Majority
OPINION OF THE COURT
In this proceeding, we hold that the Martin Act applies to the proposed privatization of a Mitchell-Lama cooperative apartment complex. Based on the circumstances of this case, we also conclude that a vote to determine whether the cooperative withdraws from the Mitchell-Lama program must be counted on a per-apartment basis rather than a per-share basis.
L
Petitioner East Midtown Plaza Housing Company, Inc. (East Midtown) has been a limited-profit housing company organized under the Mitchell-Lama Law since 1968.[1] It operates a 746-unit cooperative housing project located in six buildings in
1 The legislature adopted the Mitchell-Lama Law (Private Housing Finance Law art II) in 1955 to offer private housing companies financial incentives to develop low and moderate income housing (see Matter of KSLM *167 Columbus Apts., Inc. v New York State Div. of Hous. & Community Renewal, 5 NY3d 303 , 308 [2005]). The program “encourages such housing by offering State and municipal assistance to developers in the form of long-term, low-interest government mortgage loans and real estate tax exemptions. In return for these financial benefits, developers agree to regulations concerning rent, profit, disposition of property and tenant selection” (Matter of Columbus Park Corp. v Department of Hous. Preserv. & Dev. of City of N.Y., 80 NY2d 19 , 23 [1992]).
After the vote was taken, respondents, the New York City Department of Housing Preservation and Development (HPD) and the New York State Attorney General, informed East Midtown that a new vote was required because East Midtown had improperly held the privatization vote without first filing a cooperative offering plan with the Attorney General’s office pursuant to the Martin Act. The Attorney General also notified East Midtown that, in accordance with the voting rights provision in East Midtown’s certificate of incorporation, passage by two thirds of East Midtown’s dwelling units, rather than two thirds of the outstanding shares, would be necessary for approval.
A second vote was held in 2009, resulting in the same outcome as the original 2004 vote: the proposal would have been approved if the votes were tallied using a one-vote-per-share rule, but not if counted under a one-vote-per-household formula as directed by the certificate of incorporation and HPD. Following the vote, East Midtown filed a proposed second amendment to the offering plan with the Attorney General. This amendment sought to declare the privatization plan “effective,” stating that the 2008 plan had been adopted by “the affirmative vote of at least two thirds of the outstanding shares of East Midtown . . . by counting one vote per share.” The Attorney General refused to accept the amendment.
East Midtown responded by commencing this CPLR article 78 proceeding seeking to compel the Attorney General to accept the second amendment declaring the plan effective and to direct HPD to recognize that the plan achieved the necessary two-thirds shareholder vote under the one-vote-per-share formula. The petition also sought a declaration that the Attorney General lacked jurisdiction over East Midtown’s efforts to exit the Mitchell-Lama program on the theory that the Martin Act did not apply to the transaction. Two tenant organizations intervened in the litigation—East Midtown Plaza Tenant-Cooperator Association, which supported East Midtown, and East Midtown Plaza Mitchell-Lama Organization, a group that opposed privatization.
Supreme Court denied the petition and dismissed the proceeding ( 2010 NY Slip Op 30532 [U] [2010]). The Appellate Division, with one Justice dissenting, affirmed ( 85 AD3d 485 [1st Dept 2011]). We granted East Midtown and East Midtown Plaza Tenant-Cooperator Association leave to appeal ( 18 NY3d 803 [2012]), and now affirm.
With respect to the jurisdictional reach of the Martin Act, East Midtown argues that it should not have been required to file an offering plan because the Attorney General lacks authority over its withdrawal from the Mitchell-Lama program. East Midtown contends that the Martin Act—the statutory predicate for the Attorney General’s oversight—does not apply here because its 2008 privatization plan did not involve the “offering or sale” of securities as required by the statute. It emphasizes that, although the original 2004 proposal would have resulted in a transfer of assets and/or exchange of shares, the 2008 plan merely called for an amendment to East Midtown’s certificate of incorporation, with no conveyance of shares. The Attorney General disagrees, asserting that, however it is packaged, the privatization of a Mitchell-Lama cooperative complex comfortably falls within the parameters of the Martin Act.
The Martin Act (General Business Law art 23-A) regulates the offer and sale of securities within or from New York (see Kralik v 239 E. 79th St. Owners Corp., 5 NY3d 54 , 58 [2005]). The Attorney General is responsible “for implementing and enforcing the Martin Act, which grants both regulatory and remedial powers aimed at detecting, preventing and stopping fraudulent securities practices” (id. at 58-59). As relevant here, the Martin Act makes it illegal for a person to make or take part in “a public offering or sale” of securities consisting of participation interests in real estate, including cooperative apartment buildings, unless an offering statement is filed with the Attorney General (General Business Law § 352-e [1] [a]).[2] The purpose of the disclosures required in an offering plan is to safeguard the purchasers of cooperatives and condominiums by mandating “full disclosure of risks” and promoting “unit purchasers’ self-protection by analysis of risks” (Kerusa Co. LLC v W10Z/515 Real Estate Ltd. Partnership, 12 NY3d 236 , 243 [2009] [internal quotation marks and citation omitted]).
