On September 12, 2017, Governor Andrew Cuomo signed into law a new amendment to the New York Business Corporation Law (the “BCL”) establishing a new Section 727, containing a set of requirements for condominium and cooperative boards reporting on potential conflicts of interest. Under the new law, boards of condominium and cooperative corporations are required to provide each director with a copy of BCL Section 713 (Interested Directors) and submit an annual report to its shareholders/unit owners regarding related party transactions.
Section 713 of the BCL provides, a transaction in which a board member has an interest, either as an individual or as a director of another entity (an “Interested Director Transaction”), will not be automatically prohibited just because the interested board member was present at a board meeting, participated in board deliberations or voted in favor of the transaction. In essence, Section 713 establishes that an Interested Director Transaction will be upheld so long as the material facts as to the director’s interest are disclosed and the board approves the transaction without counting the vote of the interested director.
Under the new Section 727 of the BCL, which will become effective as of January 1, 2018, every cooperative and condominium organized under the BCL and/or NPCL must, at least once each year, in connection with any Interested Director Transactions, provide to its shareholders/unit owners a report signed by each member of the board, disclosing (i) all Interested Director Transactions voted on by the board, (ii) the identity of the parties to the transaction, (iii) the amount and purpose of the contract, (iv) a record of the meeting of the board in which the contract was voted upon, including the names of those in attendance, how each member voted and the results of such voting and (v) the date of the votes and the effective date of the contract. In the event the board did not vote on any Interested Director Transactions, the board must submit to its shareholders/unit owners a document, signed by each board member, indicating “no actions taken by the Board were subject to the annual report required pursuant to Section 727 of the Business Corporation Law.”
According to the New York State Assembly Memorandum in Support of Legislation, the purpose of this legislation is to ensure that cooperative and condominium boards are aware of the laws relating to conflicts of interest and to establish a notification requirement so that the members or shareholders are notified of transactions involving interested directors.
It should be noted that on its face the language of the new legislation applies only to cooperatives and condominiums formed under to the BCL and NPCL. As most condominiums are unincorporated associations formed pursuant to Article 9-B of the New York Real Property Law, the new law appears to not apply to most condominiums. However, the legislative history makes clear that the intent was to cover all cooperative corporations and condominium associations and we anticipate corrective legislation will be enacted to address this point.
The law is completely silent on enforcement and oversight, and does not contain any penalties for violations.