Q&A: Board Makeup Contrary to Bylaws

Q&A: Board Makeup Contrary to Bylaws
Q I reside and own shares in a co-op in Edison, New Jersey, which is experiencing many problems, including serious maintenance issues, due in part to poor service on the behalf of the current management company.

A group of residents and owners have banded together in an attempt to save our property values. Unfortunately, we have received serious, insurmountable opposition not just from the management company, but from our own board of directors as well. Let me preface this by saying that the current board, which consists of seven members, was appointed by a representative of the management company. Our bylaws state that: “the number of directors shall not be less than seven and not more than fifteen.” A three-year contract was agreed upon and signed to retain our current management company from 2006-2009, with only a three-member board present at the time. The board consisted of two resident owners and a representative of the management company. A representative of the management company occupies a seat on the board because of three sponsor-owned units.

The representative of the management company did not in fact vote, as she had a financial interest, but ultimately the two board members agreed to and signed the new contract in October 2006. Since we did not have the required minimum number of seven board members at the time the contract was signed, was this legal? Are there any quorum requirements regarding the number of board members needed, and do we have any recourse, legal or otherwise, to negate the contract?

—Exasperated in Edison

A “You may have options. The Cooperative Recording Act (N.J.S.A. 46:8D-1 et. seq.) requires the recording of the master declaration, which must include the bylaws among other things. The bylaws of the cooperative corporation generally govern the manner in which the board is legally authorized to conduct business. You indicated that the by-laws provide that the number of directors shall not be less than seven (7) and not more than fifteen (15). Also, you indicated that all seven (7) members of the board were appointed by the management company,” according to Attorney Mark D. Imbriani, who has his own practice in Somerville, New Jersey.

“The bylaws governing the board of directors should include a provision specifying what constitutes a quorum for the purposes of conducting business. According to the New Jersey Non-Profit Corporation Act, (N.J.S.A. 15A:1-1, et seq.) unless the bylaws provide for a greater or lesser number, a majority of the entire board shall constitute a quorum for purposes of conducting business. In your case, the board should consist of a minimum of seven (7) directors. Therefore, and assuming the bylaws governing your cooperative do not specify a lesser number for quorum purposes, a quorum for purposes of conducting business, i.e., approving a management contract, would be four (4) directors. In the absence of a quorum, the remaining two (2) members of the board did not have the legal authority to approve the contract, on behalf of the cooperative corporation, rendering the contract void. However, this legal defect may be cured if the contract is subsequently approved or ratified, at a meeting of the board of directors at which a quorum is present.

“Conducting business in the absence of a quorum, in violation of the governing documents is a legitimate concern. Conducting business in the absence of a quorum may adversely impact the management and administration of your property, e.g., decision making may be impaired, vendors may not be paid in a timely fashion, contracts may not be approved, services to the residents may suffer, etc. The directors have a fiduciary duty to the shareholders to administer the cooperative in accordance with the authority granted by the governing documents. By acting in violation of the governing documents and without authority, the present board exposes both the corporation and members of the board to potential liability.

“You should continue to express your concerns, preferably in writing, to the board. It is very helpful that other owners share your concerns and support your efforts. The issues you raise will potentially be given greater weight and credibility, if they are shared and supported by a significant number of residents. Your ability to organize other residents who share your view on the adequacy or inadequacy of the present management may also provide you with the most effective solution to your problem.

“You indicated that all seven (7) members of the board were appointed by the management company. It is not clear from your question why all directors are appointed as opposed to being elected by the shareholders. However, as a general rule, directors who are appointed to fill a vacancy, for any reason, serve until the next annual meeting, at which time the members elect a candidate to fill that seat for the remainder of the unexpired term. At the time of the next annual meeting, if the members of the board have either failed or refused to act in response to your letters, you and other residents who share your concerns will have the opportunity to elect a new board. The election process may be the most effective way of dealing with a board which ignores bylaws and one that may not act in the best interest of the residents.”

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