We have emphasized that General Business Law § 352-e (1)
3 Plainly, the Martin Act applies to the conversion of a rental apartment building into a cooperative building (see 511 W. 232nd Owners Corp. v Jennifer Realty Co., 98 NY2d 144 [2002]; Richards v Kaskel, 32 NY2d 524 [1973]). The question posed by this appeal is whether the act further applies to the privatization of an already-existing Mitchell-Lama cooperative apartment complex.
Federal courts have recognized that changes in the rights of the holders of existing securities can amount to a “purchase or sale” within the meaning of the federal securities laws. The Second Circuit has explained that the test is whether there has been such a “significant change in the nature of the investment or in the investment risks as to amount to a new investment” (Gelles v TDA Indus., Inc., 44 F3d 102 , 104 [2d Cir 1994] [internal quotation marks and citation omitted]; see also Abrahamson v Fleschner, 568 F2d 862 , 868 [2d Cir 1977], cert denied sub nom. Harry Goodkin & Co. v Abrahamson, 436 US 905 [1978] [same]; 3 Hazen, Securities Regulation § 12.6 [1] at 557 [6th ed 2009] [“Concepts of purchase and sale are to be construed flexibly in order to accomplish the purpose of the securities laws. The courts will consider the economic reality of the transaction and whether it lends itself to fraud in the making of an investment decision”]). The pertinent inquiry focuses on “the economic reality of the transaction” (Keys v Wolfe, 709 F2d 413 , 417 [5th Cir 1983] [internal quotation marks and citation omitted]). We have applied a similarly adaptable standard in ascertaining whether an interest qualifies as a “security” within the meaning of the Martin Act, recognizing that substance and economic actuality will control over form (see All Seasons Resorts, 68 NY2d at 88 ).
Here, the privatization of East Midtown’s cooperative apartment complex would result in a number of substantial changes to the nature of its shareholders’ interests. Most fundamentally, privatization would enable residents to sell their shares at market rates. In stark contrast, the resale price of shares in a Mitchell-Lama cooperative apartment is set by law at an amount
Furthermore, privatization would result in East Midtown’s loss of eligibility for government-subsidized financing and property tax reductions available under Mitchell-Lama. Other significant alterations upon privatization would include the imposition on shareholders of a 45% transfer fee or “flip tax” to be paid to East Midtown from the proceeds of the first sale of shares; the possibility that individual shareholders would become disqualified for government programs for persons in need; and potential increases in maintenance charges. In short, the changes affecting shareholders are substantial enough to constitute a different investment such that the proposed privatization can fairly be characterized as an “offering or sale” of securities under the Martin Act.
We do not accept East Midtown’s argument distinguishing the 2004 and 2008 privatization plans since it elevates form over substance. Mindful of the economic realities of the transaction, it matters not that the 2008 plan envisioned an amendment to the certificate of incorporation rather than a physical exchange of shares, as contemplated by the earlier plan (see 3 Hazen, Securities Regulation § 12.6 [3] at 558-559 [6th ed 2009] [“Amendments to a corporation’s articles of incorporation may result in the alteration of existing shareholder rights and thus change the nature of the shares. Alterations in the rights of securities holders can constitute a sale of the old securities and a purchase of the new”]). The end result under either proposal is the same—privatization and market value resale potential. Hence, the Attorney General properly required East Midtown to file an offering statement under the Martin Act to allow existing shareholders to make an informed decision regarding the pros and cons of withdrawal from the Mitchell-Lama program.
IIL
East Midtown also contends that the courts below erred in holding that the shareholder vote to privatize had to be counted on a one-vote-per-apartment basis. It claims that the Business Corporation Law and an HPD regulation both require that the vote be calculated using a one-vote-per-share formula, regardless of the language in the certificate of incorporation. Under
Our analysis focuses on East Midtown’s certificate of incorporation, which expressly provides that its shareholders “shall be entitled to one vote at any and all meetings of stockholders for any and all purposes regardless of the number of shares held by such holder, except as otherwise provided by statute.” In other words, as East Midtown acknowledges, the certificate generally establishes a one-vote-per-apartment formula. East Midtown relies on the final clause of the voting provision, asserting that Business Corporation Law § 1001 “otherwise provides” a different method—it directs that a privatization vote be conducted on a one-vote-per-share basis.
