even attend the meeting but may or may not vote. In that case, the ballot has priority over the proxies and, if there is no ballot, the most recent proxy has priority over an earlier version.

At times, one side may collect the proxies and leave the dates blank and then fill them in at the time of the meeting. However, if the proxy-holder or his/her supporters insert the date at a later time, that alteration of the proxy invalidates the proxy. In order to make certain that the proxy solicitor has the latest dated proxy, we have seen some very cautious proxy solicitors not only have the proxy signed and dated but also time stamped to support a potential argument that their proxy was the last one delivered. Nonetheless, all these attempts to obtain a valid proxy from a shareholder or unit-owner are meaningless if he/she attends the meeting. Frankly, if the fight merits all of the sturm und drang of two sides fighting for each proxy, then it is incumbent on every shareholder and unit-owner to attend the annual or special meeting to find out what is going on instead of relying on the rumor and innuendo that circulates through the building before the meeting. There is no fact-checker reviewing the accuracy of those preelection letters, memos, and flyers that get shoved under the door, and there is nothing that I find more disturbing than the unsigned diatribes from the often named “Committee of Concerned Shareholders” alleging all sorts of wrongdoing. If the member or members of the committee believe what they are writing, then they should append their names to it to give it at least a shred of validity.

The other complexity in proxy fights is determining whether the board or the dissidents have enough proxies and votes to elect a majority of the board. This apparently straightforward concept seems to escape the attention of many of the warriors—they do not have to elect all members to fill all of the seats, just a majority of the seats. Of course, the board meetings might be more pleasant if representatives of the two sides were not on the board at the same time. The key is merely electing a majority of the board members, which enables that side to elect the officers and enact whatever resolutions the majority side deems relevant.


Power to the People

Voting can be accomplished in one of two ways. Most boards are elected by straight voting, although some cooperative boards are elected through a process called cumulative voting. With a seven-member board and straight voting, each shareholder or unit-owner can vote his/her shares or common interests for up to seven candidates, and each candidate can receive no more votes than are equal to the shareholder’s shares or the unit-owner’s common interests. In cumulative voting, each shareholder can multiply his or her shares by the number of board seats being elected (e.g., if the board has seven directors and a shareholder has 200 shares, then that shareholder has 1,400 votes), and either gives all the votes to one candidate or spreads them around among multiple ones.

The cumulative method is intended to enable a minority of voters to elect a candidate to the board, because in straight voting, whichever side has a majority of the shares can elect the entire board. Therefore, a proxy fight is more complicated in a building with cumulative voting because it can take more than a majority of the votes to be certain of electing a majority of the board members. Again, assuming the seven-member board, whichever side has 57.1 percent of the votes should be able to elect four members to the board (i.e., four-sevenths of the votes), while in straight voting all that side would need is 51 percent. Cumulative voting is also a problem in proxy fights because it is so complicated and easy for shareholders to vote incorrectly, since they have to multiply their shares by the number of directors and then divide that number by the number of candidates for whom they want to vote.

Despite the number of proxies each side brings, in many instances the election is determined by what happens during the meeting rather than the pieces of paper that either side has. For the first time, both sides lose their ability to hide the truth. The members of the board, who have the right to run the meeting and give reports before the election, will either win or lose the proxy fight based on the accounting they give of their stewardship of the corporation or condominium during their term of office.

Sometimes, the proxies are so numerous and so few shareholders/unit-owners attend that the presentation at the meeting makes no difference. In addition, one side may show such hostility or stupidity in its actions that the shareholders/unit-owners change sides during the meeting. But usually it comes down to what actually happened during the preceding year. The unvarnished truth wins and loses more proxy fights than does anything else.

In many instances, the cause of the proxy fight is the failure of the board to communicate with the shareholders and unit-owners during the year, causing a vacuum that the dissidents fill. Any board that does not distribute a quarterly letter to the shareholders or unit-owners during the year is asking for a proxy fight. These letters do not have to be elaborate newsletters or magazines, but rather a simple one- or two-page missive from the board advising the owners what is going on and the things the board is considering.

