A watershed moment or a forgettable outlier? It is often difficult to predict how much a novel decision will impact the body of laws governing closely-held corporations and their shareholders. Decisions that seem the most innovative can be forgotten or distinguished, while seemingly run-of-the-mill decisions can become the footings for a fundamental change in the law. Cases are won and lost in the grey areas created by those novel decisions, and they’re what keep the avid followers of New York caselaw coming back for more.
Consider the First Department’s decision last week in Stile v C-Air Customhouse Brokers-Forwards Inc., which arguably seems poised to make at least two big waves in the area of minority shareholder’s rights (2022 NY Slip Op 02244 [1st Dept April 5, 2022]). First, the Court enforces an anti-dissolution provision of the type previously deemed void as a matter of public policy. Second, the Court upholds the minority shareholder’s common law cause of action for money damages arising from alleged shareholder oppression. This post explores those rulings and their potentially significant impact.
The “Stay Away” Settlement Agreement
We covered the trial court’s decision in Stile in this post. To briefly recap: C-Air Customhouse Brokers-Forwards, Inc. and C-Air International (collectively, “C-Air” or the “Companies”) provide customs brokerage, freight forwarding, and export services to international shippers. Prior to 2008, C-Air was equally owned by three shareholders: Salvatore Stile, Milton Heid, and Augustus Antico, all of whom were active participants in C-Air’s business.
After a 2008 lawsuit pitting Heid and Antico against Stile, the parties entered into a settlement agreement providing that Stile would stay away from the Companies in exchange for his receiving income and distribution payments until his death. Specifically, Stile promised to “forever forebear from commencing, prosecuting, and/or participating in, directly or indirectly, any action or proceeding against Heid, Antico, [or C-Air] concerning . . . matter[s] related to the operation and/or business of [C-Air].” The settlement agreement further provided that Stile would not petition for dissolution of C-Air, sue for distributions, or petition for access to C-Air’s books and records.
Upon Stile’s death, the Companies and the majority shareholders refused to recognize Stile’s Estate’s status as a shareholder.
Stile’s Estate (the “Estate”) commenced suit in November 2020 seeking, among other relief in a fifteen-count complaint, dissolution, money damages, and a declaratory judgment stating that the Estate is a shareholder of C-Air. Of particular note here, the Estate sought dissolution of C-Air under the common law and under BCL 1104-a and, in the second cause of action, the Estate sought money damages for minority shareholder oppression by denying that the Estate held shareholder status and denying it had the right to access the Companies’ books and records.
The trial court refused to dismiss the Estate’s claims, finding that the settlement agreement and release did not extinguish the Estate’s rights as a shareholder upon Stile’s death.
The First Department’s Decision
Defendants appealed the trial court’s order, arguing that the settlement agreement required Stile’s Estate to surrender Stile’s shares upon his death. Defendants alternatively argued that the settlement agreement’s prohibition on Stile from petitioning for dissolution applied equally to the Estate, and the Estate’s dissolution claims should therefore be dismissed.
The First Department modified the trial court’s order. As to the Estate’s claims for common law dissolution and for dissolution under BCL 1104-a, the First Department held that those claims should have been dismissed, because “in the settlement agreement, Stile agreed to not seek dividends or such dissolution.”
After dismissing the Estate’s claims for dissolution, the Court nonetheless allowed the Estate’s minority shareholder oppression claim seeking money damages, holding:
The second cause of action alleges that defendants “are guilty of shareholder oppression” because they refused to permit plaintiff to inspect the Companies’ books and records and they refused to recognize her as a shareholder. . . . [T]o the extent this claim is based on defendants’ refusal to recognize plaintiff as a shareholder, it was properly permitted to continue.
In a relatively short order, Stile gives business divorce aficionados much to consider in the area of minority shareholders’ rights.