Business Corporation Law § 1001 generally governs the dissolution of a corporation.[3] As relevant to this case, section 1001 provides that dissolution may be authorized at a shareholder meeting by “two-thirds of the votes of all outstanding shares entitled to vote thereon” (Business Corporation Law § 1001 [a] [ii]). East Midtown interprets this language to mandate a per-share vote for corporate dissolution, regardless of any contrary language that may be found in the corporation’s certificate of incorporation. We are not persuaded for three reasons. First, section 1001 requires a two-thirds vote of “all outstanding shares entitled to vote” to approve dissolution (emphasis added). In substance, the one-vote-per-apartment rule set forth in East Midtown’s certificate of incorporation entitles the holder of shares to one vote at stockholder meetings.[4] Second, the reference to “all outstanding shares” in section 1001 clarifies that a dissolution vote must be passed not merely by two thirds of those voting at the shareholder meeting
4 The Mitchell-Lama Law contemplates the dissolution and reconstitution of a limited-profit housing company that desires to privatize (see Private Housing Finance Law § 35 [2], [3]).
5 East Midtown’s certificate of incorporation permits only one class of shares. The one-vote-per-apartment voting method is compatible with the certificate’s requirements because East Midtown has but one class of shares and the certificate specifies how votes are counted within that class—a holder is entitled to one vote.
Instead, a different provision of the Business Corporation Law specifically addresses shareholder voting rights. Business Corporation Law § 612 (a) states that “[e]very shareholder of record shall be entitled at every meeting of shareholders to one vote for every share standing in his name on the record of shareholders, unless otherwise provided in the certificate of incorporation” (emphasis added). Section 612 therefore establishes a default rule of one vote per share. But it allows corporations to adopt a different vote-count methodology in their certificates of incorporation. And East Midtown did just that, it selected a one-vote-per-household voting formula in its certificate of incorporation. Because the Business Corporation Law does not mandate any specific method of vote calculation, we believe that East Midtown’s certificate of incorporation controls.[5]
East Midtown further asserts that an HPD regulation in effect at the time of the 2009 vote required that the votes be counted on a per-share basis. That regulation provided: “Dissolution and/or reconstitution of the mutual housing company requires approval of two-thirds (2/s) of the outstanding shares of the corporation as mandated by the Business Corporation Law” (28 RCNY 3-14 [i] [former (7)]).[6] Although the regulation may have been inartfully worded, it incorporated by reference and tracked Business Corporation Law § 1001 (a) (ii). For the same reasons that lead us to conclude that no conflict exists between the Business Corporation Law and East Midtown’s certificate of incorporation, the HPD regulation can be read compatibly with the certificate of incorporation.
Consequently, the courts below correctly held that the 2009 vote should be calculated using the one-vote-per-apartment
6 We note that the parties do not address the applicability, if any, of the Not-for-Profit Corporation Law.
7 HPD subsequently amended 28 RCNY 3-14 (i) (7) to require approval by two thirds of the dwelling units in the housing company. The parties all agree that the revised regulation, promulgated after the 2009 vote, does not apply to this case.
Accordingly, the order of the Appellate Division should be affirmed, with costs.
Chief Judge Lippman and Judges Cipakick, Read, Smith and Pigott concur.
Order affirmed, with costs.
