Q&A: Shareholders' Right to Choose Management Company

Q&A: Shareholders' Right to Choose Management Company
Q “Do co-op shareholders have any rights when it comes to the selection of a  management company for their building? And if they can’t directly choose which company will manage their co-op, can they attend the  interviews with the potential new companies and ask questions to determine if  they want their building managed by one company over another?”  

      —Selective Shareholder  

A “With respect to the question posed, traditionally, the affairs and business of a  co-op corporation are managed by a duly elected board of trustees and its  duties and powers are outlined and delineated in the certificate of  incorporation and bylaws,” states John Roman, principal of the New Jersey-based law firm of Hubschman & Roman, P.C.  

 “By way of background information, in a cooperative form of ownership, legal  title to the real and personal property of the development is vested in the  cooperative entity, which in New Jersey is traditionally established as a  profit, rather than for non-profit corporation. Individuals purchase shares of stock in the cooperative corporation, which carry  with it as an incident thereto the right to occupy the dwelling unit, pursuant  to the document called a “proprietary lease.”  

 “Accordingly, the shareholders have a legal interest in the corporation, as an  entity and a beneficial interest in the project itself. The corporation, which  is managed by a duly elected board of trustees, or directors, manages the  project for the benefit of its shareholders.  

 “As previously indicated, the duties and powers of the board of trustees, is set  forth in the association’s governing documents, which include the certificate or articles of  incorporation, the association’s bylaws and relevant provisions of the New Jersey Business Corporation Act. The courts in the state of New Jersey have generally upheld decisions of the  board, which have been challenged by shareholders, as long as the board has  acted and operated within the authority granted by its governing documents. The  decisions or rules and regulations promulgated by the board, are generally  reviewed by the courts, in accordance with the business judgment rule.  

 “Accordingly, since the affairs and business of the corporation is the  responsibility of the board of trustees, the selection of a management company  to carry out its various functions would normally be relegated to the sole  discretion of the board. Shareholders, generally have little rights when it comes to the selection  process, pertaining to the engagement of a vendor, whether it be a management  company or any other service provider engaged by the cooperative corporation.  

 “With respect to your particular situation, this question should be posed to the  board or to the board’s attorney to ascertain their position, as to whether the governing documents  grant them the authority to act without shareholder input and/or approval.  

 “Notwithstanding the same, generally the meetings of the board of directors are  opened to the shareholders and it depends, on whether or not your particular  board of directors permits shareholders to be present, when the board is taking  various action, as it pertains to negotiating of contracts, interviewing  potential vendors or other matters involving personnel, which are usually not  opened to the public.  

 “Again, without the benefit of reviewing the association’s governing documents or knowing how your board of directors operates its  meetings and how they conduct business, the opinion provided is a general  response. Personally, I would think that most boards would prohibit individual  shareholders from being involved in the interview process with potential  management companies. Again, any action taken by the board, which is challenged  by the shareholders, can ultimately be reviewed by a court, in accordance with  the provisions set forth above.”      

 

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