Q&A: Lawlessness Prevails

Q&A: Lawlessness Prevails

Q. We have a serious problem in our co-op building. No. 1, for as long as I can remember, there have been no annual meetings for years. Secondly, there have been no elections and the same people are entrenched on the board of directors and elected year after year. Thirdly, no bylaws or business corporation laws are being followed. The same person happens to the both the president and the managing agent and her mother is both the secretary and the treasurer. There is no vice president position. Numerous complaints have been filed to the board and building management but to no avail. Owners also have no access to any books or financial record keeping. The board members are unresponsive and won't come to any shareholder meetings. Although we are in a small building, what can we do to remedy this situation? Is there any city agency to whom we can turn?  

    —Lost in Translation in Tinley Park

A. “In Illinois, cooperative associations are governed by the General Business Corporation Act of 1983. The Act sets forth the requirements that the Board of Directors must follow while administering the cooperative,” says Kelly C. Elmore, a principal attorney at the law firm of Kovitz Shifrin Nesbit in Chicago and three other Midwest locations. “Although there is no separate administrative body or city agency to which a shareholder may turn to address a board members’ breach of the Act or the cooperative’s bylaws; the Act does provide the shareholder with a legal remedy in the Circuit Court. As a result, in situations where a board member has violated the provisions of the cooperative’s bylaws or violated the provisions of the Act, the shareholder may file a private cause of action on behalf of the complaining shareholders in the Circuit Court, as explained in further detail below.  

  “Directors – Section 8.05 of the Act provides that a corporation may be managed by “or under the direction of” the board of directors. A board may consist of only one director, regardless of the number of shareholders, and there may be a variable number of directors, not to exceed five directors. You should consult your bylaws to determine the number of directors provided for in the cooperative. Because specific officerships (i.e. president, vice president, etc.) are not designated in the Act, you should also consult your bylaws to determine the number and description of officerships. If the bylaws so provide, any two or more offices may be held by the same person. Accordingly, you should consult your cooperative’s bylaws to determine whether the mother and daughter board members may continue to hold two offices.  

 “Election of Directors – The Act provides for the expiration of a board member’s term at the next annual shareholders’ meeting following his/her election, unless the board member’s terms are staggered. However, despite the expiration of a term, he or she may continue to serve until the next meeting of shareholders at which directors are elected. In other words, until a new election is conducted, the board member may continue to serve on the board indefinitely until either a new election is conduct, or the board member is removed.  

 “Removal of Directors – Section 8.35 of the Act addresses removal of directors and states that generally, a director may be removed by the shareholders with or without cause, at a meeting of the shareholders, as long as the notice of meeting states that the purpose is to remove one or more directors and such director or directors are named in the notice. However, some exceptions exist to this general rule. For example, if a board is classified, the Articles of Incorporation may provide that directors may only be removed for cause. In addition, an exception also exists where a director is elected by a particular class of shares and may only be removed by shareholders of that class. A special exception also exists for cooperatives that have cumulative voting.  

 “In addition to removal of a director at a shareholder meeting, Section 8.35 of the Act provides that a director may be removed by the Circuit Court upon the petition of shareholders of 10% of the outstanding shares of any class where the court finds that the director is engaged in fraudulent or dishonest conduct, or has grossly abused his or her position to the detriment of the corporation, and that removal is in the best interest of the corporation. If the Circuit Court removes a director, the director may be barred from reelection in the future.  

 “Meetings of the Shareholders – The board of a cooperative is required by the Act to hold at least one annual meeting. If the annual meeting is not held within the earlier of six months after the end of the corporation’s fiscal year, or fifteen months after its last annual meeting, a shareholder may send a written request to the president of the corporation requesting the  meeting. If the board fails to send notice of the shareholder meeting within 60  days of such a request, then a shareholder may file an action in the Circuit  Court, seeking an order directing that the meeting be held and setting the time  and place of the meeting. The Act also provides that the Circuit Court may issue additional orders as may be necessary or appropriate for holding the meeting.  

“In addition, the Act also grants the authority to shareholders to set a meeting.  Section 7.05 states that special meetings of the shareholders may be called by  holders of not less than 1/5 of the outstanding shares entitled to vote on the  matter for which the meeting is called.  

 “Inspection of Records – A corporation is required to keep correct and complete records of account.  Pursuant to Section 7.75 of the Act, any person who is a shareholder has the  right to examine, in person or by an agent, at any reasonable time, the  corporation’s books and records of account as long as he or she states a proper purpose. The right to inspect includes the records of account, minutes of board meetings, voting trust agreements filed with the corporation and the record of shareholders. If the board refuses examination or otherwise interferes with this right, the board member(s) may be exposed to liability. In the event of such refusal to allow or interference with the examination, the shareholder may file suit in the Circuit Court to compel the examination of the records.  

 “As detailed above, the Act provides for specific remedies in the Circuit Court to address a board member’s failure to comply with the Act. A shareholder who may potentially have a cause of action against his or her board should consult with an attorney to determine whether a case should be filed. It should be noted that because some types of actions, such as derivative actions (which are actions filed by shareholders against either a third party or the board of the corporation) require that certain steps be taken prior to filing an action, it is important that the shareholders consult with an attorney to ensure compliance with any requisite steps.”     

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