Mandatory Disclosure of Conflicts of Interest Transactions: Memorandum from General Counsel Ben Kirschenbaum

Posted on Thursday December 21, 2017

We want to advise the Board about a new state law enacted in September 2017 intended to require the Boards of all cooperatives and condominiums to disclose to their owners all transactions in which a member of the Board has a conflict of interest. The purpose of the new law clearly intended to include both cooperatives and condominiums, but the law itself only applies to entities formed under the business corporation law (“BCL”) or the not-for-profit corporation law (“NFPCL”). Thus, the law applies to all cooperatives. Since very few condominiums in New York are incorporated, the law only applies to those condominiums that are incorporated pursuant to one of these two laws. Nevertheless, most people in the industry expect the law to be amended to apply to all condominiums. Thus, we are recommending that the boards of our condominiums as well as cooperatives adopt the procedures set forth in the memorandum. The law is effective January 1, 2018.
 
The new law does not change the requirements for addressing transactions where there is an “interested director” as defined in the laws. Section 713 of the BCL (and Section 715 of the NFPCL) have set forth the procedures to follow if there is an interested director. The new law’s requirements are procedural and are set forth below. They will clearly make sure there is a greater focus on the existing requirements.
 
As always, we urge the Board to consult with its counsel about how the law applies to your cooperative or condominium. Based on our understanding of the law, and with the assistance of many attorneys in our industry, we want to advise you of the steps we are taking to assist in compliance. There are two specific actions required by the law, and one procedure that we believe all of our cooperatives and condominiums will have to change in order to comply with the law:
 
Notice to each Board Member:           The law requires that each director receive a copy of Section 713 of the BCL (or Section 715 of the NFPCL) once each year. We have already created a simple memorandum (copy attached) we will distribute to each board member in January of each year starting January 2018. We recommend that at the first meeting of the calendar year the Board engage in a brief discussion of the requirements of Section 713/715 so that all board members are acquainted with this portion of the law.
 
Annual Report to Shareholders:          The law requires that the board “shall submit an annual report to the shareholders, which shall be signed by each such director, containing information on any contracts made, entered into, or otherwise voted on by the board of directors where one or more of the directors was an interested director…”. The annual report shall include the following information on each such contract:
 
·         A list of all contracts (involving an interested director) voted on by the board of directors, including information on the contract recipient, contract amount and the purpose of entering into the contract
·         The record of each meeting, including director attendance, voting record for contracts and how each director voted on such contracts
·         The date of each vote on each contract and the date the contract would be and remain valid
 
If there are no contracts that would qualify for inclusion in the annual report, the board must still provide an annual report to all shareholders indicating that there were no such contracts.
 
There is no specific form for the annual report, only that the information required by the law is included in the report. Attached is a sample report provided to us by one of the firms representing a number of cooperatives and condominiums.
 
The law does not set any specific date for providing this annual report to the shareholders. We believe sending the annual report during the last quarter of the year is appropriate. Therefore, we will send a notice to each of our boards on October 1 each year reminding the board of the annual report requirement. That notice will urge the board to consult with their attorney to assist in the preparation of the report.
 
Recording Actions on Contracts:       With the passage of this law, it is now important for the board to be sensitive to each contract that it considers during the course of the year. If there is an interested director involved in any contract, it should trigger new actions not currently followed by most boards. Our boards have different policies regarding the information included in the minutes of meetings. Most boards do not record the vote of each board member. If a contract with an interested director is considered, it is important that the minutes of the meeting include all the information required to be in the annual report, including the vote of each director on any such contract. We are instructing our Property Managers about these requirements. However, it is ultimately incumbent on the president and all of the board members to be sure that the information required by the law, including properly recording the vote of each board member.
 
Interested Director Transactions:        It is beyond the scope of this memorandum to provide a complete recitation of Sections 713 or 715 and the transactions that fall under these sections, and the board should consult with its attorney for clarification. However, generally, the transactions that fall under Sections 713 and 715 include any transaction between the cooperative and condominium and a director or any corporation, firm, association or entity in which a director has a “substantial financial interest”. Based on information we have received from various attorneys engaged in practices involving cooperatives and condominiums, transactions that are likely to trigger the requirements of the law include:
 
i)                   sales/leases in the building if a board member (or the board member’s spouse) is a broker doing business in the building,
ii)                 an alteration request for an apartment owned by the board member (or by the board member’s spouse, a trust, limited liability company, etc.), and
iii)               a transaction with the sponsor if the sponsor is still represented on the board.
 
The new law has not changed the types of contracts that must be approved in accordance with Sections 713 and 715. It has always been a board member’s obligation to fulfill his/her fiduciary duty to the cooperative or condominium and disclose any transaction where the board member is an interested director.
 
Finally, we note that the law does not provide for any enforcement mechanism. Thus, if a board does not comply with the requirement to distribute the annual report, it is unclear what might happen.
 
FirstService Residential is committed to assisting its boards in complying with laws such as this. We have set up a plan that each January will provide each board member with a copy of the sections of the law and each October will remind the board to distribute the annual report. However, it will be up to you, the board members, to consult with the cooperative’s or condominium’s attorney to be sure that the annual report to the shareholders is accurate and complete.

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