Small buildings run on the people who live in them. So it is entirely normal for a New York board to find that the director who understands boilers is also a contractor, or that a shareholder-broker is the obvious person to handle a vacancy, or that a director's firm could do the work cheaper than the alternatives.
Boards handle this badly in both directions. Some treat any connection as disqualifying and lose the building's most useful person. Others do the deal on a handshake because everyone knows everyone.
New York law takes neither position. It says the transaction is fine, if you approve it properly — and it is quite specific about what properly means.
What the statute actually says
Business Corporation Law §713 governs interested directors for a co-op formed as a business corporation.
The starting point is more permissive than boards expect. A contract or transaction between the corporation and one or more of its directors — or between the corporation and another corporation, firm, association or entity in which one or more directors are directors or officers, or have a substantial financial interest — is not void or voidable for that reason alone. Nor is it void or voidable merely because the interested director was present at the meeting that approved it, or because their vote was counted.
So the interest itself is not the problem. The absence of proper approval is.
The two routes to a valid transaction
Section 713 provides two paths, and both begin with the same thing.
Route one — the disinterested board vote. The material facts as to the director's interest, and as to any common directorship, officership or financial interest, are disclosed in good faith or known to the board or committee, and the board approves by a vote sufficient for the purpose without counting the interested director's vote.
And there is a fallback within that route worth knowing: where the votes of the disinterested directors are insufficient to constitute an act of the board as defined in §708, approval may be given by unanimous vote of the disinterested directors.
Route two — the shareholder vote. The material facts are disclosed in good faith or known to the shareholders entitled to vote on it, and the transaction is approved by their vote.
Both routes are built on good-faith disclosure of the material facts. That is the load-bearing element. Everything else is procedure around it.
Confirm the current statutory text and its application to your building with the board's attorney. A condominium is not a corporation, so its position rests on the declaration and by-laws rather than on the BCL.
Recusal alone does not do it
This is the most common mistake, and it is made by boards trying to behave well.
A director realizes there is a conflict, says nothing specific, and steps out of the room while the vote happens. The minutes record that the board approved the contract.
That satisfies the appearance of propriety and not the statute, because the statute is built on disclosure. The disinterested directors cannot weigh a transaction whose material facts they were never given.
The correct sequence is:
- Disclose the material facts — what the interest is, and its extent.
- Recuse from the deliberation and the vote.
- Vote by the disinterested directors.
- Record all three in the minutes.
Recusal is step two of four. On its own it is the least useful of them.
Why this connects to everything else
A conflicted transaction that was never properly disclosed sits outside the protection a board normally enjoys.
Bad faith and self-dealing are among the grounds on which the business judgment rule stops applying. A board that follows §713 is keeping its decision inside the category courts decline to second-guess. A board that does not has removed its own shelter, on the one type of decision most likely to be challenged.
And it reaches the individual director, not only the corporation. A director exposed on a self-dealing claim will want to know exactly what their indemnification and D&O coverage actually say — and that is a considerably better question to have answered in advance.
The cases that actually come up
In residential buildings the recurring situations are mundane rather than dramatic:
- A director who is a contractor, bidding on building work.
- A director who is a real estate broker, handling sales or rentals in the building.
- A director employed by a vendor the building uses.
- A family or financial connection to a vendor — the spouse, the sibling, the business partner.
- A director who is also a large shareholder or a sponsor-affiliated party, whose interests may diverge from the general body of shareholders. That overlaps with the holder of unsold shares questions a board should already be examining.
None of these disqualify anyone from serving. All of them require disclosure when a relevant transaction comes up.
Write down the policy before you need it
The practical failure is that conflicts arrive mid-meeting, when a decision is being made and nobody wants to slow it down.
A board that has agreed its approach in advance handles it in ninety seconds. A board improvising handles it badly.
A workable policy is short: directors disclose any interest in a proposed transaction as soon as they become aware of it; disclosure is made to the full board and recorded; the interested director does not participate in the deliberation or vote; competitive bids are obtained where a director-connected vendor is under consideration; and anything unusual goes to the board's attorney before rather than after.
That last point is worth emphasizing. The cost of a phone call to counsel is trivial against the cost of unwinding a transaction that a shareholder challenges eighteen months later.
What to put in the minutes
Minutes recording that "the board approved the contract with ABC Plumbing" preserve nothing.
Minutes recording that a director disclosed a financial interest in ABC Plumbing, that the nature and extent of the interest was described to the board, that the director recused from deliberation and vote, that competing bids were reviewed, and that the disinterested directors approved — those are what make the approval demonstrable a year later, when memories have gone and the shareholder asking questions is not being friendly about it.
This is the same discipline that runs through board recordkeeping generally: the record is the protection.
Where a managing agent carries this
Getting bids from unconnected vendors so a board has a genuine comparison, flagging when a proposed transaction touches a director, and making sure the minutes record disclosure and recusal rather than only the outcome is part of co-op board management and condo association management.
If your board is about to award work to a director-connected vendor and has not disclosed or minuted anything, schedule a consultation or call 718-568-9278.
This article is general information, not legal advice. Section 713 applies to corporations; a condominium board's position depends on its declaration and by-laws. Consult the board's attorney on any specific transaction.