A recent decision by Queens County Commercial Division Justice Orin R. Kitzes in Matter of Weingarten (Thirty First Street Realty Corp.) calls attention to a critical issue in corporate dissolution proceedings, namely, the timing of the statutory election to purchase the petitioning shareholders’ stock interest. First, some background.
Section 1104-a of New York’s Business Corporation Law authorizes a petition for judicial dissolution of a close corporation brought by a shareholder holding at least 20% of the voting stock on the ground of "oppressive actions" by the controlling shareholders. The dissolution statute is counterbalanced by BCL Section 1118 which gives the respondent shareholders the absolute right to stay the dissolution proceeding and, ultimately, to avoid dissolution altogether by electing to purchase the petitioner’s shares for fair value.
The right of election is not open-ended. Section 1118 requires that the election be made within 90 days after the petition is filed. Practitioners know that only the rare dissolution petition is decided on the merits within 90 days. This poses a quandary for the respondent inclined to fight the allegations of oppression but also not willing to put the company at risk of dissolution if the petitioner prevails on the merits.
Section 1118(c)(1) provides a semi-safety valve for this situation. It provides that if an election is made after 90 days,
and the court allows such petition, the court, in its discretion, may award the petitioner his reasonable expenses incurred in the proceeding prior to such election, including reasonable attorneys’ fees.
The court’s authority to grant or deny a tardy election is discretionary, and there is not much case law on the subject. In Matter of Ambrosio (NYLJ 11/20/92, Sup Ct Suffolk County), the court permitted an election to purchase three years post-petition, conditioned on the respondent paying the petitioner’s pre-election counsel fees and giving an undertaking to secure the fair value award. In Sobol v. Les Pieds Nickles, Inc., 262 AD2d 194 (1st Dept 1999), the court affirmed an order rejecting an election made eight years after commencement of the proceeding. In Matter of Flushing Office Center, Ltd., 276 AD2d 629 (2d Dept 2000), the court affirmed an order permitting a late election, observing that the "petitioners’ rights to the fair value of their shares in the corporation shall be preserved by the appointment of an independent Referee whose responsibility will be to report to the Supreme Court as to the amount of such fair value."
The Weingarten case pits Victor Weingarten against his brother Fred and the Estate of Jacob Popovic as the three equal shareholders of a corporation that owns a commercial property in Long Island City. In May 2007, Victor filed a petition to dissolve the corporation under Section 1104-a, alleging that the other two shareholders without his consent had leased and subleased the property to other companies owned by the two of them to operate a taxi management business. Fred and the Popovic Estate denied the petition’s allegations of oppression but offered to consent to dissolution provided the leases remained undisturbed.
In a decision dated April 29, 2008, Justice Kitzes ruled that the parties’ conflicting allegations raised issues of fact requiring a hearing to determine whether judicial dissolution is warranted. In August 2008, Fred and the Popovic Estate moved for authorization to purchase Victor’s shares under Section 1118. In a decision dated October 17, 2008, Justice Kitzes denied the motion, offering the following reasons:
First, movants offer no excuse for their failure to timely exercise the right of election. Second, there is no indication that continuing the corporation is a viable and worthwhile endeavor. Third, movants’ claims that allowing the election would save further litigation and expense is not supported by any evidence and fails to take into account the work involved with a valuation under an election to purchase shares. Furthermore, movants have also failed to demonstrate irreparable harm, likelihood of success on the merits, or a balance of the equities in their favor in support of their application for a stay of the dissolution proceedings.
It’s difficult to extract much guidance from Weingarten and the few earlier cases cited above. The facts and equities are unique in each case. In many instances a petitioner prefers even a late buyout to dissolution, but that’s not always the case, particularly when the corporation’s value mainly consists of real estate or other readily marketable hard assets. For the respondent shareholder who wants to fight the allegations of oppressive conduct but who also wants to preserve the buyout option until the court determines the merits, it may be prudent to make a motion promptly after the petition is filed, seeking to toll the election period pending the court’s ruling.
But wait, there’s more. The New York Court of Appeals, in its 1984 Kemp & Beatley decision (64 NY2d 63) adopting the reasonable expectations test for "oppressive actions" under Section 1104-a, stated that "[e]very order of dissolution . . . must be conditioned upon permitting any shareholder of the corporation to elect to purchase the complaining shareholder’s stock at fair value." In that case, where the respondent shareholders never sought to elect to purchase, the orders of the lower courts and the Court of Appeals directing dissolution nonetheless all included extensions of the time for exercising the election to purchase, long past the original 90 days. I have yet to see a case that reconciles Kemp & Beatley’s seemingly inflexible command with the court’s discretionary authority under Section 1118(c)(1) to grant or deny an untimely election. Until that happens, we may continue to face the anomalous circumstance in which a respondent who fails to elect within the first 90 days but later decides to do so, may be better off waiting for a conditional order of dissolution than moving for leave to make an untimely election.
Update December 18, 2009: Fred and the Estate appealed Justice Kitzes’ denial of their Section 1118 motion. On December 15, 2009, the Appellate Division, Second Department, turned down their appeal. Read here.