Interesting Conflicts How State Laws Combat Boards' Conflicts of Interest

There is a natural inclination in business to work with those whom you know and trust. Relying on relationships that have developed over time is just a commonsense way to ensure that you’re getting a fair deal from a competent vendor who will perform their job with inducing minimal headaches. All of this is well and good. But when an individual board member stands to profit from hiring a preferred vendor in any way  – and fails to disclose the true nature of the transaction  – then you’re talking about a potential conflict of interest, which is decidedly less kosher.

Individual states have assorted rules and regulations – usually within their respective condo acts – designed to prevent self-dealing and ensure that association business stays on the up-and-up for the benefit of every owner or shareholder, rather than specific individuals. In New York, for example, there is the Business Corporation Law, under which most cooperatives in the state were created. It’s worth taking another look at the law, similar legislation in other states, and conflict of interest in general. 

In response to the BCL changes, Richard Klein and Emil Samman, partners at New York City law firm Romer Debbas LLP, sent out a packet to their board members advising them as to how the law will continue to affect their associations going forth. For a primer, a portion of that memo is excerpted below:

For years, section 713(a) of the BCL has provided that if a director of a board has a substantial financial interest in a contract or transaction between a contractor or vendor and the board, this interest must be disclosed to the board. In such a situation, that director cannot vote on that contract or transaction and must recuse him/herself from any deliberations on the matter.

Further, Section 713(b) provides that if the contract or transaction was entered into without such a disclosure from the interested board member, the board may void the contract or transaction unless it can be established that the contract was fair and reasonable at the time it was authorized by the board.

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