If the board does not communicate with the shareholders and unit owners, then eventually someone else will. A board that fails to communicate can be doing the most incredible job imaginable, but could be ousted at the next election by a small group of angry residents who will use a small issue as their rallying cry. Of course, sometimes boards make colossal mistakes, but with sufficient communication, even those can be explained.

The election itself must be held absolutely honestly and without either side getting any help from the corporation or condominium’s professionals. It is one thing to advise the board beforehand, but when it comes to the meeting, the professionals are representing the corporation or condominium and not just the current board. That means that both sides are to be treated equally during the meeting and a neutral party counts the ballots and proxies. I strongly recommend that the ballots and proxies be counted the next morning at the managing agent’s office in a quieter atmosphere where everything can be checked, including the signatures on questionable ballots and proxies. Once the vote is completed and certified by the inspectors of elections, the ballots and proxies should be sealed in an envelope and seal/signed by the inspectors to avoid any tampering.


You Know My Name

One question that arises all of the time is the confidentiality of the ballot and proxies, which I believe in very strongly. Every shareholder and unit-owner who votes does so with the understanding or belief that no one other than the inspectors of election and the management company employees, who tally the votes, will know for whom the shareholder or unit-owner voted or gave their final proxy. Since the bylaws of virtually every cooperative and condominium are silent on this issue, my assumption is based on the provision that is contained in most bylaws that elections will be held by ballot. To me, the existence of a written ballot means that the shareholder or unit-owner is assured that his or her vote will not be publicly known.

In any event, what this means is that, subject to a losing candidate obtaining a court order to the contrary, neither the winners nor the losers can show up to go through the ballots and proxies to see how the losers could possibly have lost. Still, the Business Corporation Law provides that the board has complete control over the corporation’s (and by analogy, the condominium’s) books and records, so the board should be able to see the ballots and proxies. However, to keep the process fair and impartial, the ballots and proxies are sealed so that no one can see them without it being common knowledge.

This year I tested my hypothesis about voters believing that the ballots and proxies are secret when a winning candidate asked to see the ballots and proxies after a contested election, possibly in an attempt to enable a friend, who lost, to challenge the results. Faced with the request for an inspection for the first time and knowing that if I just said no, there would be suspicions about the refusal, I wrote to the building’s shareholders and told them what had happened and, without naming the candidate that made the request because I did not want that to influence how anyone felt, I indicated that the inspection would be permitted only if the shareholders did not object. Within a few days, more than 20 percent of the shareholders, including many who I assume had voted for one of the candidates in question, called and wrote and objected strenuously.

In fact, not a single shareholder voiced a desire to permit the ballots and proxies to be examined.

Based on the results, I assume the second candidate lost because some or many people who voted for the winning candidate split their ballot and did not vote for the second candidate. It is anecdotal, but I suspect that if a similar poll were taken in other buildings, there would be a similar result.

At this point some of you are speculating that if the ballots and proxies cannot be inspected, then who can be certain that the results are fair? In order to provide a mechanism to protect the honesty of the system, I permit the ballots and proxies to be examined by the losing candidate’s lawyer or accountant or someone who is not a resident of the building and knows the residents. The only stipulation is that the reviewer cannot make any written notes indicating who voted for whom or whether there were multiple proxies issued. The reviewer is basically checking the math for accuracy and making certain that the last proxy or ballot was used. The reason for these steps is to get through the election process without creating a schism in the building that can last for decades and have neighbors accusing each other of violating their friendship or a promise made during a morning elevator ride.

Naturally, this is not a problem for our larger clients who use voting booths. There, the anonymity of the voter is protected because no one can check who pulled the lever for a particular candidate. As a result, the contentiousness ends with the election results and does not drag out into months of arguments and recriminations.

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