You’ve met with your client who’s embroiled in a nasty dispute with his or her business partners. You’ve learned the facts and reviewed the documents. You’ve explained to your client the ins and outs, the pros and cons, the timing, expense and possible outcomes of bringing a judicial dissolution proceeding. The client has given you the green light to start the lawsuit. You’re at your desk, fingers on the keyboard, ready to draft papers. What documents do you prepare, and where do you start?
If the case involves a closely held New York business corporation and you’re seeking judicial dissolution based on 50/50 deadlock or minority shareholder oppression, the rules laid out in Article 11 of the Business Corporation Law require you to file a "special proceeding" consisting minimally of two documents: (1) a petition and (2) an order to show cause (OSC).
The petition differs slightly in format but closely resembles an ordinary complaint in which you’ll set forth in numbered paragraphs all of the relevant factual allegations along with the legal claims and relief sought. (Read here my recent post on the need to include detailed factual allegations in the petition rather than bare allegations of dysfunction or misconduct.)
The focus of this post is the OSC, which is a form of court order, prepared by the petitioner’s lawyer and affixed on top of the petition, submitted to the assigned judge for signature. At its most basic the OSC requires the respondents to appear in court on a specified date to "show cause" why the relief demanded in the petition should not be granted. It is used in special proceedings in lieu of the more familiar summons that accompanies a complaint in ordinary lawsuits.
When I draft dissolution papers, I almost always start with the OSC. Why? Because it forces me to think about requests for critical interim relief that ought to be included in the OSC, such as a temporary restraining order (TRO) or other measures necessary to preserve the status quo or otherwise protect my client’s interests while the litigation is pending. Once I determine the remedies I’m seeking in the OSC, I’m better able to draft a petition and any supplemental affidavits including facts and documents supporting the specific relief sought.
Let’s take a closer look at what goes into the OSC, using some recently filed sample OSC’s that I found on the state court system’s website. For comparison purposes we’ll also look at a sample OSC involving an LLC dissolution case. (I’ve chosen these particular samples for convenience and illustration purposes only, not as an endorsement.)
Sample OSC #1 is from a deadlock dissolution case filed earlier this month in Brooklyn Supreme Court, signed by Commercial Division Justice David Schmidt. As is typical, the first paragraph identifies the papers being filed with the court in support of the OSC, in this case including the verified petition as well as a separate affidavit of the petitioner. The inclusion of the affidavit usually indicates that the petitioner is seeking TRO relief which, indeed, is the case here.
The second paragraph contains the obligatory "show cause" command addressed to the respondents, also setting a return date for the court appearance and reciting the relief sought by the petitioner which usually tracks the relief specified in the petition. Under BCL Section 1106(a), the hearing date is supposed to be not less than four weeks after the date the OSC is signed, which is designed to allow sufficient time for publication notice (more on that below). In Sample OSC #1, Justice Schmidt sets a hearing date only three days after the OSC, undoubtedly because of the petitioner’s request for interim injunctive relief. A hearing on the merits of the dissolution petition likely will be scheduled at that time for a future date, subsequent to publication.
The next three, decretal paragraphs include various temporary restraints granted by the court against the presumed co-shareholder, restricting her activities on behalf of the subject company and also directing preservation of business records. Bear in mind, under court rules a party seeking a TRO generally must give reasonable advance notice to adversaries of the TRO application, giving them the opportunity to appear in person to oppose the TRO when the OSC is submitted to the judge for signature. Often this is the first encounter between opposing counsel, so it may take on an importance beyond the grant or denial of the specific relief requested.
Sample OSC #1’s final two paragraphs deal with publication and service of the OSC. The publication order tracks the requirements in BCL Section 1106(b) for publication of a copy of the OSC at least once in each of the three weeks preceding the hearing date in a newspaper of general circulation in the county in which the office of the corporation is located. The final provision for service by a specified date of the OSC on the corporation, the other 50% shareholder and the state tax commission conforms with BCL Section 1106(c).
Sample OSC #2 is another recent OSC signed by Justice Schmidt in a dissolution case by a one-third shareholder claiming oppression and deadlock. In certain respects the style and content are quite different than Sample OSC #1. The initial paragraph identifies the petitioner’s supporting affidavit only (likely the petition is packaged as an exhibit to the affidavit) followed by a series of clauses summarizing the petitioner’s factual allegations and the need for appointment of a receiver. In this case Justice Schmidt fixes a hearing date in the "show cause" paragraph over two months after the date of the OSC, which is consistent with the absence of any request for issuance of a TRO. The publication and service provisions in Sample OSC #2 are very similar to those in Sample OSC #1.
There is one other notable contrast between the two OSC’s. Missing from Sample OSC #1, but included in Sample OSC #2 in its penultimate paragraph, is language tracking BCL Section 1106(a)‘s provision authorizing the court to order the corporation’s officers and directors:
to furnish the court with a schedule of all information, known or ascertainable with due diligence by them, deemed pertinent by the court, including a statement of the corporate assets and liabilities, and the name and address of each shareholder and of each creditor and claimant, including any with unliquidated or contingent claims and any with whom the corporation has unfulfilled contracts.
Under BCL Section 1106(d), the required schedules must be filed within 10 days after the OSC is entered by the clerk. Particularly for the non-controlling minority shareholder-petitioner, who may not have access to the company’s books and records, inclusion in the OSC of such a provision can be quite helpful.
Do OSC’s in LLC dissolution cases look any different? The most important distinction (and money saver) is the absence of a publication requirement in LLC dissolution cases, which also allows the court to set a hearing date sooner than the minimum four weeks in BCL dissolution cases. Otherwise they’re pretty much the same, as illustrated by Sample OSC #3 signed by Brooklyn Commercial Division Justice Carolyn E. Demarest in an LLC dissolution case. The OSC includes typical TRO relief prohibiting any transactions outside the ordinary course of business, although you can see where the petitioner asked for more extensive TRO relief which the judge struck from the OSC. Sample OSC #3 also is interesting insofar as it borrows from the BCL by requiring the respondent to produce schedules of company assets, liabilities, etc., and by requiring service of the OSC on the Attorney General (presumably on behalf of the tax commission), neither of which is mentioned in the LLC Law.