It’s among the most common scenarios seen by business divorce lawyers: A minority shareholder of a non-dividend paying close corporation — let’s call him Joe the Shareholder — for years has been a full-time employee, officer and director of a company he co-founded. Joe the Shareholder’s salary and occasional bonus are the sole source of return on his investment in the company. Without any advance notice, the majority shareholders fire Joe the Shareholder, remove him from the payroll, cut off his access to the company computer and change the office locks. Joe the Shareholder can’t believe that, as a company owner, he can be fired and thrown out by his business partners just like that. Joe the Shareholder wants to know what his remedies are and, in particular, whether he can sue for wrongful termination of his employment to recover lost salary and other damages.
Joe the Shareholder has a standard shareholders’ agreement that gives a majority of the Board of Directors control of all company business affairs. The shareholders’ agreement does not fix any definite term of employment for any of the company’s shareholders, and it has no language limiting the Board’s authority to terminate an officer or employee with or without cause. Joe the Shareholder has no separate employment agreement with the company.
So what’s the answer to Joe the Shareholder’s question? In New York, without any agreement for employment of a definite duration, Joe the Shareholder is considered an at-will employee of his own company who can be fired for any or no reason (except for reasons made illegal under federal and state workplace anti-discrimination laws), and therefore he has no claim for wrongful termination of his employment. If Joe the Shareholder has any remedy, he must look to his statutory right to seek judicial dissolution for shareholder oppression under Section 1104-a of the Business Corporation Law.
Employers’ common law rights to terminate at-will employees are entrenched in New York case precedent stretching back over 100 years (e.g., Martin v. New York Life Ins. Co., 148 NY 117 ). More recently, in Murphy v. American Home Products Corp., 58 NY2d 293 (1983), New York’s Court of Appeals (the state’s highest court) held that an employer has no implied obligation of good faith and fair dealing in an employment at will, and it rejected any tort claim for abusive or wrongful discharge of an at-will employee.
Six years after its Murphy decision, the Court of Appeals specifically addressed application of the at-will doctrine in the shareholder context in a case called Ingle v. Glamore Motor Sales, Inc., 73 NY2d 183 (1989). Philip Ingle started with Glamore Motor Sales as a sales manager in 1964, which was then owned 100% by James Glamore. In 1966, Ingle became a 22% shareholder, and later 40%. He paid a total of $75,000 for the shares. In 1982, the corporation issued new shares to Glamore and his two sons, reducing Ingle’s holding to 25%. The shareholders’ agreement included a stock repurchase provision giving the company the option to redeem the shares of any shareholder who "shall cease to be an employee of the Corporation for any reason". Ingle had no separate employment agreement.
In 1983, at a Board of Directors meeting, the Glamores voted Ingle out of his corporate posts and terminated his employment as operating manager. They immediately gave Ingle notice that the company was exercising its right under the shareholders’ agreement to redeem Ingle’s shares for $96,000.
Ingle accepted the payment but then sued for damages for breach of fiduciary duty and of contract. As summarized in the court’s majority opinion, Ingle argued that
his employment status should not be governed by the employment at-will doctrine but, rather, that as a minority shareholder in a close corporation he should be treated as a co-owner, equivalent to a partner, whose employment rights flow from a special duty of loyalty and good faith. He [also] urges that an implicit covenant of good faith and fair dealing under the shareholders’ agreement precluded his termination without cause, despite the express language and nature of the agreement in that regard. He concludes that even if he is an at-will employee, an action properly lies for the respondents’ breach of fiduciary duties and for wrongful interference with his employment.
Five of the Court’s seven judges rejected Ingle’s arguments in favor of applying the at-will rule. Here’s what they said:
A minority shareholder in a close corporation, by that status alone, who contractually agrees to the repurchase of his shares upon termination of his employment for any reason, acquires no right from the corporation or majority shareholders against at-will discharge. There is nothing in law, in the agreement, or in the relationship of the parties to warrant such a contradictory and judicial alteration of the employment relationship or the express agreement. It is necessary in this case to appreciate and keep distinct the duty a corporation owes to a minority shareholder as a shareholder from any duty it might owe him as an employee.
The Court then went a step further, by explicitly uncoupling its holding from the repurchase provision in the shareholders’ agreement, as follows:
Under the established common-law rule—and without any reference to the shareholders’ agreement—the corporation had the right to discharge plaintiff at will (Sabetay v Sterling Drug, 69 NY2d 329, 333; O’Connor v Eastman Kodak Co., 65 NY2d 724, 725; Murphy v American Home Prods. Corp., 58 NY2d 293, 305; Weiner v McGraw-Hill, Inc., 57 NY2d 458, 465-466; Martin v New York Life Ins. Co., 148 NY 117, 121).
The twist in this fact pattern is an asserted liability based on allegations that the corporate officers breached fiduciary duties of good faith and fair dealing arising from the shareholders’ agreement and on tortious interference with Ingle’s employment. The twist does not support a deviation from the governing principle in this case.
Calling this result "egregiously unfair," the two dissenting judges countered that "the relationship of a minority shareholder to a close corporation, if fairly viewed, cannot possibly be equated with an ordinary hiring and, in the absence of a contract, regarded as nothing more than an employment at will." They also noted that the "singular vulnerability of the minority shareholder in a close corporation" underlies the ""solicitude toward the rights of minority shareholders’ shown by our Legislature in enacting Business Corporation Law §§ 1104- a, 1118" (citations omitted).
Which leads to my final point. The majority in Ingle noted that the case did not require it to decide any issue of the legal rights afforded a minority shareholder to seek judicial dissolution under BCL § 1104-a for oppressive conduct by the majority. Indeed, subsequent cases confirm that a minority shareholder’s at-will employee status does not bar equitable relief of dissolution under § 1104-a, and that the shareholder’s employment may be considered an incident of stock ownership, cloaking him with a reasonable expectation of continued employment. In other words, the majority’s frustration of Joe the Shareholder’s reasonable expectation of continued employment may not give rise to a claim for lost wages based on wrongful termination of employment, but it does enable him to seek relief by way of a proceeding for judicial dissolution which, in turn, will trigger the majority’s statutory right to avoid dissolution by electing to purchase his shares for fair value under BCL § 1118.