As I’ve previously pointed out (read here), when shareholder disputes arise, including corporate dissolution contests, courts will readily stay litigation proceedings in favor of arbitration where the parties’ shareholders’ agreement provides for mandatory arbitration. There is no exception for dissolution cases arising from 50-50 deadlock, as the unsuccessful petitioner recently learned in Matter of Brooks (Aqua Shield Inc.), Short Form Order, Index No. 1572/09 (Sup Ct Nassau County June 5, 2009).
Aqua Shield Inc. was formed in 2000 to market a patented telescopic swimming pool enclosure invented by co-founder and petitioner Bob Brooks who, along with his wife, holds 50% of the company’s shares. The other 50% is held by investor Igor Korsunsky and his wife.
The October 2001 shareholders’ agreement has a broad arbitration clause requiring arbitration of "any controversy or claim arising out of or relating to [this] Agreement or its breach . . .."
In November 2008, the Korsunskys commenced an arbitration proceeding with the American Arbitration Association (AAA) against the Brookses who interposed an answer. The AAA issued an order on motions and scheduling orders in February 2009, and scheduled a preliminary hearing for April 2009.
Meanwhile, in late January 2009, the Brookses filed a judicial proceeding to dissolve Aqua Shield based on deadlock pursuant to Business Corporation Law Section 1104. The Korsunskys moved to dismiss the petition or, alternatively, to compel arbitration and stay the judicial proceeding.
The Brookses argued that arbitration should not be compelled because the matter is "unique in that there is a 50%/50% deadlock among the shareholders." The argument carried no weight with Nassau County Commercial Division Justice Ira B. Warshawsky, who wrote that "the Court does not consider this unique, or, in fact, even unusual." He then elaborated:
The arbitration proceedings appear to be well underway, and it is reasonable to expect a determination in the near future. The Court declines to dismiss the current action, since jurisdiction of the Court is appropriate for a motion to confirm or disaffirm the findings of the Arbitrator. The Brooks have not sought to stay arbitration, and in fact have actively participated in the process. The commencement of a proceeding in this Court, approximately two months after the Notice of Intent to Arbitrate, is not a motion to stay arbitration, and even if it were interpreted as such, it would be untimely and inappropriate.
. . . The agreement to arbitrate is clear, the parties have participated in the arbitration proceeding, and the arbitrator has determined that the issues presented are arbitrable. Under these circumstances it is appropriate to defer further action to the agreed-upon arbitration process.
The arbitration clause in the Aqua Shield shareholders’ agreement is lifted almost verbatim from the AAA-approved form. As this case teaches anew, lawyers should not assume that corporate dissolution of any type falls outside the scope of the clause.