Disclosure of Conflict of Interest Transactions: Top 10 Key Points Condo and New York Co-op Boards Need to Know to Ensure Compliance
While the law is intended for all co-ops and condos, in reality, it only affects co-ops and condos formed under the Business Corporation Law (“BCL”) or the Not-For-Profit Corporation Law (“NFPCL”) – every co-op, but almost no condos as virtually all are unincorporated.
Nevertheless, industry experts expect the law to be amended to apply to all condos and a bill to do so has been introduced, so FirstService Residential is recommending that both condo and co-op boards adopt the procedures set forth.
Following are the key points contained in the law:
1. The new law has not changed the types of contracts that must be approved in accordance with BCL § 713 and NFPCL § 715. It has always been a board member’s obligation to fulfill his/her fiduciary duty to the co-op or condo and disclose any transaction where the board member has a “substantial financial interest.” Rather, as detailed below, it now requires an annual report be distributed.
2. Transactions likely to trigger the requirements of the law include:
• Sales/leases in the building if a board member (or their spouse) is a broker,
• An alteration request for an apartment owned by a board member (or by their spouse, a trust, limited liability company, etc.), and
• A transaction with the sponsor if the sponsor is still represented on the board.
3. Specifically, the board must submit an annual report to the owners, signed by each director, that contains:
• A list of all contracts, voted on by the board, with an entity in which a director has a financial interest,
• Information on the contract recipient, amount and purpose of entering into the contract,
• A record of the meetings of the directors in which the contract was voted upon – including attendance and how each director voted, and
• The date of each vote and the effective date of the contract.
4. Even if no contracts qualify, the board must still provide an annual report to all owners indicating there were no such contracts.
5. There is no specific form for the annual report, only that the information required by the law is included.
6. While the law does not set a specific date, FirstService Residential recommends sending the annual report during the fourth quarter each year.
7. If there is an interested director involved in a contract, it should trigger new actions not currently followed by most boards.
8. Specifically, if a contract with an interested director is considered, the meeting minutes should include all information required to be in the annual report, including the vote of each director on any such contract.
9. It is ultimately incumbent on the president and all of the board members to ensure compliance with the law, including properly recording the vote of each board member.
10. The law requires that each director receive a copy of BCL § 713 and NFPCL § 715 each year. As such, FirstService Residential will provide copies of these sections of the law to all directors each January, and each October, we will remind the board to distribute the annual report.
As always, your board should consult with its attorney regarding how the law applies to your building and ensure the annual report is accurate and complete.