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Is it kosher to allow a co-op shareholder to vote on the buyer of her own apartment?

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Question:

My co-op currently allows shareholders to vote in favor of the buyer when their apartment is being sold. However, I understand this to be self-serving, unethical behavior. But the bylaws offer no guidance on the matter. Is there anything to be done?

Answer:

Believe it or not, what you're describing is probably okay in the eyes of the law, our experts say.

In fact, the typical proprietary language used in co-op bylaws allows for shareholders to vote on a sale (rather than the co-op board, which more commonly does the voting) in a case in which the board doesn't decide on a sale within a certain amount of time. That same language, according to lawyer Steve Wagner of Wagner Berkow LLP (a Brick Underground sponsor), doesn't expressly prohibit a shareholder from voting for the buyer of her own apartment.

That said, this is not something that happens often.

"I don't recall ever seeing a vote going to the shareholders," says Jeff Reich of Schwartz Sladkus Reich Greenberg Atlas LLP. Reich agrees with Wagner, though, saying that there may be no legal problem with a shareholder voting on the sale of her own apartment.

Shareholders, unlike board members, don't have any fiduciary duties to the corporation or its shareholders. Fiduciary duties are what board members owe their neighbors who have placed their trust in them by electing them to operate and manage the cooperative. They require, "among other things, undivided loyalty to the shareholders," and they prohibit conflicts of interest, Wagner says.

 "The board members should not vote on something in which they have a direct financial interest," he says. 

Reich also always recommends that board members recuse themselves from voting on purchase applications when selling their own apartments, and he doesn't recall seeing a case when a board member didn't do that. But, technically speaking, even a board member selling his own apartment can vote on the sale, with a caveat, he says. 

"Under New York law, as long as the shareholder board member discloses their financial connection to the vote, they can technically vote, they just can't be the deciding vote," he says.

Remember that your building is also allowed to do things in its own way.

"Every building is set up a little differently," says Deanna Kory of Corcoran.

In any case, you may be able to make a clear argument to the board and shareholders that you don't think this behavior is ethical. And you would have a valid point.

"Most people feel it is a conflict of interest to vote for a situation that would benefit them," Kory says. "They know that they are leaving and that the remainder of the board/committee and fellow shareholders will have to welcome (or not) the new shareholder into the co-op. So it seems to them unfair to vote on a process where the approval will benefit them directly."


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