Q&A: Not Following the Rules

Q We have a serious problem in our co-op. No. 1, there have been no annual  meetings for years. There have been no elections and the same people are  entrenched on the board of directors. 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 to no  avail. There is also 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 and in Limbo  

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, an attorney at Chicago-based Penland & Hartwell, L.L.C.  

 “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.”