It’s Time to CO-OPerate: Commercial Division Refuses to Overturn Election of Board of Directors

Business Corporation Law § 619 (“BCL”) gives shareholders an “exclusive method . . . to test the validity of an election of a director.” Specifically, BCL § 619 states:

“Upon the petition of any shareholder aggrieved by an election, and upon notice to the persons declared elected thereat, the corporation and such other persons as the court may direct, the supreme court at a special term held within the judicial district where the office of the corporation is located shall forthwith hear the proofs and allegations of the parties, and confirm the election, order a new election, or take such other action as justice may require”

But under what circumstances can a court reverse an election? And what factors does a court consider? The case of Jazwinski v Justice Ct. Mut. Hous. Coop. is illustrative on these questions.

Background

Petitioners Richard Jazwinski and Jessie Yang (collectively “Petitioners”) initiated a proceeding against Respondent Justice Court Mutual Housing Cooperatives (“Respondent” or the “Co-op”). Petitioners sought the reversal of the Co-op’s election of the board of directors in 2023. The Co-op’s board of directors (“BOD”) consisted of seven directors.

Specifically, Petitioners claimed that the Co-op violated the organization’s bylaws by holding an election for only four out of the seven directors in 2023. Petitioners based their argument on the belief that the terms of all seven directors expired due to the Co-op’s lack of elections during COVID, and that it was necessary to reelect all seven directors.

 The Co-op rebutted Petitioners’ claim by arguing that an election for only four out of the seven directors was a good-faith effort to restore the Co-op’s staggered election cycle. The Co-op argued that COVID disrupted the Co-op’s elections, and that it was necessary to ease back into the staggered election cycle while maintaining board continuity – hence, an election of only four directors. The Co-op maintained this was permissible because the organization’s bylaws did not control the manner of elections during COVID, allowing the Co-op to use its business judgment to determine the best way to return to pre-COVID elections.

Analysis under BCL 619

The Court, under BCL § 619, stated that Petitioners must show improprieties in the challenged election process for the Court to consider ruling the election improper. However, the Court cautioned that even if there was a finding of improprieties regarding the challenged election, the Court cannot set the election aside unless “the Court concludes further that the result would have been different had no such improprieties existed, or that an inequitable result has been thereby produced.”

The Court found that Petitioners did not assert “any irregularities that would place this matter within the purview of section 619.” Specifically, the Court stated that Petitioners alleged none of the following:

• Improper notice of the annual meeting to shareholders;
• No quorum in the annual meeting;
• Certain votes should not have been tallied; or
• A particular director did not receive a sufficient number of votes.

Instead, the Court found that Petitioners simply objected to the Co-op’s decision to only put four out of the seven directors up for election. The Court ruled that this did not warrant overturning the election under BCL § 619 and instead stated that the Co-op’s decision should be analyzed under the business judgment rule. Under this deferential standard, the Court found that the Co-op’s election should not be overturned.

Upshot

Shareholders who disagree with the results of an election of a board of directors must make the requisite showing to justify a court overturning the election. Shareholders must not only show improprieties in a challenged election, but also that these improprieties changed the election process or caused an inequitable result. Without this showing, courts will be hesitant to overturn an election of a board of directors under the BCL.