Cases cited
- United Housing Foundation, Inc. v. Forman 421 US 837 p. 163, p. 165
- KSLM-Columbus Apartments, Inc. v. New York State Division of Housing 5 NY3d 303 p. 163, p. 165
- Verdell v. Lincoln Amsterdam House, Inc. 27 AD3d 388 p. 163
- 2550 Olinville Avenue, Inc. v. Crotty 149 Misc 2d 806 p. 163, p. 164
- Columbus Park Corp. v. Department of Housing Preservation & Development 80 NY2d 19 p. 163
- Kralik v. 239 East 79th Street Owners Corp. 5 NY3d 54 at 58 p. 163, p. 164, p. 169
- People v. Landes 84 NY2d 655 at 660 p. 163, p. 165, p. 170
- Council for Owner Occupied Housing, Inc. v. Abrams 72 NY2d 553 p. 163, p. 164
- Assured Guaranty (UK) Ltd. v. J.P. Morgan Investment Management Inc. 18 NY3d 341 p. 163
- Guzman v. Haven Plaza Housing Development Fund Co. 69 NY2d 559 p. 163, p. 164, p. 165
- Acker v. Berman 54 Misc 2d 647 p. 163, p. 165
- Global Reinsurance Corp. v. Equitas Ltd 18 NY3d 722 p. 163
- Walker v. Walker 86 NY2d 624 p. 163
- New York State Psychiatric Ass'n v. New York State Department of Health 19 NY3d 17 p. 164
- Badem Buildings v. Abrams 70 NY2d 45 p. 164
- Scherbyn v. Wayne-Finger Lakes Board of Cooperative Educational Services 77 NY2d 753 p. 164
- 88 Associates v. Abrams 159 AD2d 412 p. 164
- Treger Management Co. v. Abrams 180 AD2d 614 p. 164
- Gilman v. New York State Division of Housing & Community Renewal 99 NY2d 144 p. 164
- State v. Rachmani Corp. 71 NY2d 718 at 726 p. 164, p. 170
- Brooklyn Assembly Halls of Jehovah's Witnesses, Inc. v. Department of Environmental Protection 11 NY3d 327 p. 164
- Howard v. Wyman 28 NY2d 434 p. 164
- Tommy v. Department of Consumer Affairs 95 AD2d 724 p. 164
- Tommy & Tina, Inc. v. Department of Consumer Affairs 62 NY2d 671 p. 164
- Elliott v. City of New York 95 NY2d 730 p. 164
- Schumer v. Caplin 241 NY 346 p. 164
- Parkview Associates v. City of New York 71 NY2d 274 p. 164
- Mendel v. Henry Phipps Plaza West, Inc. 6 NY3d 783 p. 164
- Blumenfeld v. City of New York 44 Misc 2d 475 p. 164
- Fe Bland v. Two Trees Management Co. 66 NY2d 556 p. 164
- Wapnick v. Seven Park Avenue Corp. 240 AD2d 245 p. 164, p. 166
- Spiegel v. 1065 Park Avenue Corp. 305 AD2d 204 p. 164, p. 166
- Kurcsics v. Merchants Mutual Insurance 49 NY2d 451 p. 165
- Dworman v. New York State Division of Housing & Community Renewal 94 NY2d 359 p. 165
- Roberts v. Tishman Speyer Properties, L.P. 13 NY3d 270 p. 165
- In re the Claim of Gruber 89 NY2d 225 p. 165
- Ansonia Residents Ass'n v. New York State Division of Housing & Community Renewal 75 NY2d 206 p. 165
- Schenectady Police Benevolent Ass'n v. New York State Public Employment Relations Board 85 NY2d 480 p. 165
- Richardson v. Commissioner of New York City Department of Social Services 88 NY2d 35 p. 165
- In re Charles A. Field Delivery Service, Inc. 66 NY2d 516 p. 165
- Blossom View Nusring Home v. Novello 4 NY3d 581 p. 165
- Cordero v. Corbisiero 80 NY2d 771 p. 165
- Roman Catholic Diocese v. New York State Department of Health 66 NY2d 948 p. 165
- CDL West 45th Street LLC v. City of New York Department of Finance 308 AD2d 210 p. 165
- Boreali v. Axelrod 71 NY2d 1 p. 165
- Nicholas v. Kahn 47 NY2d 24 p. 165
- All Seasons Resorts, Inc. v. Abrams 68 NY2d 81 at 86-87 p. 165, p. 170
- Securities & Exchange Commission v. Ralston Purina Co. 346 US 119 p. 165
- Tcherepnin v. Knight 389 US 332 p. 165
- Pell v. Board of Education 34 NY2d 222 p. 165
- Salvati v. Eimicke 72 NY2d 784 p. 165
- Nelson v. Roberts 304 AD2d 20 p. 165
- E. & R. Mavin Construction Ltd. v. Abrams 180 AD2d 425 p. 165
- 140 West 4th Street Corp. v. Abrams 152 AD2d 847 p. 165
- 44 West 96th Street Associates v. Abrams 85 AD2d 563 p. 165
- Academy Street Associates v. Spitzer 50 AD3d 271 p. 165
- Schwartz v. Marien 37 NY2d 487 p. 166
- Vernon Manor Co-operative Apartments, Section I, Inc. v. Salatino 15 Misc 2d 491 p. 166
- Smolinsky v. 46 Rampasture Owners, Inc. 230 AD2d 620 p. 166
- Tormey v. LaGuardia 172 Misc 1091 p. 166
- Archdeacon v. Town of Oyster Bay 12 Misc 3d 438 p. 166
- Garson v. Rapping 66 NY2d 928 p. 166
- Cadplaz Sponsors, Inc. v. Cadman Towers, Inc. 84 Misc 2d 961 p. 166
- East Midtown Plaza Housing Co. v. Cuomo 85 AD3d 485 p. 168
- Kerusa Co. v. W10Z/515 Real Estate Ltd. 12 NY3d 236 at 243 p. 169