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Habitat Magazine Business of Management 2021

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ARCHIVE ARTICLE

Missed Annual Meetings: Beware the 603 Demand

It’s perfectly understandable that some co-ops and condos have postponed their annual meetings and board elections. Amid the upheavals caused by the pandemic – including working from home alongside equally frazzled family members – distracted board directors may not realize that a year has already flown by. Or they may simply want to adhere to the health and safety protocols of avoiding large public gatherings.

But pandemic stress and safety concerns aside, boards can no longer afford to miss their due dates. With a recent change to the Business Corporation Law (BCL) that now allows for virtual annual meetings, buildings that fail to hold theirs in time could find themselves facing not only a revolt from residents but also legal headaches and hefty fines.

“You don’t want to get to the point where people have to force an annual meeting,” says Steve Wagner, a partner at the law firm Wagner, Berkow & Brandt. “That’s like a shot across the bow.” Here’s what you need to know to avoid a showdown – and the fallout that comes with it.

 

Timing Is Everything

Essentially, the October 2019 amendment to the BCL allowing virtual meetings gives more teeth to shareholders to demand action. Section 603 of the BCL, “Special Meeting for Election of Directors,” states that if 13 months have passed without the election of “a sufficient number of directors to conduct the business of the corporation,” the board must call for a special election within two weeks. If it doesn’t, holders of 10% of the shares entitled to vote may demand, in writing, a special meeting to be held not less than 60 or more than 90 days later.

Some co-op bylaws may require that 20% or 25% of shareholders sign the petition, as opposed to 10. But either way, the board secretary has five business days to give notice of the requested meeting. Fail to do so, and the annual meeting can be called by any single person who signed the petition – and the optics aren’t good. “It makes the board look ineffective,” Wagner says. “That’s one reason why, in my experience, anytime I’ve sent a 603 demand, the board has responded promptly.”

As for condos, which are governed under the New York State Condominium Act and not the BCL, their boards aren’t off the hook, either. “I’ve never seen a provision of condo bylaws that didn’t include the right to a special meeting,” Wagner says. “The unit-owners can get together to call for an annual meeting exactly the same way shareholders can.”

There’s another incentive for boards to move quickly: When shareholders convene a meeting, whoever shows up is considered a quorum. If just five people turn up, that’s a quorum. Even though a 603 petition strictly limits shareholders from conducting any business other than holding elections, handing over that power is the last thing any board wants.

“It goes without saying that you don’t want the people you’re fighting with running an election,” Wagner says. “You want it to be orderly, proper and transparent, but if it comes down to a special meeting, you’ve lost control.”

 

The Written Word

So how can boards expect to be notified by disgruntled residents? A 603 petition can be sent to the entire board or the president, but the request is typically made to the board secretary. While no case law has established it definitively, digital documents will most likely satisfy legal requirements, according to Wagner. “I’ll put in the petition itself that the petition may be executed in counterparts – which means multiple identical emails, one from each individual petitioner – that can be deemed one and the same document,” he explains. “The same goes for PDFs, photocopies and other electronic reproductions of the petition. For instance, there’s no reason a shareholder or unit-owner couldn’t be sent a physical copy of the petition, sign it, take a photo of it and then send it back.”

Whatever path or format a petition takes, boards should respond in writing immediately. “You want to send out a letter saying that you’re calling an election meeting and explain what the procedure is, with the goal of assuring everyone that it will be run fairly and squarely,” Wagner advises, adding that boards should keep the message positive. “Don’t go on the defensive and try to explain why the meeting hasn’t been called, and certainly don’t take potshots at anyone,” he says. “And keep it brief. The longer the letter, the less likely people will read, or believe, it.”

 

Collateral Damage

No matter how well-intentioned a board is, procrastination can prove costly. A board may give notice of a special meeting after receiving a 603 demand, but if it doesn’t follow through quickly enough, petitioners could get a court order – and then go back to the judge asking to have the board be found in contempt. “You’re asking for what’s called an equitable remedy, which allows the court to look at what’s fair and do whatever it wants to do,” Brucker explains. “That could mean monetary damages, like paying the petitioners’ legal fees and being fined a daily amount until the meeting is called. Theoretically, you could even be jailed.”

While that’s an extreme scenario, no board can afford the bad blood that inevitably flows from delaying elections. “Of course there are buildings where boards have taken advantage of the pandemic to postpone the annual meeting and hold on to power,” Wagner says. “But even when that’s not the case, you lose political capital because there’s always the question of why you didn’t or won’t call for elections.” The bottom line, he adds, is that “a petition should be a wake-up call. If a board gets a demand for a meeting, the board should call the meeting. It’s as simple as that.”

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