Few, fewer, and almost non-existent, is how I would quantify the number of reported court decisions, respectively, in cases brought by minority shareholders for common-law dissolution decided (1) on pre-answer motions to dismiss the pleadings, (2) on pre-trial summary judgment motions, and (3) after trial.
Which I why I feel compelled to write about a decision last month by a Manhattan appellate panel affirming in part and modifying in part a post-trial judgment for the plaintiff 15% shareholder in a common-law dissolution case, even though the decision reveals few details of the allegations and claims involved in the dispute.
The case is Gjuraj v. Uplift Elevator Corp., 2013 NY Slip Op 06811 (1st Dept Oct. 22, 2013), in which the Appellate Division, First Department, affirmed a judgment entered after a bench trial before Bronx Supreme Court Justice Sharon A.M. Aarons insofar as it determined that the plaintiff had a right to common-law dissolution, but modified the trial court’s remedy by limiting it to a fair value buy-out, as opposed to both a buy-out and dissolution.
Prior to New York’s adoption in the late 1970’s of a statutory remedy for minority shareholder oppression under § 1104-a of the Business Corporation Law, a minority shareholder alleging squeeze-out or other coercive conduct by controlling shareholders was limited to a common-law claim for dissolution which, as somewhat amorphously articulated by New York’s highest court in Leibert v. Clapp, 13 NY2d 313 (1963), required proof that the majority owners “have so palpably breached the fiduciary duty they owe to minority shareholders that they are disqualified from exercising the exclusive discretion and the dissolution power given to them by statute.”
The common-law dissolution remedy remains relevant because, in their infinite if not dubious wisdom, our legislators included in § 1104-a minimum ownership of 20% of the corporation’s voting shares as a prerequisite for standing to invoke that statute. Thus, in the last several decades suits for common-law dissolution almost always are brought by minority shareholders holding non-voting shares or holding less than 20% voting shares. A good example of this, which I wrote about here, can be found in Justice Alan Scheinkman’s comprehensive opinion last year in White v. Fee.
As best as I can divine from the court’s sparse opinion in Gjuraj, the plaintiff 15% shareholder brought suit asserting direct and derivative claims against the majority shareholder of a close corporation engaged in the elevator maintenance and repair business. Plaintiff apparently based his claims for breach of fiduciary duty and common-law dissolution on allegations that the majority owner distributed profits to a non-shareholder employee without making a 15% distribution of profits to plaintiff; by relocating the corporation’s office without plaintiff’s knowledge and without giving plaintiff access to it; and by closing out the corporation’s bank account on which plaintiff was a signatory and opening another corporate account on which plaintiff was not a signatory.
Following a trial, the lower court entered judgment for the plaintiff against the corporation, its majority shareholder, and the non-shareholder employee, directing the corporation’s dissolution and also awarding plaintiff an undisclosed sum for the fair value of his 15% stock interest based on expert testimony by plaintiff’s business appraiser.
On appeal, the First Department rejected the majority shareholder’s argument, that his conduct was protected by the business judgment rule, because it had not been raised as an affirmative defense in the defendant’s answer. The appellate panel also upheld the majority shareholder’s personal liability for the corporation’s debts to plaintiff on the ground that “‘a corporate officer who participates in the commission of a tort may be held individually liable, regardless of whether the officer acted on behalf of the corporation in the course of official duties and regardless of whether the corporate veil is pierced'” (quoting Peguero v 601 Realty Corp., 58 AD3d 556, 558 [1st Dept 2009]).
In contrast, the court vacated the judgment against the non-shareholder employee, finding that as an employee he did not owe the plaintiff any fiduciary duty.
The appellate court’s opinion offers no analysis in support of its affirmance of the lower court’s determination concerning common-law dissolution, other than to say that the lower court “used the correct standard in determining that plaintiff had a right to common-law dissolution” and citing to Fedele v Seybert, 250 AD2d 519 (1st Dept 1998), where the court reversed a lower court’s pre-trial ruling that improperly converted a common-law dissolution claim to an unpleaded § 1104-a claim.
Without seeing the lower court’s orders and judgment, it’s impossible to know exactly how the lower court fashioned the monetary relief granted to plaintiff, i.e., as a “damages” award or as a buy-out. I can only infer from the appellate decision’s statement, that “[t]he trial court properly relied on plaintiff’s expert’s valuation methodology,” that the amount awarded reflected the value of plaintiff’s stock interest and therefore constituted a de facto buy-out however labeled.
The inference also is supported by the appellate court’s modification of the lower court’s judgment, enforcing a buy-out remedy while vacating the dissolution of the corporation. The appellate decision unfortunately offered but a few words on the subject:
However, we find that a buy-out of plaintiff’s interest for fair value, as opposed to both the buy-out and dissolution, is the more appropriate remedy here.
The court’s citation to Leibert v. Clapp in support of this statement is slightly more helpful. There, in dicta at the opinion’s conclusion, the Court of Appeals explained:
It is hardly necessary to add that whether the plaintiff will be able to prove his allegations is a question which must necessarily await a trial, as is also the further question whether, if the plaintiff does prove those allegations, the court should grant either the relief of dissolution which the plaintiff seeks or, alternatively, such other relief as might seem more appropriate once the actual facts and circumstances are ascertained. All that we are now deciding is that the complaint states a cause of action which would, in a proper case, enable the court to grant the remedy of dissolution which the plaintiff requests.
The Gjuraj decision also cited Matter of Davis (Shayne-Levy Associates, Inc.), 174 AD2d 449 (1st Dept 1991), where the court affirmed a fair value buy-out requested by the respondent corporation over the petitioner’s objection in a common-law dissolution case. Between Davis and Gjuraj, therefore, it’s safe to say a court may compel buy-out in a common-law dissolution case whether sought or resisted by either side.