An appellate ruling in a case featuring dueling dissolution petitions popped up last week, reminding us of the important strategic differences vis-à-vis the buyout when considering whether to seek involuntary corporate dissolution under one or the other of New York’s pair of asymmetric statutes governing shareholder oppression and deadlock.
The petitioning minority shareholder in Matter of Carson (Carrabasset Management Corp.), 90 AD3d 1279, 2011 NY Slip Op 09063 (App. Div. 3rd Dept. Dec. 15, 2011), sought judicial dissolution of two corporations under Business Corporation Law §1104-a based on shareholder oppression by the majority shareholder who allegedly resigned and abandoned his corporate responsibilities.
A petition brought under §1104-a triggers the other shareholder’s absolute right under BCL §1118 to elect to purchase the petitioner’s shares for "fair value" to be agreed upon by the parties or, absent agreement, determined by the court. Quite often the minority shareholder will petition for dissolution under §1104-a hoping and expecting that the respondent majority shareholder will elect to purchase the petitioner’s shares in lieu of dissolution.
If that was the expectation in Carson, the petitioner surely was surprised and disappointed when, instead of electing to buy out petitioner, the respondent counterclaimed to dissolve the two corporations under BCL §1104, which applies to instances of directors and shareholders deadlock. Section 1104, unlike §1104-a, does not give the respondent shareholder the right to purchase the petitioner’s shares for fair value.
After discovery and multiple conferences, the respondent submitted an order for the trial court’s review that dissolved both corporations. The petitioner objected to the order and requested that, instead of dissolution, the court allow petitioner to purchase respondent’s majority share of the corporations. The trial court, by Justice Stephen A. Ferradino of Saratoga County Supreme Court, issued the order submitted by respondent and dissolved both corporations, from which the petitioner appealed.
The petitioner offered two arguments in support of his right to compel a purchase of the respondent majority shareholder’s stock interests. First, he argued that the lower court erred by not holding a hearing to determine whether a forced buyout by petitioner of respondent’s interest was a more equitable remedy than dissolution. The argument relied on BCL §1109, which states that, "[a]t the time and place specified in the order to show cause, or at any other time and place to which the hearing is adjourned, the court or the referee shall hear the allegations and proofs of the parties and determine the facts." Second, he argued that the lower court erred by not conditioning its order of dissolution on giving petitioner the opportunity to purchase the respondent’s shares.
The Albany-based Appellate Division, Third Department, rejected both arguments and affirmed the dissolution order. As to the lower court’s failure to hold a hearing, the court wrote:
Business Corporation Law § 1109 states that "the court . . . shall hear the allegations and proofs of the parties and determine the facts." Here, petitioner claimed in his petition that dissolution of both corporations was a "necessity" and argued that it was "the only feasible means" available to protect his investment because respondent, as the majority shareholder, was guilty of oppressive conduct. Given the content of these allegations and the concession implicit in both petitions that dissolution was a remedy that met the needs of both parties, a hearing was not required.
The court likewise rejected petitioner’s second argument in support of his right to purchase the respondent’s shares, explaining:
Petitioner also argues that Supreme Court should have given him the opportunity to purchase respondent’s majority share when it ordered both corporations dissolved. However, such relief is not available to a petitioner who makes an application for dissolution pursuant to Business Corporation Law § 1104-a. The statute specifically provides that "any other shareholder . . . may, at any time within ninety days after the filing of such petition . . ., elect to purchase the shares owned by [petitioner] at their fair value and upon such terms and conditions as may be approved by the court" (Business Corporation Law § 1118 [a] [emphasis added]).
This is an important point which, for better or worse, underscores New York’s one-sided approach to the buyout remedy. That is, only the respondent in an oppressed shareholder proceeding under §1104-a can elect to purchase the petitioner’s shares, and only the respondent is given the last-resort opportunity to purchase the petitioner’s shares as a condition of the order of dissolution. Compare this scheme with, e.g., New Jersey’s corporate dissolution statute which gives the court authority to order a buyout by any shareholder of any shareholder made a party to the proceeding, regardless who initiated the dissolution case.
There’s no clue in the decision as to why the respondent didn’t simply consent to dissolution (without admitting the allegations of oppression) rather than counterclaim for the same relief. In any event, had the respondent in Carson counterclaimed for dissolution under §1104-a instead of §1104, the petitioner clearly could have elected to purchase the respondent’s majority stake under §1118. I can only assume that the respondent chose §1104 deliberately to foil petitioner’s counter-buyout demand, either to secure a stronger negotiating position down the road or perhaps because he anticipates greater benefits from a winding up and liquidation of the business assets.