When it comes to reading court decisions in business divorce cases, I have a number of pet issues. If I come across a decision with one such issue, I’m happy. Two in the same opinion, I’m thrilled. Three in the same opinion, it’s like hitting the trifecta.
A recent decision by Nassau County Commercial Division Justice Stephen A. Bucaria offers a winning threesome: (1) arbitrability of corporate dissolution petitions; (2) petitions seeking dissolution of out-of-state corporations; and (3) dissolution petitions that trigger mandatory buybacks under a shareholders’ agreement.
The case, Matter of Schneck (R&J Components Corp.), 2007 NY Slip Op 32966(U) (Sup Ct Nassau County Sept. 17, 2007), involves two brothers who went into, and eventually each inherited 50% interests in, an electronic parts business founded by their father who died in 1990. The business came to be organized as six separate companies, two of which were formed as out-of-state corporations but all of which operated in New York. The complaining Brother A claimed that Brother B had frozen him out of the business, denied him access to business records, and took hundreds of thousands of dollars more each year than Brother A was getting. Brother A sought judicial dissolution of all the companies based on internal dissension and deadlock under Business Corporation Law § 1104.
Brother B raised several defenses. First, he asked the court to stay the proceedings pending arbitration pursuant to a mandatory arbitration clause in the shareholders’ agreement. Such clauses routinely are enforced in dissolution proceedings. In this case, however, the court found that Brother B had waived arbitration by moving for summary judgment on the merits. Here’s the money quote: “The courtroom . . . may not be used as a convenient vestibule to the arbitration hall so as to allow a party to create his own unique structure combining litigation and arbitration.”
Brother B fared better on his next defense aimed at the two non-New York corporations, successfully arguing that a New York court may not dissolve a foreign corporation even if its principal place of business is New York. The argument invoked the so-called “internal affairs” doctrine under which courts traditionally refuse to rule on the regulation and management of a foreign corporation. I have followed this issue for many years in the hope — thus far unrealized — that courts will re-analyze the wisdom of the internal affairs doctrine as applied to the dissolution of a corporation operating wholly within New York whose only connection to the other state is the place of incorporation. After all, New York courts routinely interpret and apply the law of other states in many other types of corporate governance disputes. Although the idea of a New York court ordering, e.g., Delaware’s secretary of state to dissolve a Delaware corporation is no less repugnant than that of a Delaware judge ordering New York’s secretary of state to dissolve a New York corporation, so long as the court has personal jurisdiction of the business owners it seems to me that either judge in either jurisdiction could order the parties to file a certificate of voluntary dissolution without offending the incorporating state’s sovereignty. Also, there is at least one lower court decision (Matter of Dohring [CVC Products, Inc.], 537 NYS2d 767 ) holding that, even if dissolution of a New York based foreign corporation technically is not within the court’s power, it may adjudicate the case and fashion a lesser or alternative remedy that achieves “substantial justice” between the parties.
The third issue is one of my all-time favorites, about which a colleague and I wrote an article published in July 2006 in the New York Law Journal. Shareholders’ agreements frequently have stock transfer restrictions that grant a right of first refusal under certain circumstances, generally involving a shareholder who wishes voluntarily to sell his or her shares. Such provisions often include broad language that can be construed as triggering the duty to offer the shares for sale – typically at a formula price well below fair value – whenever there is an attempt to dispose of one’s shares through any means, including judicial dissolution. In this case, the court concluded that the language was not broad enough and therefore it denied Brother B’s request to compel Brother A to convey his shares.