In 1979, New York enacted Sections 1104-a and 1118 of the Business Corporation Law, the former giving minority shareholders of close corporations the right to petition for judicial dissolution based on “oppressive actions” by the controlling shareholders, and the latter giving the corporation and non-petitioning shareholders the right to avoid dissolution by electing to purchase the petitioner’s shares for “fair value.”
As originally enacted, Section 1118 did not prohibit the revocation of the election to purchase. This encouraged the electing, controlling shareholders to engage in delay tactics with the aim of forcing the petitioning minority shareholder to succumb to a lesser buy-out price under the threat or actuality of revocation of the election to purchase.
The legislature responded in 1986 by amending Section 1118(a) to provide that “[a]n election pursuant to this section shall be irrevocable unless the court, in its discretion, for just and equitable considerations, determines that such election be revocable.”
The post-amendment case law almost without exception has rejected attempts to revoke elections under Section 1118(a). For instance, in Matter of Pace Photographers, Ltd., 163 AD2d 316, 557 NYS2d 443 (2d Dept 1990), the appellate court affirmed an order denying leave to revoke a buy-out election sought after the court determined that the buy-out price was not dictated by the amount specified in the shareholders agreement. The court found that the electing shareholders’ claimed financial inability to acquire the shares “rang hollow” in view of their earlier assurances that their combined net worth was more than sufficient to effectuate the buy out.
Other cases refusing bids to revoke elections include:
Matter of Chu (Sino Chemists, Inc.), 192 AD2d 315, 595 NYS2d 465 (1st Dept 1993) (reversing order permitting revocation of election after referee’s valuation of shares)
Matter of Smith, 230 AD2d 863, 646 NYS2d 711 (2d Dept 1996) (reversing order permitting revocation by two of three electing shareholders after the third shareholder filed for bankruptcy)
Matter of Penepent Corp., 96 NY2d 186, 726 NYS2d 345 (2001) (affirming order denying revocation of election following death of petitioning shareholder, where electing shareholder sought to invoke buy-out terms in shareholders agreement triggered by shareholder’s death, in lieu of fair value appraisal)
The one and only post-amendment case I’ve seen in which a court allowed revocation of a buy-out election is Matter of Rey (Pan American Cash & Carry Corp.), 152 AD2d 246, 548 NYS2d 524 (2d Dept 1989). In that case, after the election was made but before a valuation hearing was held, a fire destroyed the supermarket business’s premises, effectively terminating the corporation’s operations and, even accounting for fire insurance proceeds, leaving it with a negative net worth. The court found no evidence that the electing shareholder had delayed the valuation proceedings. It also found that the unforeseeable business casualty justified revocation, stating:
We are convinced that an unforeseeable fire, which impairs, if not destroys, the value of corporate stock, constitutes a “just and equitable consideration”, within the purview of the statute. Under the circumstances, it would be unreasonable to expect Capote to purchase Rey’s shares at their prepetition value, when the stock has been rendered worthless because of an unfortunate and unanticipated event. Rather, the parties, as equal shareholders, should proportionately bear the financial losses occasioned by the fire.
Matter of Gold
An unpublished decision last month by Nassau County Commercial Division Justice Stephen A. Bucaria, in Matter of Gold (Hazardous Elimination Corp.), Short Form Order, Index No. 017735/10 (Sup Ct Nassau County Sept. 21, 2012), adds to the list of cases denying requests to revoke an election to purchase in Section 1118 valuation proceedings.
This is my second post about the Gold case. Back in April 2011, I wrote about a prior decision by Justice Bucaria granting the petitioning minority shareholder’s application to require the electing respondent shareholder to post a bond to secure the eventual fair-value award (read here). Around the same time as that earlier ruling, the parties agreed to engage jointly a business appraiser to determine fair value and to be bound by that determination, absent “manifest error.”
On May 1, 2012, the appraiser submitted its final report valuing petitioner’s 49% interest in the company at $1,035,000. The petitioner thereafter moved for an order directing the respondent to purchase his shares at the appraised value or to enter a money judgment in the same amount. The respondent cross moved for an order permitting her to revoke her election to purchase petitioner’s shares. Revocation was warranted, she argued, because following the appraisal the company was denied a claim for municipal work it had performed for almost $860,000, and would have to write off an additional $2.2 million receivables due from the project contractor.
Justice Bucaria’s decision contains a useful summary of the applicable law:
The legislative purpose in rendering a § 1118 election irrevocable is to prevent the majority shareholder from making an election, prolonging negotiations as to fair value, and then revoking the election, thus delaying the dissolution proceeding and exhausting the petitioning shareholder’s resources. Once an election is made, subsequent events, such as the death or retirement of the petitioning shareholder, are not ground for determining the election to be revocable. Nor should the majority shareholder be permitted to revoke her election once the fair value of petitioner’s shares has been determined. [Citations omitted]
Justice Bucaria makes short shrift of the respondent’s argument supporting revocation, writing as follows:
The court determines that the parties having stipulated to be bound by the valuation report, it is conclusive as to the fair value of petitioner’s shares. The subsequent write off of receivables is not grounds for allowing respondent to revoke her election. Accordingly, respondent’s cross motion for leave to revoke her election to purchase petitioner’s share is denied.
Although the decision does not provide detail, presumably the bad receivables relate to work performed prior to the valuation date in 2010, in which case one would expect the appraiser to have taken into account the risk of collection. In any event, the fact that respondent agreed to be bound by the appraisal left her with little or no room to argue for an “equitable” revocation of her election to purchase.
One final observation: The respondent’s attempt to revoke after the valuation, based on a downturn in the company’s financial condition, underscores the importance of the petitioner’s prior request that respondent be required to post a bond to secure the award. The court’s prior order requiring respondent to post a $750,000 bond nonetheless left the petitioner with a hefty, unsecured portion of his $1,035,000 fair value award.