New York has a peculiar statutory scheme when it comes to dissolution proceedings and buyouts.
There are two basic statutes governing dissolution of closely held business corporations. The older statute, codified as Section 1104 of the Business Corporation Law (BCL), permits a 50% shareholder to seek dissolution in cases of deadlock. When one 50% shareholder petitions for judicial dissolution under this statute, the other has no right to elect to purchase the petitioner’s shares. More often than not, if the business has going concern value, the parties eventually will reach a settlement involving a buyout, but the point is, neither party can force a buyout. Essentially it becomes a game of chicken as both sides maneuver in and out of court to gain negotiating leverage as the company approaches the dissolution precipice.
The other, newer statute, BCL Section 1104-a, permits a shareholder holding at least 20% of the voting shares of a closely held corporation to seek judicial dissolution where those in control have engaged in illegal, fraudulent or oppressive conduct or have looted, wasted or diverted corporate assets. Here, unlike deadlock dissolution, the legislature enacted a companion statute, BCL Section 1118, which gives the respondent majority shareholders (that is, the shareholders who did not bring the dissolution petition) the absolute right to avoid dissolution by electing to purchase the petitioner’s shares. If the parties cannot agree on price and terms, the court will determine the “fair value” of the petitioner’s shares.
This distinction between buyout rights based on the different grounds for dissolution is ignored by many (arguably wiser) states whose statutes authorize compelled buyouts in all cases seeking judicial dissolution of closely held corporations.
Future posts will address the interesting tactical decisions faced by 50% shareholders who may have the option to seek judicial dissolution under both BCL Sections 1104 and 1104-a simultaneously. For now, if you’re considering bringing a dissolution petition as an oppressed minority shareholder under Section 1104-a, be aware that the controlling shareholders will have the right to buy you out, but not if you’re a 50% shareholder seeking dissolution based on deadlock under Section 1104.