October 1, 1993 MEMORANDUM TO CLIENTS DIRECTORS ARE SELECTED TO VOTE, NOT TO SIT The close of summer brings renewed interest in corporate governance. Directors and those seeking to be elected to be directors at upcoming annual meetings desire to know their voting rights. As a general rule, directors are selected to utilize their good judgment as fiduciaries or trustees of a corporation's shareholders or members. Directors are required to use that judgment to set corporate policy, not just to attend meetings without making decisions. Florida law does not allow a director's vote to be ignored if a director does not want to vote. This requirement is set forth in the Florida Business Corporations Act, §607.0824(4) Fla. Stat. (1991), and in the Florida Not-for-Profit Corporations Act, §617.0824(4) Fla. Stat. (1991). If a director is present at a meeting of either the directors or of a committee of directors, then the director is deemed as a matter of law to ascent to the action taken by the directors, unless the director objects or specifically abstains from a vote. A director may object at the beginning of the meeting to the holding of the meeting or the transaction of specific business. This requirement is restated in the Condominium Act, §718.111(1)(b) Fla. Stat. (1992 Supp.) and the Cooperative Act §719.104(8)(b) Fla. Stat. (1992 Supp.). Thus, if a director is present at a meeting and does not cast a vote on a motion, then the record will record the director as voting for action taken, unless the director abstains because of a conflict of interest. Directors should not abstain from voting unless a conflict of interest occurs. While generally fairness mandates that a director abstain if a conflict of interest occurs, the director can vote under certain circumstances such as if the facts underlying the conflict are disclosed to the other directors, or if the transaction to be voted upon is fair and reasonable at the time of the vote. §§607. and 617.0832 Fla. Stat. (1991). If a director abstains from a vote because of a conflict of interest, then the director's attendance at a meeting still can be utilized in determining whether a quorum exists. Corporate shareholders and members delegate their decision-making powers to directors. Thus, directors are required to utilize this delegated power. Mere personal discomfort or desire to avoid controversy should not be a basis to abstain. Similarly, because a director is charged with acting as a fiduciary for shareholders or members, a director should not abstain because of ignorance. Directors have a duty to inform themselves of issues that may be anticipated to come before a board of directors. NEW CONDOMINIUM AND COOPERATIVE FINANCIAL RULES The Division of Florida Land Sales, Bureau of Condominiums, Cooperatives and Mobile Homes, has promulgated new financial rules concerning condominium and cooperative accounting. With the transfer of the Division of Florida Land Sales under the auspices of the Department of Business Professional Regulation, all rules previously filed under Florida Administrative Code Chapter 7D are now filed under Chapter 61B. Proposed regulations were published for public comment last spring. The new financial rules are effective for all new condominium and cooperative association budgets. As with most statutory-type pronouncements, the new regulations begin with definitions. The revised definitions identify the different types of condominiums which may be administered by an association, and the types of documents including accounting records and reserves which must be maintained. Of particular interest may be the definition of a "capital expenditure" which is:
Fla. Admin. Code R. 61B-22.001(2). Separate records must be maintained for association operations as opposed to "ancillary operations". Ancillary operations are "abnormal" functions such as rental programs, recreational facilities, laundry and vending income. Fla. Admin. Code R. 61B-22-001%). The preparation of a budget is changed by Fla. Admin. Code R. 61B-2203. The budget's beginning and ending date must be stated. Annual dues cannot be waived or reduced before the proposed annual budget is mailed to owners. If a common expense required by the Condominium or Cooperative Act is not applicable to an association, the budget category must still be included in the budget, but labeled "not applicable". Budget decisions must be clearly documented. A condominium or cooperative association's minutes must state not only the adoption of a budget, but also any waiver of reserves. Fla. Admin. Code R. 61B-22.0053(1). The Condominium Act provides that proposed and adopted budgets must be maintained as part of an association's financial records. Multiple condominium associations which do not have a consolidated budget as allowed by the Condominium Act must have separate budgets for each condominium and a budget for general association expenses. Fla. Admin. Code R. 61B-22.003(2). For condominiums which charge individual owners for maintenance to the owners' limited common elements, the budget must separately schedule limited common element budget and reserves. Fla. Admin. Code R. 61B-22.003(3). Documentation concerning reserve funds is tightened. Estimated reserve fund balances as of the beginning and ending of the budget period must be stated. The intended use of reserve funds must be identified. "Contingency reserves", meaning funds which are not limited for a particular use, cannot be accounted as reserves but must be shown as operating funds. Fla. Admin. Code R. 61B-22.003(2)(g). For budgeting purposes, 61B-22.005 allows related use assets to be considered separately when determining whether the $10,000 reserve threshold has been met. Reserves must be timely funded. When the Condominium Act was amended in 1992, there was a question as to when reserves must be funded from an association's operations account. Fla. Admin. Code R. 61B-22.0052(1) requires reserves to be funded on the same frequency as assessments are due from owners. Thus, if an assessment is payable on a monthly basis, then reserves must be funded on a monthly basis. While invested operating and reserve funds may be commingled under certain circumstances, separate accounting records must be maintained. Fla. Admin. Code R. 61B-22.002(2)(b). While at first glance the new regulations may appear onerous, the regulations clarify many issues and assist associations in the budgetary process. Clarity is essential because owners and associations rely on the budget process. Now many prospective purchasers will rely on budgets when deciding whether to purchase a condominium unit or cooperative apartment. Thus, improperly drafted budgets may not only invite fiscal disaster, but may also lead to claims by misled purchasers!
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