Read All About It! Publication Notice of Dissolution Proceedings
Most business co-owners prefer to keep their internal disputes private, lest competitors get a whiff and take advantage with the customers, or because it might give customers or suppliers an excuse to back out of pending deals. When an owner goes to court to ask for judicial dissolution of the business, however, thanks to statutory publication requirements and internet access to court filings, the whole world is watching.
Section 1106 of the Business Corporation Law (BCL) requires the court, upon the presentation of a petition seeking judicial dissolution of a closely held corporation, to make an order to show cause setting a date for a hearing to determine if the corporation should be dissolved. For readers who haven’t seen one, here’s what a typical order to show cause in a dissolution case looks like.
Subdivision (b) of the statute also requires, among other things, that the text of the order to show cause be published at least once in each of the three weeks before the hearing date in one or more newspapers of general circulation in the county in which the office of the corporation is located. If, perhaps, in a moment of excruciating boredom, you've ever spent time perusing the legal advertisements in your favorite newspaper's classified ads section, amidst the dozens of announcements of newly formed limited liability companies and spouses disowning the debts of their soon-to-be-ex-spouses, you may have run across a notice of a judicial dissolution proceeding.
I like to think that long ago, when our wise legislators originally enacted the publication requirement, they had more in mind than generating legal advertising revenues for newspaper publishers. I imagine back then, when population centers were smaller, corporations fewer and access to court filings harder to come by, it made sense for the protection of creditors and potential creditors to publish a notice in the local newspaper whenever someone filed a petition for corporate dissolution.
Today, with instant access via the internet to a vast array of business and financial information as well as online court records, the publication requirement seems like a relic. It can be, however, a very expensive relic. Depending what county you’re in – New York County being the most expensive – and whether the court requires publication in a single newspaper or multiple newspapers, the cost of publication can run in the thousands of dollars.
The publication requirement can also raise tactical considerations, including:
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Subdivision (e) of BCL § 1106 permits the court to require the costs of publication to be borne by the corporation "or such other persons as the court may order." A minority shareholder seeking dissolution has a strong incentive to impose publication costs on the corporation, if not the majority owners.
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Insofar as publication may increase the odds of a business competitor learning of the dissolution case and using it to its competitive advantage, the shareholder more likely to end up as the purchaser in a buyout settlement may want to avoid the potential loss of goodwill from publication, and therefore may seek to adjourn the hearing date pending negotiations in order to defer publication.
What happens if the petitioner fails to comply with the publication requirement by the date of the hearing? The petition won’t be dismissed, but the proceeding will be adjourned until after publication, which usually translates into at least one month’s delay. Here’s a case where the court ordered an adjournment for publication.
By the way, New York’s Limited Liability Company Law has no such publication requirement for dissolution of LLCs.
Expelling an LLC Member
Let's say you're one of the many thousands of business owners who have opted to organize their business as a limited liability company (LLC) rather than as a traditional shareholder corporation. Let's also say you have a business partner, Member X, who has a 25% membership interest in the business. Time passes and, unfortunately, Member X has become an impediment to the business's success to the point you conclude that the business can't continue with Member X. Finally, let's say Member X rejects every reasonable offer you make to buy him out of the business.
What are your choices? Do you have to hire a lawyer to bring an expensive legal action to be rid of Member X? Is that possible? Wouldn't it be much easier if, as Brooklyn Dodger fans famously taunted, you could just "Throw da bum out!"?
Utah is a long way from Brooklyn, but a recent decision by that state's highest court got me thinking about the issue.
In the Utah case, Duke v. Graham, the issue was whether an arbitrator was legally authorized to expel LLC members as a remedy for breach of their duties owed to the remaining members. In upholding the expulsion, the court examined Utah law that expressly authorizes LLC members to expel another member either when so authorized by the parties' Operating Agreement or by applying to a court based on the member's misconduct.
Unlike Utah, New York's LLC Law (LLCL) has no express provision authorizing non-judicial member expulsion or authorizing one member to bring a legal proceeding to expel another. The only tangential mention of the issue is in Section 701(b) of the LLCL under which, absent contrary provision in the operating agreement, member expulsion is one of several occurrences that do not result in dissolution unless the other members agree to dissolve.
So where does that leave you and Member X? As with most issues surrounding the internal affairs of LLCs, the answer lies in the operating agreement. A carefully drafted operating agreement should include dispute resolution and buy-sell provisions that enable the parties to separate their interests when they no longer can get along. The key is, at the outset of the business relationship, to create efficient exit mechanisms that provide all parties with a fair degree of financial security and business continuity. If the operating agreement provides for expulsion of a member under specified circumstances or by a specified majority vote, to avoid disruption and legal expense it also should provide the expelled member with payment for the fair value of his or her membership interest. At the same time payment terms must ensure the company's future viability. Absent such agreement, the fate of the business will be dictated by negotiating muscle or expensive legal proceedings including possible dissolution.
