NY Business Divorce Adds Case Alerts via Twitter
There's a new twitter module in the sidebar of this blog. The module displays my most recent tweets and provides a link for anyone who'd like to follow me. My tweets will be devoted primarily to short descriptions of, and links to, newly released court decisions of interest to business lawyers and other professionals.
For some time I've been following the twitter phenomenon from afar, with a special interest in how it's being used by lawyers. The overwhelming majority of what I see strikes me as piffle, although, according to everything I read in the blogosphere, I'm missing the point of social media. Clueless though I may be, I pledge not to tweet about my lunch-time tuna fish sandwich or pass on platitudes about life lessons lifted from Bartlett's Quotations.
On the other hand, I've become convinced that the immediacy, format and accessibility of twitter, if used intelligently, can serve a highly useful purpose. Effective tweeting for professionals, like effective blogging, is about adding value. For many years I've regularly scanned the online decisions posted daily by the New York courts during the week. I also follow numerous law blogs and other secondary legal resources. If I can filter, interpret and repackage some of that information to make it more readily available to others, that's value added.
So I encourage you to follow me on twitter if you'd like any easy way to keep abreast of breaking decisions -- but not if you're looking for piffle.
Interview with Law Professor Douglas Moll, Leading Authority on Shareholder Oppression
Douglas K. Moll is Professor of Law at the University of Houston Law Center, where he teaches corporate and commercial law, and is one of the nation's leading authorities on shareholder oppression in the closely held business entity. His scholarly writings on the subject have been cited in numerous cases including, in New York, Horning v. Horning Construction LLC, 12 Misc 3d 402 (Sup Ct Monroe County 2006), in which the court relied on Professor Moll's analysis of the impact of the 1999 amendments to the LLC Law on relations between minority and majority members of LLCs.
I've had an occasional correspondence with Professor Moll for a number of years, so when I heard that he and co-author Robert Ragazzo had published a new treatise called The Law of Closely Held Corporations (Aspen Publishing 2009), I figured it would be a great opportunity to pose some questions about his views on shareholder oppression and about his new book. I think you'll find his answers interesting.
Mahler: Professor, how did you get interested in problems of the close corporation and shareholder oppression?
Continue Reading...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...Winning the Dissolution Battle, Losing the War
Most business divorce litigation involving closely held companies results either in a buyout of one party by the other, or the two sides dividing the remaining assets and going their separate ways.
The biggest problem getting to the buyout is the absence of a public market to establish the value of the interest being acquired, particularly when dealing with a non-controlling interest in a sales or services-based operating company. The buyer and seller, even when advised by qualified business appraisers, can be light years apart on price due to different assumptions about a host of valuation inputs some of which necessarily require subjective analysis.
Splitting up the business can be very easy or very difficult, depending on the specifics of the business. It tends to be more difficult when there is value associated with the defunct company's name or other such intangible good will value at the enterprise level (as opposed to personal good will that follows the individual business partner wherever he or she goes).
Litigation means time, expense and uncertainty, all of which can jeopardize the potential benefits of an eventual buyout or business split-up. It is difficult for the controlling owner to invest and make business plans while under the cloud of a prospective buyout of uncertain magnitude. The risks can be even greater in a split-up scenario for business partners who, perhaps as a matter of business survival, begin taking unilateral and sometimes surreptitious steps at odds with each other, designed to retain for themselves the loyalty and business of key customers and vendors.
These ruminations, and the title of this post, are inspired by recent decisions in two cases in which business partners remain locked in protracted and undoubtedly expensive litigation even after one side's initial attempt to achieve judicial dissolution became moot.
Continue Reading...Disputed Allegations of Shareholder Oppression Require Evidentiary Hearing
There's nothing special about the corporate dissolution case brought by David Wenger involving a family-owned construction business. The facts of the case are garden variety, as these things go. The case presents no novel legal issues. The court's decision, ordering an evidentiary hearing to determine the petition's disputed allegations of oppression, is nothing if not anti-climactic.
But that's exactly why I want to write about it, to illustrate what happens in the ordinary dissolution case, where there are no knockout punches in the first round. That plus, it's my first occasion to highlight a decision by Suffolk County Commercial Division Justice Emily Pines.
The court's decision in Matter of Wenger (L.A. Wenger Contracting Co.), Index No. 31701/08 (Sup Ct Suffolk County Nov. 12, 2008), describes a case of corporate and family dysfunction pitting father against son. In August 2008, the son, David, as a 31% shareholder filed a petition to dissolve L.A. Wenger Contracting Co. of which his father, Louis, is majority owner. Upon filing the petition David obtained a temporary restraining order enjoining his father from disbursing company funds to any shareholder, officer or director except in the ordinary course of business. David's petition also sought appointment of a receiver pursuant to Section 1113 of the Business Corporation Law.
