Deborah Koplovitz in Board Operations on May 18, 2021
With the annual meeting season around the corner, we continue to receive numerous questions about the voting rights of sponsors and holders of unsold shares. (For purposes of this article, I am using the word “sponsor” to refer to both.) Many co-op boards still seem to believe that a sponsor should be able to appoint the number of board members specified in the offering plan – but the sponsor cannot, in addition, vote any of its shares or common interests.
Is this correct? Unfortunately, many factors are in play, and the question does not have a blanket, one-word answer. But the answer matters because if a board runs afoul of the governing documents and adopts an incorrect method for counting votes, it could get drawn into litigation over the outcome of the election.
The starting point for an explanation of voting rights is the New York State Attorney General's Rules, with the understanding that a review of those rules may not provide enough legal information for a board to make an informed evaluation of the election process. With respect to voting, the rules state that the offering plan must “[d]escribe the extent to which sponsor …or other holders of unsold shares will or may control the board of directors after closing, and the consequences to purchasers of such reservation of control.”
For non-eviction conversions, “voting control” of the board ends at the earlier of two dates: five years after the conversion, or when the sponsor owns fewer than half of the unsold shares or common interests. Confusion has arisen, however, over exactly what the term “voting control” means. Is this provision the sole consideration as to voting? Or are the building’s governing documents also pertinent?
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New York courts have narrowly interpreted the term “voting control.” They have concluded that eliminating voting control of a sponsor is not accomplished by disenfranchisement of the sponsor but is achieved when a sponsor is no longer able to designate people to fill a majority of the board positions. Therefore, a sponsor can designate the number of board members provided for in the offering plan and vote, together with other owners, for the remaining seats on the board. Accordingly, boards should take care when deciding how they will count votes at an annual meeting in “voting control” situations.
The courts have also noted that there would be a different analysis if the bylaws and offering plan contain a different provision and do not, like the Attorney General’s Rules, merely address “voting control.” As a purely practical matter, boards should bear in mind that the sponsor drafts the offering plan, so it is the exception rather than the rule for the plan to contain a “will-not-vote” clause.
The short answer on this aspect of corporate governance is that as your board prepares for annual meeting season, it should not merely look to the Attorney General’s Rules. It should also consult the corporation’s governing documents, including the certificate of incorporation. These need to be reviewed and analyzed by your attorney so that all votes are counted correctly. That way, your election can proceed without a hitch – and can withstand any legal challenge.
Deborah Koplovitz is a partner at the law firm Herrick, Feinstein.
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