“The purpose of reviewing the bylaws is really to protect the board against (legal) claims,” says David Berkey, a partner in the law firm Gallet Dreyer & Berkey. “If one claim is raised, the cost of defending such a claim is going to be far more than the cost of reviewing the bylaws and updating them. So, it’s a type of insurance policy.”
First, a board must determine who has the power to alter the bylaws – the board, the shareholders, or some combination of the two. The answer can be found in the existing bylaws. Once the board determines it has the power and the desire to update the bylaws, the process is fairly straightforward.
“The process has become streamlined,” Berkey says. “There’re about a dozen things that we look at. My estimated cost is usually under $2,000 for the review and the memo.”
It’s also important to make sure that your proprietary lease and bylaws are consistent. If, for instance, you modify your proprietary lease to allow the co-op to impose a flip tax – a move that usually requires approval by a “super-majority” of two-thirds or three-quarters of the shareholders – you want to make sure that the board’s power to impose the flip tax is also included in the amended bylaws.
“We generally amend both at the same time so they’re consistent,” Berkey says.
Another rule of thumb is that the bylaws must obey the co-op’s certificate of incorporation. “Anything in the bylaws that’s inconsistent with the certificate of incorporation is simply not valid,” says Joel Miller, a lawyer with the firm Miller & Miller.
Adds Berkey, “There are so many potentials for problems, even in a small building, if the bylaws are not followed. Board actions can be set aside. So you want to have bylaws that are modern and easy to follow.”
In the end, updating bylaws is usually money well spent.
“Bylaw review is not a difficult process and it's not an expensive process,” says Berkey. “If you’re a fiduciary and you’re representing a building even as small as 10 units, you want your building to be in as up-to-date a state as possible.”
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