New York’s Business Corporation Law (BCL) provides three pathways for non-controlling shareholders to achieve involuntary (judicial) dissolution. The first two are well known to business divorce practitioners and to regular readers of this blog:
- a petition under BCL § 1104 (a) by a shareholder holding 50% of the voting shares on the grounds of director deadlock, shareholder deadlock, or “internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders”; and
- a petition under BCL § 1104-a by a shareholder holding at least 20% of the voting shares on the grounds of “illegal, fraudulent or oppressive actions” or looting, waste, or diversion of corporate assets by the directors or those in control of the corporation.
The third pathway is far less familiar and is rarely invoked: a petition under BCL § 1104 (c) by any holder of any percentage of shares entitled to vote at an election of directors on the ground that
the shareholders are so divided that they have failed, for a period which includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired or would have expired upon the election and qualification of their successors.
If you read it too quickly, you might think all the statute requires is the simple failure to hold a board election on two consecutive, annual meeting dates — not a high hurdle for the countless, small close corporations that ignore corporate formalities including annual shareholder meetings. Not to be overlooked, however, are the critical words, “the shareholders are so divided that they have failed . . . to elect.”
Those words tripped up the petitioner in a noteworthy case recently decided by Manhattan Commercial Division Justice Andrea Masley. In Matter of Gupta [E.J.’s Bucket Buddies, Inc.], 2020 NY Slip Op 32446(U) [Sup Ct NY County July 24, 2020], Justice Masley summarily dismissed for legal insufficiency a § 1104 (c) dissolution petition brought by a 25% shareholder of a realty holding corporation due to the petition’s omission of any allegation that the shareholders “have ever held an annual meeting or elected directors during the company’s existence.” Continue Reading Dissolve for Failure to Elect a Board? Better Demand an Election First