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.
Here’s a recent case where things took a different and unhappier direction for the petitioning 50% Shareholder A who sought dissolution under BCL Section 1104-a alleging that he was frozen out by 50% Shareholder B. The case involved a real estate holding company that leased the property to a separate business solely owned by Shareholder B. The troubles started when Shareholder A’s employment with the tenant business terminated. The court denied Shareholder A’s application to dissolve upon finding no evidence of oppression, looting or other misconduct by Shareholder B.
Would Shareholder A have done better seeking deadlock dissolution under Section 1104? It’s hard to say without knowing more facts. Establishing deadlock in a relatively passive real estate holding company can pose a challenge. The fact that he did proceed under Section 1104-a suggests that he made a losing bet that Shareholder B would elect to purchase his shares. One also can speculate that the lease held by Shareholder B’s separate company was of the sweetheart variety, thereby taking away some measure of Shareholder B’s incentive to opt for a buyout.
The case, Matter of Livolsi (111 Glen Street Corp.), 2007 NY Slip Op 32911 (U) (Sup Ct Nassau County Sept. 13, 2007), was decided by Justice Stephen A. Bucaria of the Nassau County Supreme Court, Commercial Division.
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.
