BY STUART M. SAFT, ESQ.
Every cooperative housing corporation has two documents that are the basis for its operation. There are other documents which are also considered "governing" instruments, including the Articles of Incorporation and, in some cases, the Regulatory Agreement with HUD. While these should be examined for applicability, this article focuses on the By Laws, which contain the most relevance in terms of the day to day operation of the cooperative. It is also important to note that HUD- assisted or insured cooperatives or those with By Laws mandated by a lending institution or others, may not have the right to amend their By Laws without the approval of HUD or another institution. Nevertheless, boards of cooperatives, whose actions are limited, should still review this article for ideas on improving their operation and changes they can make after their financing is repaid.
The By Laws provide the guidelines for the relationship between the corporation, its board of directors and the shareholders. Conversely, the proprietary lease or occupancy agreement deals with the landlord-tenant relationship between the corporation, as landlord, and the shareholders, as tenants. Although it is the proprietary lease or occupancy agreement that get a great deal of attention because they deal with the operation of the building and the resident's homes, the By Laws are just as important because it establishes the board of directors and provides it with the power to manage the corporation’s affairs. It is the By Laws that provides the corporation with its directors and establishes their authority.
Over the last decade we have seen an escalation of litigation involving the operation of cooperative corporations in areas covered by the By Laws; litigation that could be avoided with properly written By Laws that are carefully followed by the Board of Directors. Areas of frequent litigation include such issues as the process of electing and removing a board of directors, the power of the president and other corporate officers, how and when annual and special shareholder meetings are to be called, the ability of a board to allocate the corporation’s shares, election procedure, the availability of indemnification of officers and directors by the corporation, the right to impose special assessments, whether the board or all of the shareholders must vote on major issues, the right to terminate resident or equity status, and Fair Housing Act issues.
Because of the importance of the By Laws, it is imperative that they be reviewed periodically in order to make certain that a) they comply with changes in state and federal legislation relating to the operation of a corporation, b) they are consistent with court decisions, and c) they provide the appropriate framework for the operation of the corporation. Since the By Laws are based on the corporate law of the state in which the corporation was formed, the By Laws could be affected by legislation and decisions that have nothing whatsoever to do with cooperatives. That is, the cooperative can be affected by decisions and laws targeted for other types of corporations.
Moreover, because members of the Board may not be aware of changes in the law and developing case law, the board should request that corporate counsel either keep it regularly informed of changes in the law, or examine the By Laws and advise the board of what actions it should take in order to avoid problems in the future. This should be an ongoing process, but if not, it certainly should be undertaken at least every five years.
It is difficult to generalize as to the areas of the By Laws that could require updating because that would depend on the age of the existing By Laws and whether there have been significant court decisions or legislation since the By Laws were enacted or were last reviewed. The other area of concern is that most By Laws were written by the Sponsor’s counsel and reflects the sponsor’s concerns rather than issues that would facilitate the orderly operation of the Cooperative. It is therefore particularly important for the Board of a new cooperative to undertake this review and revision as soon as the sponsor transfers control of the corporation.
It is incumbent on the board of directors of a cooperative housing corporation to periodically examine its By Laws to make certain that they make sense in light of the actual business practices of the corporation. Examine how your cooperative is actually operating compared to what is called for in the By Laws. If there are discrepancies, perhaps amendments are necessary.
One of the problems with the By Laws used by many cooperative apartment corporations is that they have simply been adapted from corporate documents and may not deal with the kind of problems that a cooperative housing corporation would encounter. In that regard, reviewing the By Laws is not so much an issue of modernizing them but customizing them to the appropriate use. Unlike other corporations every decision a cooperative board of directors makes will have an effect on the lives of its shareholders.
In modernizing the By Laws the Co-op should pay particular attention to the indemnification of officers and directors in order to make certain that the board has the maximum protection available. During the last ten to fifteen years, as a result of litigation against boards of directors, various state legislators have increased the available protection for board members. This protection should be incorporated into the cooperative's By laws. In addition, modernizing the By Laws can also help the board take advantage of changes in technology that could ease a board's operations. For instance in most states, board meetings can be held by telephone conference call and shareholder proxies can be faxed, two items which were not available in the past. In the future we may see authorization of board meetings by e-mail and the By Laws would have to be updated to permit it. Other areas of By Laws that frequently require review and updating relate to mandatory insurance, actual meeting dates, board election procedures and quorum requirements for shareholder meetings.
The process of amending the By Laws varies based upon the particular incorporating documents, the amending procedures contained in the existing By Laws and state law. Generally, however, most By Laws can be amended with the vote of two-thirds of the shareholders. In some Cooperatives, By Laws can also be amended by the Board of Directors as long as the Board does not change a provision that had been enacted by the shareholders. Although this later option provides the Board with a great deal of latitude, it can be tempered by limiting the areas of the By Laws that the Board can amend to just those that relate to administrative issues.
Occasionally the By Laws are so outdated that it is easier to just enact an entirely new set rather than go through the laborious task of incorporating all of the required changes into an old set of By Laws. In another common situation, a cooperative formed under a particular government program was given the boiler plate By Laws used by the government agency at the time of formation when the shareholders and Boards rights were limited and it no longer has any relevance or is otherwise inadequate.
Operating a cooperative corporation is a complex procedure requiring a Board to stay on top of numerous details. A well written and followed set of By Laws will provide the Board with a road map of how to do its job properly and avoid aggravation and litigation.
Basically, the By Laws should contain the following provisions:
Article I - Meeting of Shareholders:
Article II - Directors:
Article III - Officers
Article IV - Indemnification of Directors and Officers.
Article V - Proprietary Leases
Article VI - Capital Shares:
Article VII - Seal:
Article VIII - Checks, Notes, Etc.
Article IX - Sale, Lease, Demolition or Disposition of Property:
Article X - Amendments:
Article XI - Fiscal Year:
Article XII - Reports:
Article XIII- Miscellaneous:
Stuart M. Saft, Esq., heads the real estate department at Wolf Haldenstein Adler Freeman & Herz, a full-service law firm, which represents the boards of over 200 cooperative corporations in New York City. Mr. Saft is chairman of the Council of New York Cooperatives & Condominiums and sits on the boards of directors of both the NAHC and the National Cooperative Bank. He has written nine books and over two dozen articles on real estate issues.
This article originally appeared in the May/June 2000 issue of the Cooperative Housing Bulletin published by the National Association of Housing Cooperatives. Reprinted with permission from NAHC. You can visit NAHC on line at www.coophousing.org.