Commercial Division Blog

Posted: June 14, 2023 / Written by: Jeffrey M. Eilender, Thomas A. Kissane, Samuel L. Butt, Joshua Wurtzel, Channing J. Turner / Category Commercial

Sale of Co-Op’s Air Rights Triggered BCL §909(a) Requirement of Shareholder Approval

In a Decision and Order, dated May 19, 2023, in Cogan v. Lei, Index No. 653221/2022, Justice Andrew Borrok held that the Purchase and Sale Agreement to sell a Co-op’s air rights was void for, among other reasons, failure to obtain shareholder approval. The Court explained:

Pursuant to BCL § 909(a), shareholder approval is required for, among other things, the sale of all or substantially all of the assets of a corporation. Although the PSA itself only involves the Co-op's air rights, the evidence indicates that the developer and the Board always intended to compel a sale of the Co-op and that the PSA was an indivisible part of a two step plan to liquidate the Co-op hatched from inception. The problem was that many shareholders (including the Petitioner's wife) had indicated a lack of willingness to sell over the years. Hence, the multi-step approach to coerce a sale. Step 1 — sell the air rights. This was done to attempt to avoid having to obtain shareholder approval. Indeed, at the annual meeting, and after executing the PSA (i.e., Step 1) a few days earlier, the Board announced that the developer had offered $40 million for the entire building which the Board indicated it turned down as too low (without doing any diligence or otherwise presenting such offer to the unit owners):

As we noted at the annual shareholder meeting,

Legion made an offer of 40 Million to buy 38 GPM

(outright building sale) and that the BOD turned down as too low"

(NYSCEF Doc. No. 34).

When Step 1 was completed and the deal presented as a done deal to the shareholders, when the shareholders complained, the Board moved to Step 2 — sale of the building which they then presented as a "unique" and "time sensitive opportunity". (e.g., NYSCEF Doc. Nos. 35 and 41). They again disseminated false information to pressure sale both by disparaging the Petitioner's concerns in communications and also by falsely indicating that over 86% of the shareholders favored the transaction (this could not be the case given the Petitioner's proxies). In any event, inasmuch as the PSA was not a one-off transaction and instead was an inseparable part of a contemplated overall sale, shareholder approval was required under BCL § 909(a). Inasmuch as this was not obtained, the PSA is void. For the avoidance of doubt, it does not matter that when the Board realized that the contemplated building sale as cast would trigger adverse tax consequences (i.e., double tax) they had to shuffle and restructure the transaction. What matters is that the sale of the air rights was a step in a transaction with the developer for the sale of substantially all of the assets requiring shareholder consent that was always intended (Dukas v Davis Aircraft Prod. Co., 131 AD2d 720, 721, 516 N.Y.S.2d 781 [2d Dept 1987]; Kingston v Breslin, 56 AD3d 430, 431, 866 N.Y.S.2d 778 [2d Dept 2008]).

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