New conflict of interest laws for condos and co-ops in New York—Impact on existing boards and sponsors of new condo and co-op offerings



September 20, 2017

Real Estate Alert 

Author(s): Erica F. Buckley, Julia F. Casteleiro, Ari Glatt

Recently, New York legislated amendments to its Business Corporation Law and Not-For-Profit Corporation Law which establish procedures for boards of condominium and cooperative corporations to handle certain conflicts of interest. This alert discusses what owners, developers and shareholders need to know.

On September 12, 2017, the governor signed into law new amendments to the New York Business Corporation Law (the BCL) and the New York Not-For-Profit Corporation Law (the NPCL), which establish procedures for boards of condominium and cooperative corporations to handle certain conflicts of interest. Now, boards of condominium and cooperative corporations are required to provide each director with the conflict of interest section of the applicable law and submit an annual report to its members or shareholders regarding related party transactions.

What is the purpose of the new legislation?

The purpose of this legislation, according to the New York State Assembly Memorandum in Support of Legislation, is to ensure that cooperative and condominium housing boards of directors are aware of certain laws relating to conflicts of interest. It also establishes a notification requirement so that the members or shareholders are aware of transactions involving an interested director.

What new requirements does the new legislation impose on boards?

  • If a corporation is organized pursuant to the BCL, the law now requires that, at least once a year, each director receives a copy of Section 713 of the BCL. If a corporation is organized pursuant to the Not-For-Profit Corporation Law, the new legislation requires that, at least once a year, each director receives a copy of Section 715 of the NPCL.
  • In each case, an annual report must be sent to all members or shareholders of the corporation, signed by all directors, stating all contracts or transactions that were voted upon by the board that involved an interested director. The report must also include:
  • Information on the recipient, amount and the purpose of the contract;
  • A record of the meetings of the directors, including attendance and how each director voted; and
  • The date of the vote and the date the contract is valid.
  • If there were no transactions that involved an interested director, the board must still prepare a document signed by all directors to all members or shareholders of the corporation, which states that no actions were taken by the board that were subject to the annual report requirement.

The new legislation on its face only impacts certain condominium and cooperative boards.

The explicit language of the new law applies only to those condominium and cooperative corporations formed pursuant to either the BCL or the NPCL, which appears to leave out most condominiums that are unincorporated associations formed pursuant to Article 9-B of the New York Real Property Law, known as the Condominium Act. Moreover, the law is completely silent on enforcement and oversight, which leads one to believe that any violations of the law must be addressed by shareholders or members through litigation.

What does this mean going forward for existing boards and sponsors?

All cooperatives or condominiums formed pursuant to either the BCL or the NPCL may wish to consider amending their governing documents to ensure they are compliant with the new legislation. Such amendments should establish a procedure to provide each director a copy of the applicable statute and track when the annual reports will be circulated. For sponsors of cooperative or applicable condominium offerings, especially during such time that the sponsor controls the board of directors or board of managers, a question arises as to whether this information must also be included in an amendment to the offering plan, or if providing a separate report suffices.

Nixon Peabody’s team of cooperative and condominium attorneys will continue to monitor any updates on this new law, paying particular attention to any new requirements applicable to sponsors.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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