This being the last, lazy week of August, I thought I’d offer something lighter than my usual fare for those sitting beachside with one eye on the kids and the other on their iPad.  So without further ado, here are some short summaries of miscellaneous cases of interest involving shareholder disputes:

Court grants interim injunction restraining directors of Delaware corporation from committing acts that constitute grounds for dissolution under BCL 1104-a.  In Ziglin v. Hommel, 2009 NY Slip Op 32636(U) (Sup Ct NY County Oct. 9, 2009), Manhattan Supreme Court Justice Debra A. James granted an unusual preliminary injunction in a dispute between two shareholders of a New York based Delaware corporation, requiring that the directors “not commit acts that constitute grounds for dissolution contained in BCL 1104-a(a)(1) and (2) , and that corporate records be made available pursuant to BCL 1104-a(c).”  Why unusual?  (a) The plaintiff filed a summons with notice, i.e., did not file a complaint.  (b) The notice did not include a request for dissolution. (c) Case precedent seems to foreclose dissolution of a Delaware corporation by a New York court. (d) How does a director comply with an injunction against “oppression” of a minority shareholder?

Court denies dissolution petition but authorizes petitioner to seek fair value award under BCL 910 arising from sale of business assets.   In Matter of Banani (New Millenium Pawnbrokers, Inc.), Short Form Order, Index No. 007728/10 (Sup Ct Nassau County Aug. 16, 2010), Nassau County Commercial Division Justice Stephen A. Bucaria ruled that the administrator of a deceased shareholder’s estate failed to establish grounds for judicial dissolution under BCL 1104-a but granted her leave to serve an amended petition seeking payment of fair value for the shares under BCL 910.  The latter statute authorizes a shareholder to initiate a dissenting shareholder appraisal proceeding upon the happening of certain events including, as occurred in Banani, the sale of all of the corporation’s assets.

Court rules that shareholder of Corporation A cannot utilize de facto merger doctrine to seek dissolution of Corporation B.   In Matter of Akcan (Vita Ristorante 58, Inc.), 2010 NY Slip Op 32195(U) (Sup Ct NY County Aug. 16, 2010), the petitioner sought to dissolve a corporation of which, admittedly, he was not a shareholder on the theory that it had entered into a de facto merger with another corporation in which he held a 25% stock interest.  Manhattan Supreme Court Justice Jane S. Solomon dismissed the petition, noting that the petitioner cited “no authority that would allow a court to utilize the doctrine of de facto merger to shift his shareholder interest in one corporation to another corporation for the purpose of forced dissolution of the new corporation.”

A year ago, in Tzolis v. Wolff, 10 NY3d 100 (2008), New York’s highest court recognized the common law right of LLC members to bring a derivative action on the LLC’s behalf.   Late last month, in Gottlieb v. Northriver Trading Co., LLC, 58 AD3d 550 (1st Dept 2009), an intermediate appellate court cited Tzolis in support of its decision recognizing the right of LLC members to seek an equitable accounting under common law. 

The "equitable action on account" has a rich legal history in early English and American law, reflecting a time when forms of pleading and the scope of judicial powers made sharp distinctions between actions "at law" and those "in equity."  In modern usage, the accounting action allows a trust beneficiary, partner, etc. to compel a fiduciary entrusted with property to render an account of his or her actions and for the recovery of any balance found to be due.  The accounting involves more than simply turning over existing financial records.  In New York practice, if the court grants an accounting, it may order the fiduciary to prepare a "long accounting" with detailed schedules of income and expenses over a defined period, followed by the filing of objections to the accounting, followed by proceedings before a court-appointed referee to hear and determine the accounting.  (To view a form of order of reference to determine an account, click here.)

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