Thirty years ago, in Matter of Kemp & Beatley, Inc., New York’s highest court defined minority shareholder oppression as “majority conduct [that] substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture.” For example, the court wrote,
A shareholder who reasonably expected that ownership in the corporation would entitle him or her to a job, a share of corporate earnings, a place in corporate management, or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment. [64 NY2d 63, 73]
One of the rarer applications of the reasonable-expectations test in corporate dissolution proceedings occurs when the controlling shareholder denies outright the petitioner’s status as a shareholder. The few such reported cases usually feature corporations that never followed corporate formalities, never issued stock certificates, and have no written shareholders’ agreement. The Pappas case, about which I wrote here and here, is a good example of a case in which the respondent’s repudiation of the petitioner’s stock interest was the primary factor supporting the court’s finding of oppressive conduct. As the court in Pappas wrote, it is “difficult to recognize a more reasonable shareholder expectation than that its interest will not be repudiated in its entirety, and that legal action would be required to compel its acknowledgment.”
The complaining shareholders in Pappas had been employed by, and actively involved in the management of, the subject businesses, hence they offered a multi-faceted picture of oppressive conduct by the controller. But what about a putative minority shareholder who has no involvement in the business other than as a passive investor or donee of shares? Such a shareholder cannot allege loss of employment or exclusion from a role in managing the corporation’s affairs. Is the controller’s denial of the petitioner’s shareholder status, by itself, enough to establish oppressive conduct under Kemp‘s reasonable-expectations standard?
The Quazzo Case
The question is at the core of a decision earlier this month by Manhattan Commercial Division Justice Marcy Friedman in Quazzo v 9 Charlton St. Corp., 2014 NY Slip Op 30625(U) [Sup Ct, NY County Mar. 11, 2014], in which she denied the controlling shareholder’s motion to dismiss a dissolution petition brought by his daughter who claimed a disputed one-third interest in three closely-held corporations.
The case involves a fight between daughter Christina Quazzo and father Ugo Quazzo over two real estate holding companies and a third, importing and equipment service company. It was undisputed that Ugo exercised control over the corporations since inception and that Christina, who resides overseas, had no involvement in their operations. Christina alleged that prior to 2001 Ugo gifted to each of her and her two brothers a one-third stock interest in the three corporations. Christina’s dissolution petition (read here) alleged that her father refused to acknowledge her stock ownership, refused her access to books and records, withheld her share of distributions and was diverting corporate assets.
Ugo denied giving his children shares and asked the court to dismiss Christina’s petition for lack of standing. He also argued that, even if she had been gifted the shares, as a passive shareholder who invested no capital of her own, she had no reasonable expectations that were or could have been defeated. (Read here and here Ugo’s and Christina’s respective supporting and opposing memoranda of law.)
Christina obtained from respondents in discovery documentary evidence of her stock ownership, including stock certificates dated between 1976 and 2001; written shareholder consents for action without a meeting for all three corporations signed by Christina and her two brothers; and Schedule K-1s for one of the companies issued to Christina for the years 1996-2001 and 2003-2010.
Justice Friedman noted that Ugo did not contest the authenticity of any of these corporate records and offered no explanation for their identification of Christina as shareholder, other than the K-1s which he contended were mistakenly prepared by his tax accountant. Ugo claimed that although he considered gifting shares to his children as part of his estate planning and prepared share certificates, he never delivered the shares to his children and never intended to transfer a present interest in the corporations to them.
Justice Friedman rejected Ugo’s argument that Christina lacked shareholder standing, finding that his “conclusory assertions of lack of donative intent do not warrant summary judgment in the face of Christina’s documentary evidence to the contrary.” In so ruling, Justice Friedman observed that “[p]hysical possession of the shares is not dispositive” and that Christina had presented sufficient evidence for trial of her “exercise [of] control over the stock” such as the written shareholder consents for action without a meeting.
But Was There Oppression?
Justice Friedman next addressed and rejected Ugo’s contention that, even assuming Christina owns a one-third stock interest, as a passive shareholder who never invested in the corporations, she could not state a claim of oppression as a matter of law. “Contrary to [Ugo’s] contention,” Justice Friedman wrote,
the facts that Christina did not invest capital, but rather allegedly was gifted the shares, and was not involved in management do not preclude her claim that she had reasonable expectations of economic benefit as a result of ownership of shares in the corporations.
. . . [R]espondents do not, on this inadequately briefed record, demonstrate as a matter of law that an oppression claim may not be maintained based on the very denial of a petitioner’s status as a shareholder. Indeed there appears to be some authority that has recognized a claim on this basis.
The “some authority” cited by Justice Friedman included the above-mentioned Pappas case and a 1998 appellate decision in Matter of Pickwick Realty, Ltd. in which the court held that the controlling shareholders defeated the petitioner’s reasonable expectations by denying his one-third stock interest in the subject corporation. The court was not persuaded to the contrary by the case precedents cited by Ugo including Matter of Farega Realty Corp., a 1987 appellate ruling dismissing an oppression case where the petitioner was a “passive investor” who neither sought responsibilities in the day-to-day management nor expected the corporation to provide him with a job.
Notwithstanding her apparent rejection of Ugo’s argument, Justice Friedman wrote that “the court makes no final determination on the motion, as briefed, as to whether petitioner has a viable oppression claim” under Business Corporation Law § 1104-a(a)(1). Instead, she bottomed her denial of Ugo’s summary judgment motion on her holding that Christina “states a viable independent claim for dissolution pursuant to § 1104-a(a)(2)” based on her allegations that Ugo looted, wasted, and diverted for non-corporate purposes assets of the corporations.
There’s a theoretical dissonance between cases like Quazzo, where the petitioner allegedly was gifted her shares in pre-existing corporations and admittedly neither sought nor played a role in the corporations’ affairs, and Kemp‘s formulation of the reasonable-expectations test predicated on the petitioning shareholder’s reasonable expectations “central to the petitioner’s decision to join the venture.” But it’s important to recognize that the court in Kemp expressly refrained from establishing a rigid standard for oppression, stating,
It would be inappropriate, however, for us in this case to delineate the contours of the courts’ consideration in determining whether directors have been guilty of oppressive conduct. As in other areas of the law, much will depend on the circumstances in the individual case. [64 NY2d at 73]
It’s also important to recognize that courts have broad remedial powers upon a finding of shareholder oppression, that the drastic remedy of dissolution is a last resort, and that, in cases involving the denial of rightful stock ownership of a passive shareholder, a compulsory buy-out, or the restoration and enforcement of minority shareholder rights to information, responsible management and profit distributions, may suffice without destroying the company.