The statutes and decisional law governing dissolution of close corporations can vary significantly from state to state, which is generally why this blog gives scant attention to case developments outside New York (with Delaware being the sole, consistent exception). Occasionally, however, I come across an out-of-state decision with trans-border implications meriting attention.
One of them, courtesy of the Detroit Business Law Blog, is an unpublished ruling by a Michigan intermediate appellate court last year in Schimke v. Liquid Dustlayer, Inc., No. 282421 (Ct. App. Sept. 24, 2009). The court in Schimke upheld the compelled buyout of a minority shareholder based on a threat by the controlling shareholder, never actually carried out, to have the corporation redeem the controlling shareholder’s stock on terms not made available to the minority shareholder.
Plaintiff John Schimke had nearly a one-third interest in Liquid Dustlayer, with the balance owned by controlling shareholder and sole director Richard Rademaker and his daughter. The proposed redemption of Rademaker’s interest apparently would have left the daughter as controlling shareholder. As described by the appellate court, the evidence at trial showed that
Rademaker repeatedly indicated that he wanted Liquid Dustlayer to redeem his stock and that he was not willing to redeem [Schimke’s] shares immediately, or at the same price. Even after transferring some of his stock to his daughter, Tina, Rademaker controlled a majority of the shares. Rademaker had his attorney draft closing documents for the company-financed redemption of his remaining stock, at $15,000 a share. Rademaker also proposed scheduling a shareholders’ meeting on the issue, but stated that the meeting could be held on the same day as the closing, thus suggesting that whatever happened at the meeting was unlikely to affect Rademaker’s plans.
Rademaker testified that the redemption was "merely a hope or a dream that had not been finalized, not a real plan," and that he "voluntarily refrained from implementing the redemption" after Schimke brought an action for corporate dissolution. He argued that, as an "inchoate" plan, the proposed redemption was not actionable under Michigan’s statute authorizing judicial dissolution, Section 489 of the Michigan Business Corporation Act (MCL 450.1489), which defines "willfully unfair and oppressive conduct" as "a continuing course of conduct or a significant action or series of actions that substantially interferes with the interests of the shareholder as a shareholder."
The trial court ruled, and the appellate court agreed, that Rademaker’s discriminatory redemption plan, though unfulfilled, met the statutory criteria as a "well-formed imminent plan to cause Liquid Dustlayer to redeem his remaining shares of stock, but not plaintiff’s shares, for $15,000 a share." In support of its conclusion that "oppressive conduct that has not yet been completed is actionable under the statute," the court also relied on the statute’s separate remedial provisions which, upon a finding of oppressive conduct, authorize the court to cancel, alter, enjoin, or direct any act of the corporation, shareholders, directors or officers.
Would Schimke fly in a New York dissolution proceeding? I have not come across any New York case law on point. Unlike Michigan’s statute, the New York statute authorizing judicial dissolution at the behest of an oppressed minority shareholder, Section 1104-a(a)(1) of the Business Corporation Law, does not define "oppressive" conduct. New York’s highest court defined the term in Matter of Kemp & Beatley, 64 NY2d 63 (1984), using a reasonable expectations test that is met "when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture." The operative "defeats expectations" language in the Kemp formulation does not seem materially different than the "substantially interferes with" language in the Michigan statute, at least in regard to making any distinction between oppressive acts completed versus uncompleted. On the other hand, the New York statute does not contain express remedial provisions like those in the Michigan statute upon which the Schimke court apparently relied in construing the statutory definition of oppressive conduct.
If and when a New York case comes along testing the proposition, the issue may boil down to a factual one of whether the alleged oppressive conduct constituted idle chatter or something that placed the minority shareholder at a real and imminent risk of irreparable harm to his or her shareholder interests, for example, in continued employment or having some voice in the company’s management. Any New York court addressing the issue also will have to consider whether judicial dissolution is the appropriate remedy for oppressive conduct that has not yet been put into action, such that an injunction or rescission of a shareholder or board resolution might offer the minority shareholder sufficient protection.