Double Whammy: When Romantically Involved Business Partners Fall Out
The mom-and-pop business is engrained in the American psyche as a symbol of combined domestic and business durability. I have two theories about that. One, in the olden days if the business was incorporated, chances are the husband owned 100% notwithstanding the wife’s equal labors. Two, those were the days before a 50% divorce rate.
Today, women have become equal forces as entrepreneurs and managers in most areas of the business world. Combine that with the high incidence of unmarried couples not only living together, but also going into business together, and you have a sure-fire recipe for heated business divorce cases when a good number of these couples inevitably break up.
The mix of personal and business relationship turned volatile in a recent case (read opinion here) in which the girlfriend – let’s call her Barbie – commenced a proceeding for judicial dissolution of a company she allegedly owned 50-50 with her former boyfriend – let’s call him Ken – alleging that he had looted, wasted or diverted company assets and was engaging in oppressive acts toward her. The court’s opinion doesn’t describe the company business, though it does mention that the company owned the house in which Barbie lived. Indeed, Barbie filed for dissolution shortly after Ken caused the company to serve her with eviction papers.
Ken asked the court to dismiss Barbie’s case on the ground she was not a shareholder and therefore lacked standing. The company’s stock register listed Ken and Barbie as the only two shareholders with 100 shares each. Relying on § 624(g) of the Business Corporation Law (BCL), Barbie contended that the register was prima facie evidence of ownership even if the stock certificate never was physically delivered to her. Ken countered that Barbie had failed to pay an agreed upon price of $165,000 for her shares, and cited BCL § 504(h) which states that stock certificates may not be "issued" until payment is made for the shares. Barbie did not claim that the shares were a gift nor, apparently, did she deny her agreement and failure to pay $165,000. The court found for Ken and dismissed the case.
Did Mattel ever make a Shareholder Barbie?
The case, Matter of Sanyou New York, Inc., 2007 NY Slip Op 33326(U) (Sup Ct Queens County Sept. 25, 2007), was decided by Justice Joseph P. Dorsa of the Queens County Supreme Court.
Get Thee to the Commercial Division!
In 1995, following a successful pilot program in the New York County Supreme Court, the statewide court administration created a Commercial Division in that county and in Monroe County to handle business-related cases only. Since then the program has expanded to eight additional counties: Albany, Erie, Onondaga, Kings, Queens, Nassau, Suffolk and Westchester.
Here’s an overview of the Commercial Division from its website:
The Commercial Division serves as a vehicle for resolution of complicated commercial disputes. Successful resolution of these disputes requires particular expertise across the broad and complex expanse of commercial law. Because disclosure in commercial cases can be complicated, protracted and expensive, particularly in light of electronic discovery, the Division makes use of vigorous and efficient case management. The court sets deadlines and enforces them, managing discovery as needed to protect the rights of the parties to fair disclosure while minimizing expense and delay. Motion practice, especially in the form of motions to dismiss or for summary judgment, is particularly common in commercial cases. The caseload of the Division is thus particularly demanding, requiring of the court scholarship in commercial law, experience in the management of complex cases, and a wealth of energy.
The popularity of the Commercial Division among commercial litigators and the business community is driven in large part by the business-law expertise of its judges. The ability to tap such expertise, and to achieve a relatively fast resolution, is particularly useful to business owners and their counsel who get caught up in a business divorce.
The Commercial Division’s rules specify that cases involving dissolution of corporations, partnerships, limited liability companies, limited liability partnerships and joint ventures qualify for assignment to the Commercial Division. Counsel for the party who initiates the dissolution is required to submit a brief signed statement justifying the Commercial Division designation. If initiating counsel fails to file the dissolution petition as a Commercial Division case, the respondent’s counsel may write a letter to the Administrative Judge within 10 days after receipt of the RJI (Request for Judicial Intervention) requesting a transfer into the Commercial Division.
A number of Commercial Divisions, including those in New York, Kings, Nassau and Westchester Counties, also have established ADR (Alternative Dispute Resolution) programs that permit the judges to require the parties to participate in mediation using a roster of qualified volunteer lawyers. Mediation permits the combatants to air their grievances and objectives face-to-face in a controlled setting that can foster creative solutions to the difficult issues involved in separating or otherwise resolving their business interests.
Addendum (January 24, 2008): I received an interesting message in response to this entry from a lawyer representing a respondent in a dissolution case. The petitioner's counsel did not file the proceeding as a commercial case. The initiating order to show cause sought a preliminary injunction which was conferenced with the assigned non-Commercial Division judge and scheduled for a hearing. The respondent's counsel then timely delivered a letter to the Administrative Judge requesting transfer into the Commercial Division. Although the Administrative Judge acknowledged that the case qualified for assignment to the Commercial Division, the request was denied on the grounds that the assigned judge had already spent time on the case; that the case was not complex; that few assets were involved; and based on the petitioner's allegation that the delay resulting from re-assignment was prejudicial. Although the Commercial Division Rule states that cases meeting the specified criteria "will be heard" in the Commercial Division, it also provides that assignment decisions by the Administrative Judge are final and subject to no further administrative review or appeal.
