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.

Update November 24, 2009The petitioner in Livolsi started a new 1104-a proceeding in 2009.  By order dated November 9, 2009, Justice Bucaria dismissed the new petition because it was “grounded on precisely the same allegations” raised in the first dismissed proceeding.  Justice Bucaria took it a step further, hinting that he might have granted sanctions had the other side asked for them, and cautioning the petitioner against any future such application.