Court Orders Hearing On Minority Shareholder's Petition for Common Law Dissolution
Minority shareholders in closely held New York corporations, unlike many other states, must hold at least 20% of the corporation’s voting shares to petition for judicial dissolution on grounds of oppression under Section 1104-a of the Business Corporation Law. There’s little if any legislative history to explain the arbitrary 20% threshold. I imagine it was included as a compromise to satisfy legislators opposed to judicial interference with traditional corporate majority rule.
Shareholders with less than 20%, and without any claim for breach of shareholders' agreement, have limited options to right perceived wrongs by the controlling shareholders. They may bring a derivative action under BCL Section 626 for corporate waste, diversion of assets or other wrongs causing injury to the corporation, but first they either must make proper demand upon the board of directors or demonstrate demand futility. BCL Section 627 also requires a derivative plaintiff-shareholder with less than a 5% interest to give security for the corporation's costs including legal expenses. Furthermore, depending on the circumstances, commencing a plenary action for breach of shareholders' agreement or asserting derivative claims for recovery on the corporation's behalf may not provide sufficient leverage to induce a buy-out of the plaintiff's shares, assuming the plaintiff is pursuing an exit strategy.
The below-20% shareholder has one other option: common law dissolution. It carries no minimum ownership percentage. It's harder to establish than statutory oppression under BCL 1104-a, and rarely successful, but under the right circumstances it may give such a shareholder at least a toe-hold toward dissolution, which also may be enough to induce serious buy-out negotiations.
A recent decision by Queens County Commercial Division Justice Orin R. Kitzes presents one of the relatively rare instances in which a claim for common law dissolution successfully advances past the pleading stage. The case, Matter of Mouzakitis (Pearl Nightlife, Inc.), Index No. 28420/08 (Sup Ct Queens County Feb. 24, 2009), was previously featured on this blog when the court initially dismissed without prejudice a common law dissolution petition because the plaintiff's husband, who co-owned the shares as tenants by the entirety, was not a party to the action. Husband and wife thereafter filed a new action as co-plaintiffs, again suing for common law dissolution.
Continue Reading...Spouses Holding Shares as Joint Tenants Must Jointly Petition for Corporate Dissolution
When husband and wife hold shares as joint tenants with right of survivorship, can one of them seek corporate dissolution without joining the other?
The answer is "no," according to a recent decision by Queens County Supreme Court Justice Patricia P. Satterfield in Matter of Mouzakitis (Pearl Nightlife, Inc.) (read decision here).
Petitioner Marianthi Mouzakitis and her husband, Leonidas, own 15% of the common shares of Pearl Nightlife, Inc. as tenants by the entirety. The corporation operates a restaurant in Bayside, New York, that opened in March 2008. The Mouzakitises contributed $125,000 for their interest. Ms. Mouzakitis alleged that the controlling shareholders failed to make required contributions, failed to pay salaries and dividends, withheld access to corporate books and records, and diverted corporate funds and assets including liquor and food allegedly diverted to other restaurants separately owned by the corporation's president. In May 2008, the other shareholders allegedly had the petitioner arrested at the restaurant.
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