A new law (effective January 1, 2018) was just passed unanimously by Senators throughout New York which will make it more difficult for cooperative and condominium managers and boards to deal with board member conflicts of interest when it comes to contracts. Conflicts of interest in contract making can no longer be overlooked and must be reported to condo owners and coop shareholders. The New York Legislature is clearly pushing coops and condos to be transparent with owners and shareholders.
The first new requirement is that condos and coops must give each board member a copy of the applicable law at least once annually. For an incorporated condominium, Section 715 of the Not-for-Profit Corporation’s law and for incorporated coops, Section 713 of the Business Corporation Law. Those sections could be confusing without explaining to board members what an ‘interest in a related party transaction” is when it comes to condo board members’ interests and what a “substantial financial interest” of a coop board member is. If those standards are implicated, a disclosure must be made. Boards and management need a way to track when board members are given copies of these laws as it will be essential to prove such sometime in the future. Compliant record keeping is essential.
Imagine a board deciding to enter into a vendor contract and the board president’s brother-in-law is the vendor. This interested transaction must be reported as it presents a potential conflict of interest. Fast forward two years from then and the board and board member are sued relating to the contract and the conflict of interest that was not reported. The board showing that the proper documentation was provided to each board members at least annually in accordance with the new law and that the board and board members other than the president had no idea of the president’s conflict would be essential in establishing a defense in a lawsuit. Otherwise, the board is exposed to potential liability for not complying with the law.
In addition to providing the right documentation to board members at least annually, board members have to provide an Annual Report to the coop shareholders or condo owners representing that either there were no actions taken by the board that fall within Section 519-A of the Not-for-Profit Corporation Law for the incorporated condominiums or within Section 727 of the Business Corporation Law for incorporated cooperatives. The Annual Report must be signed by each of the board members. If there were such actions by the board during the year, then the board must provide information on any contracts made, entered into, or otherwise voted on by the board that were considered related party transactions in the case of incorporated condominiums, or where one or more of the board members were interested.
Further, the Annual Report has to include a list of all contracts voted on by the board including information on the contract recipient, contract amount and the purpose of entering into the contract, the record of each meeting including board member attendance, voting records for the contract and how each board member voted on such contracts, and the date of each vote on each contact and the date the contract would be and remain valid. The law is a bit ambiguous as to whether the board has to report this information on each and every contract, or just the ones that involve board member conflicts of interest.
In view of these new requirements, it is essential for board and their management to keep track of all of this information in a proactive way. Many boards have failed to keep track of votes and which board member voted for or against a contract. Boards often recorded a passed or not passed record in their minutes, and no record of how each board member voted. Based on this new law, in order to prepare the Annual Report, minutes on votes on contracts have to identify which board members were in attendance for a vote and how each board member voted.
Unfortunately the lawmakers didn’t provide the consequences of noncompliance. We will have to wait for the inevitable lawsuits to start and Court will have to decide the appropriate consequences of noncompliance. As explained above, in a lawsuit where a board and its members cannot point to good record keeping and Annual Reporting in compliance with the new law, they will likely find themselves on the wrong side of liability and perhaps unable to establish the applicability of defenses like the often cited Business Judgment Rule. It is critical for boards and management to be proactive in complying with this new law.
Click here to read this significant law change.
