By Deborah Goonan, Independent American Communities
A new disclosure law in New York State highlights the fact that condominium and cooperative corporations are subject to different legal standards than government entities.
While municipal, county, and state governments officials are legally prohibited from steering taxpayer-funded contracts to their own businesses, or those in which they hold a financial interest, condo and co-op boards can engage in potentially conflicted business deals, so long as the relationship is properly disclosed.
For example, see New York City’s 42-page plain language handbook of public policies regarding conflict of interest for City employees:
Excerpt from pages 17-18:
OUTSIDE BUSINESSES AND INVESTMENTS
There are restrictions on public servants having an ownership interest in a company that has business dealings with the City. These restrictions also apply to an ownership interest that your spouse, registered domestic partner, or unemancipated child has in a company that does business with the City. (Your child is unemancipated if he or she is under 18, unmarried, and living in your home.) What defines an ownership interest? See the checklist below:
CHECKLIST: You have an ownership interest in a firm if your interest is:
• More than 5% of the firm; or
• Worth more than $48,000; or
• More than 5% of the firm’s debt (such as bonds); or • More than $48,000 of the firm’s debt.
However, even if your interest is less than these amounts, if you or your spouse or registered domestic partner or unemancipated child runs the business (that is, you or they have a “managing interest”), you are still considered to have an ownership interest in the firm.
By contrast, New York law allows condo and co-op board members to engage in contracts for businesses that provide goods and services to the corporate association, even if one or more board members personally benefit from those contractual relationships.
The only new legal requirement is that, each year, each board member must submit an annual disclosure report to shareholders and unit owners disclosing information about recipient of each potentially confflicted contract, the amount of that contract, and a record of board members votes with regard to the contract.
By the time co-owners or shareholders find out about these potential conflicts of interest, members have already compensated contracted professionals and businesses for their products and services.
Member knowledge of such contracts assumes, of course, that board members follow new legal requirements by distributing a truthful annual report to all members.
Other than allowing the corporate condo or co-op association members to cancel a conflicted contract, it’s unclear what consequence, if any, follows for board members who fail to comply with New York statutes.
In essence, even though condo and co-op board members are unpaid volunteers, the potential exists for substantial personal financial benefit by way of board sanctioned, and statutorily enabled conflict of interest.
CHANGES IN CONFLICT OF INTEREST LAWS FOR CO-OPS AND CONDOS
November 1, 2017
by Darya Shneyder, Senior Manager, Marks Paneth LLP
Board members of cooperatives and condominiums in New York now have a new fiduciary duty to the shareholders of their respective corporations. In September 2017, the governor signed an amendment to the New York Business Corporation Law (BCL) establishing procedures for handling conflict of interest contracts. The addition of Section 727 identifies the changes in procedures related to contracts entered into with board members for cooperatives and condominiums formed under BCL.
Section 727 now requires board members to obtain and review a copy of Section 713 of BCL on an annual basis. Section 713 allows for contracts to exist between a board member and corporation, and states these agreements are not voidable simply due to related party relationship. This includes contracts that are made with a board member, an entity in which a board member has financial interest (investment), and/or an entity in which a board member holds a position that participates in the decision making process for that entity. However, Section 713 also identifies procedures the board must follow to approve the contract with the board member.
Read the new section of statute: NY BCL section 727
NY BLC section 713