Attorneys and managers often talk about a board’s fiduciary duty to its shareholders or unit-owners. But what does that actually mean?
“Everything you should be doing should be for the best interests of the shareholders of your cooperative or for the unit-owners of your condominium, and not just for yourself,” says Mark Hankin, a partner in the law firm of Hankin & Mazel. “Quite frankly, sometimes that gets askew.”
Hankin points to a board that was arguing over who should get parking spaces when there weren’t enough for everyone. There were several members on the board who wanted parking spaces, claiming that getting one would be payback for the time they had spent serving on the board. Hankin told them: “You’re not here to get remuneration. You’re here to work on behalf of hundreds of people for their best interests. That’s your fiduciary responsibility. Represent everybody. Not just yourself.”
Then there’s the case of the Dreamy Hollow co-op, discussed elsewhere in this issue, where a dire financial situation left the board with a clear fiduciary responsibility to find a solution. Its members came up with three options: a one-time additional assessment of $7,000 per unit; a hike in maintenance charges to $1,100-$1,500 per unit; or the sale of their shares to a buyer, who would turn the building into a rental.
For such an important decision, says Hankin, the board has a fiduciary duty to consult with the shareholders. That, in fact, is what this co-op did, sending an announcement out in July of a meeting to discuss the options in September. All right and proper. But then, without the knowledge of the shareholders, the board signed a six-month contract with an individual authorizing him to look for a buyer and to start lining up willing sellers in preparation for a buyout.
By August – a full month before the shareholders were scheduled to meet and discuss the three options – a tent had been set up by Dreamy Hollow’s pool. There, representatives met with interested residents to discuss the terms of a potential buyout. The board members involved insist that doing this before discussing the three options with the shareholders was simply being “proactive.”
When the September meeting arrived, board members say it drew only 30 percent of the shareholders, citing this turnout as proof that a majority of the residents didn’t care what happened to the property. But this ignores the fact that for the previous month, a firm had been sitting by the co-op’s pool, offering shareholders thousands of dollars and months of free rent if they sold out. How would turnout have been if the board had not put its finger on the scale? What might have happened if the board had actually wanted to discuss the options and had pushed people to come to the meeting? Instead, pro-buyout board members insisted that the low turnout only highlighted the community’s “inertia problem.”
Hankin says this was a clear breach of fiduciary duty. “I wouldn’t have jumped the gun by hiring somebody in advance of that meeting because how could you be asking the shareholders’ opinions if you’re already going ahead with that? The board voided the choice. They had an obligation to discuss the three options with everyone before they started to have people sign up to sell their shares. If they hired this [buyout advisor] company before the meeting because they wanted to really have only one option, then that’s a violation because they weren’t thinking on behalf of all of the shareholders. They were thinking of themselves.”
In effect, he argues, the board members stacked the deck against the other two options. And that’s not doing their fiduciary duty.