The New York State Legislature recently enacted a law which requires members of cooperative or condominium boards to disclose any transactions in which they have an interest to all shareholders or unit owners. Both the New York Business Law (with new Section 727) and the New York Not-for-Profit Corporation Law (with new Section 519-a) now provide that board members are subject to conflict of interest laws and therefore must make appropriate disclosures at least annually.
An “interested transaction” is a contract or transaction in which a member of the cooperative or condominium board has a substantial financial interest. For example, if a board member owns or is involved with a company which is providing services to the cooperative this is something that now needs to be disclosed to all shareholders.
There was some confusion when the law was initially enacted (effective January 1, 2018) because the Business Corporation Law (“BCL”) and the Not-for-Profit Corporation Law (“NPCL”) generally only apply to cooperatives. However, on April 18, 2018, Governor Cuomo signed an amendment to the new law clarifying that the same rules apply to condominiums as well.
Whether a co-op or a condominium, the responsibility for compliance with the new legal requirements contained in the BCL and NPCL falls on the entity itself. Thus, managing agents will likely be involved in taking the steps necessary to ensure compliance. One of the new requirements is that at least once each year the co-op or condominium must provide an annual report to all shareholders and/or condominium unit owners that identifies all contracts voted upon by the board which involved an interested board member. In the event no interested contracts were voted upon by the board the annual report must so state.
If, however, there were any interested contracts during the year covered by the annual report, the same report must include the following:
- a description of the work or services being performed
- the term of the contract
- the amount and purpose of the contract
- any additional information on the entity awarded the contract and how the same is related to the board member
- a list of all board meetings during which an interested contract was either discussed or voted on setting forth the names of all board members in attendance, and how each board member voted and the final results of the vote.
Each board member must sign the annual report, even if there were no contracts voted upon which involved an interested board member during the report period. In such instance, however, a disclosure statement stating that “no actions were taken by the board that was subject to the annual report required pursuant to Section 727 of the BCL” (or if the entity is a not-for-profit entity, Section 519-a of the NPCL) can be provided to the shareholders or unit owners in lieu of the annual statement.
In addition to the inclusion of this information in the annual report and its distribution to each shareholder or unit owner, the cooperative or condominium association must provide each board member with a copy of BCL Section 713 or, if applicable, NPCL Section 715, which define what an interested director is and sets out the procedures to be utilized in order for members of the board to avoid a conflict of interest.
If you are a member of a coop or condominium board or a managing agent and wish to better understand your obligations under the new law, please contact one of our real estate attorneys.