Continue Reading...Timing is Everything When it Comes to the Buyout Election in Corporate Dissolution Cases
A recent decision by Queens County Commercial Division Justice Orin R. Kitzes in Matter of Weingarten (Thirty First Street Realty Corp.) calls attention to a critical issue in corporate dissolution proceedings, namely, the timing of the statutory election to purchase the petitioning shareholders' stock interest. First, some background.
Section 1104-a of New York's Business Corporation Law authorizes a petition for judicial dissolution of a close corporation brought by a shareholder holding at least 20% of the voting stock on the ground of "oppressive actions" by the controlling shareholders. The dissolution statute is counterbalanced by BCL Section 1118 which gives the respondent shareholders the absolute right to stay the dissolution proceeding and, ultimately, to avoid dissolution altogether by electing to purchase the petitioner's shares for fair value.
The right of election is not open-ended. Section 1118 requires that the election be made within 90 days after the petition is filed. Practitioners know that only the rare dissolution petition is decided on the merits within 90 days. This poses a quandary for the respondent inclined to fight the allegations of oppression but also not willing to put the company at risk of dissolution if the petitioner prevails on the merits.
Section 1118(c)(1) provides a semi-safety valve for this situation. It provides that if an election is made after 90 days,
Continue Reading...and the court allows such petition, the court, in its discretion, may award the petitioner his reasonable expenses incurred in the proceeding prior to such election, including reasonable attorneys' fees.
Dissolution and the 50% Shareholder
In the judicial dissolution arena, one of the trickiest decisions faced by counsel representing a 50% shareholder of a closely held New York corporation is whether to ask for dissolution based on deadlock under Section 1104 of the Business Corporation Law (BCL), or based on allegations that the other 50% shareholder is guilty of illegal, fraudulent or oppressive conduct or has looted, wasted or diverted corporate assets under BCL Section 1104-a, or under both statutes.
The choice can have a dramatic effect on the outcome of the proceedings, not just because of the different proofs required, but because only one of the statutes – BCL Section 1104-a – triggers the other shareholder’s right to avoid dissolution by electing to purchase for “fair value” the shares of the petitioning shareholder. (See previous post on the subject.)
In many business divorce cases involving two 50% shareholders there nonetheless is one natural buyer and one natural seller. Sometimes it’s because one of the two controls more of the client relationships. Sometimes it’s because one of the two personally or through a separate company owns the realty leased by the co-owned company. Sometimes it’s because one of the two has far deeper pockets. In these situations, the 50% shareholder who wants out and his or her counsel must think long and hard about whether they gain or lose bargaining leverage by handing the opposing shareholder the right to force a buyout. In my experience, a deadlock petition under BCL Section 1104 usually packs a bigger wallop than an 1104-a petition by denying the automatic buyout and thereby putting added pressure on the shareholder who may be more motivated to keep the company as a going concern.
Continue Reading...Voluntary Dissolution vs. Judicial Dissolution
Dissolution of a closely held New York corporation can be accomplished either voluntarily, by vote of the shareholders, or involuntarily by way of a petition for judicial dissolution. The two methods are fundamentally different and should never be confused.
Article 10 of the Business Corporation Law (BCL) governs voluntary or “non-judicial” dissolution. For corporations formed after February 22, 1998, when the law was amended, a simple majority vote of the shareholders may authorize the filing of a certificate of dissolution. For corporations formed before that date, a two-thirds vote is required unless an amended certificate is filed authorizing dissolution approved by a simple majority. For older or newer corporations, the certificate need not contain any provision on the subject, and frequently the issue instead is dealt with in the shareholders agreement, which often prohibits voluntary dissolution absent unanimous consent of the shareholders.
BCL Article 11 governs judicial dissolution. Section 1104 authorizes a 50% shareholder to seek a court order dissolving the corporation based on director deadlock, shareholder deadlock and “internal dissension”. Section 1104-a authorizes a 20% or greater shareholder to seek judicial dissolution where those in control have engaged in illegal, fraudulent or oppressive conduct or have looted, wasted or diverted corporate assets.
In Matter of General Trading Co., Index No. 106157 (Sup Ct NY County July 28, 2006), a 50% shareholder and creditor of the corporation brought a petition for judicial dissolution even though he had already gained control of all the corporation’s shares under a pledge agreement and had replaced its board of directors with his own single designee. The court dismissed the case on the ground that, since the petitioner held all the shares and controlled the one director, there was no deadlock under BCL Section 1104 and no need for judicial dissolution under Section 1104-a when the petitioner could achieve the same result by filing a certificate of voluntary dissolution under Article 10. The case was decided by Justice Leland DeGrasse of the New York County Supreme Court.
