Ready to take a pop quiz? Here we go:
- Can a 50% shareholder of a closely held corporation petition for judicial dissolution under the deadlock statute, Business Corporation Law § 1104? __ Yes __ No
- Can a 50% shareholder of a closely held corporation petition for judicial dissolution under the oppressed shareholder statute, Business Corporation Law § 1104-a? __ Yes __ No
- Can a 50% shareholder of a closely held corporation petition for judicial dissolution under common law? __ Yes __ No
- Can a 50% shareholder of Company A, who also is a director of Company B in which Company A holds a majority interest, petition for judicial dissolution of Company B under common law? __ Yes __ No
Let’s see how you did. If you answered “Yes” to #1, you’re right. But that was easy. Without even looking at the statute, BCL § 1104, logic tells you that a shareholder who possesses half the available voting power — that is, not enough to secure majority approval for shareholder or board action but enough to block the other 50% shareholder from doing the same — should be able to seek dissolution where deadlock results from disagreement with the other 50% shareholder.
Question #2 is harder. Logic suggests a “No” answer. After all, when we think of an “oppressed” shareholder, we think of a non-controlling shareholder with 49% or less voting power who is subjected to one or another form of overreaching or squeeze-out by the controlling 51% or more majority shareholder.
But a “No” answer is incorrect because the statute says otherwise. Section 1104-a(a) authorizes a dissolution petition by “holders of shares representing twenty percent or more of the votes of all outstanding shares of a corporation” on specified grounds including “the directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders.” As New York’s highest court recognized when confronted with the issue in 1985, in Matter of Christo Bros., Inc., 64 NY2d 975, the statute sets a 20% minimum but specifies no maximum so a 50% shareholder — or a 99% shareholder for that matter — has “more” than 20% and therefore has standing under the statute.
It may not be common, but sometimes a 50% shareholder by agreement will cede full or partial voting control to the other 50% shareholder, thereby subjecting themselves to oppressive board or shareholder actions. Plus, § 1104-a includes several grounds for dissolution other than oppression, such as looting, waste or diversion of corporate assets which may have nothing to do with stock percentages. As I’ve discussed previously here and here, a 50% shareholder also may be motivated to petition under § 1104-a by the expectation that the other 50% shareholder will exercise their statutory right to elect to purchase the petitioner’s shares for fair value — a right that doesn’t exist when the petition is brought under the deadlock statute alone.
Likely you don’t know the answer to Question #3 unless you’ve previously studied common-law dissolution. For those who haven’t, under New York common law, which apparently pre-dates statutory dissolution remedies, courts have wielded the power to dissolve closely held corporations where, as described in the most widely cited New York case on the subject, Leibert v Clapp, 13 NY2d 313 , “the directors and majority shareholders have so palpably breached the fiduciary duty they owe to the minority shareholders that they are disqualified from exercising the exclusive discretion and the dissolution power given to them by statute.” An appellate ruling some years later in Matter of Sternberg, 181 AD2d 897 [2d Dept 1992], reinforced that the common-law dissolution remedy is “available only to minority shareholders.” So it’s a “No” answer for #3.
Question #4 is really just a variation on #3 and gets the same “No” answer, supplied by a decision last week in Matter of Candlewood Holdings, Inc., 2015 NY Slip Op 00533 [2d Dept Jan. 21, 2015], in which the Appellate Division, Second Department, reversed a lower court’s order granting common-law dissolution at the behest of a director who’s also a 50% shareholder of a holding company with a majority interest in the company that was the subject of the dissolution petition.
Candlewood is the latest chapter in a ten-year, serial litigation between competing 50/50 shareholder factions of a company called ANO, Inc. whose primary asset is a 2/3 ownership interest in Candlewood Holdings, Inc. which, in turn, owns a 90% interest in a company that owns and operates a commercial property. Back in 2009 I wrote about the fight over ANO’s ownership, centering on the meaning and effect of a nominee agreement, resulting in a court order declaring that the two, adverse owners each holds a 50% interest (read here). Fast forward to 2013, when the lower court denied a petition for dissolution of Candlewood Holdings insofar as it was based on § 1102 of the Business Corporation Law, which authorizes a petition based on the vote of the majority of the board of directors, but nonetheless ordered dissolution under common law (read here).
In last week’s ruling, the appellate court affirmed the denial of dissolution under BCL § 1102 but reversed the grant of common-law dissolution and dismissed the petition, stating:
“[T]he remedy of common-law dissolution is available only to minority shareholders who accuse the majority shareholders and/or the corporate officers or directors of looting the corporation and violating their fiduciary duty” (Matter of Sternberg [Osman], 181 AD2d 897, 897-898; see Matter of Kemp & Beatley [Gardstein], 64 NY2d 63, 69-70; Leibert v Clapp, 13 NY2d 313, 315-317; Ferolito v Vultaggio, 99 AD3d 19, 28). The petitioners did not allege that a majority of shareholders, the directors, or the officers looted the corporation or breached a fiduciary duty to Arieh Yemini as a minority shareholder. Accordingly, the Supreme Court should have denied the petition and dismissed the proceeding upon determining that the petitioners lacked standing under Business Corporation Law § 1102.
Bottom line: a 50% shareholder has standing to seek dissolution under BCL § 1104 (deadlock) and BCL § 1104-a (oppression, etc.) but not under common law.