New Conflict of Interest Law

September 26, 2017

By Andrew P. Brucker

The vast majority of cooperative housing corporations in New York were created under the Business Corporation Law (the “BCL”), and for decades the BCL has included a provision (Section 713) that discusses potential conflicts of interest.

Section 713 basically provides that contracts or other transactions between a BCL corporation and a director (or a company in which a director has an interest) are not automatically prohibited just because of that conflict.  If all material facts in regard to the director’s interest were disclosed in good faith, and the Board voted to approve such contract or other transaction without counting the vote of the interested director, the contract or other transaction is valid: it is not void or voidable (due to the conflict).

Section 713 also provides that failure to approve such a contract or other transaction in accordance with the above paragraph gives the corporation the right to void it, UNLESS it can be established affirmatively that it was fair and reasonable to the corporation at the time it was approved by the Board.

In mid-September a new section of the BCL was added, which will become effective as of January 1, 2018.  Section 727 requires that at least once a year every cooperative housing corporation must:

  1. Provide a copy of Section 713 of the BCL to each Director;
  2. Submit an annual report to the shareholders, signed by each Director, containing information on any contracts made, entered into, or otherwise approved by the Board where there was an interested director (as outlined in Section 713). This annual report must include:
    • A list of all such contracts, as well as the identity of the other party, and the amount and purpose of the contract;
    • A record of all meetings of the Board when it voted on such contracts, including attendance, how each director voted on such contracts, and the actual result of voting for each such contract.
    • The date of each vote on each contract and the date the contract “would be and remain valid.”
  3. If the Annual Report would contain no information because the Board did not vote on any such contracts, then the Board shall instead of an annual report submit to the shareholders a document, signed by each director, indicating “No actions taken by the Board were subject to the annual report required pursuant to Section 727 of the Business Corporation Law.”

The new law also has a similar provision for cooperative housing companies created under the Not-for-Profit Law.

Further, the new law provides that it applies to “every condominium … incorporated pursuant to this chapter.”  But condominiums are not incorporated.  Although the Condominium Law does provide that a condominium board may incorporate, this is rarely done.  So it is still unclear what the authors of this new law meant, and how it actually applies (if at all) to condominiums.  We understand that this will be corrected soon, and that the change will apply similar rules to condominium boards.

It should be noted that the law does not contain any provision for enforcement, nor any penalties for violations of this provision.

Boards and managers should be aware of this new law, and the annual reporting requirements.  Many of our condominium and cooperative clients have requested that we help them develop a Code of Ethics and Conflicts Policy for their Board.  If this is of interest, or you would like assistance in complying with the new law, please feel free to contact us at Montgomery McCracken Walker & Rhoads.

To view a PDF version of this memorandum, please click here.