Stile and Anti-Dissolution Provisions
A few weeks ago, Frank McRoberts wrote about anti-dissolution provisions in shareholder agreements. As explained in Matter of Validation Review Assocs., Inc., contractual provisions that absolutely bar a shareholder from seeking judicial dissolution are generally void as against public policy (223 AD2d 134 [2d Dept 1996]). As Validation Review holds, “[s]uch a provision violates the public policy for the protection of shareholders as expressed by the Legislature and under the common law.”
While Validation Review and its progeny were not cited by either party in the Stile briefing, consider what impact Stile has on the principle that anti-dissolution provisions are void as against public policy. In Stile, the First Department enforced the anti-dissolution provision of the settlement agreement, dismissing the Estate’s dissolution claims simply because Stile agreed in the settlement agreement not to seek judicial dissolution.
Can Stile and Validation Review be reconciled? It is true that in Validation Review, the anti-dissolution provision appeared in the corporation’s shareholders agreement; in Stile the provision appeared in a subsequent settlement agreement, which was so-ordered by the court overseeing the parties’ 2008 dispute. On the one hand, the fact that the settlement was so ordered by a court in 2008 (the parties did not raise with the court the potential unenforceability of the anti-dissolution provision then), lends additional weight to the enforceability of the settlement agreement. On the other hand, I’m not sure why an anti-dissolution provision would be against public policy in a shareholders’ agreement but enforceable in a settlement agreement.
Stile and Shareholder Oppression Claims
An even more interesting question is the impact of the First Department’s holding that the Estate may pursue its claim for money damages based on “shareholder oppression” to the extent the claim is based on defendants’ refusal to recognize the Estate as a shareholder.
Until Stile, allegations of “shareholder oppression” in New York occurred exclusively within claims for dissolution under BCL 1104-a. The “shareholder oppression” claim comes straight from BCL 1104-a, which provides that a minority shareholder holding at least 20% of the voting rights may petition for dissolution on the grounds that the majority is guilty of “illegal, fraudulent or oppressive actions toward the complaining shareholders.” The New York Court of Appeals in Matter of Kemp & Beatley, defined oppression under 1104-a, stating “oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture” (64 NY2d 63, 73 ). Since that seminal definition, shareholder oppression has always been a creature of BCL 1104-a as a ground for invocation of the court’s equitable power to dissolve a closely-held corporation.
In 2020, then trial-court Justice Scarpulla provided a great summary of how a shareholder oppression claim was coterminous with a claim for dissolution under BCL 1104-a. In BML Properties Ltd. v China Const. Am., Inc., Justice Scarpulla dismissed an independent, non-BCL 1104-a cause of action for shareholder oppression, holding that “In New York, a cause of action for shareholder oppression is typically brought under § 1104-a of New York Business Corporation Law…[and] [i]n any event, BCL § 1104-a specifically provides for the remedy of dissolution in the case of alleged shareholder oppression, not damages” (2020 NY Slip Op. 30816[U], 9 [NY Sup Ct, New York County 2020]).
Stile brings shareholder oppression out of the BCL 1104-a context. By dismissing the Estate’s claim for dissolution under BCL 1104-a but also holding that the Estate may pursue its claim for shareholder oppression, the First Department arguably opens a door that has not previously been opened in New York business divorce: money damages for shareholder oppression.
How much does Stile open the door to a monetary oppression claim? In Stile, the Estate’s remaining “oppression” claim hinges on the allegation that the majority refused to recognize the Estate as a shareholder. Those allegations also form the basis of the Estate’s eleventh and twelfth claims for breach of fiduciary duty. In circumstances like these, where the allegedly oppressive conduct also forms the basis of an independent tort, recognizing a monetary claim for shareholder oppression makes sense; a not-so-novel bootstrapping of the shareholder oppression standard onto the independent tort.
What about cases where the conduct that forms the basis of a shareholder oppression claim does not give rise to an independent tort? For instance, consider a closely-held corporation where all shareholders are at-will employees of the business and directors of the corporation. If the majority shareholders of a non-dividend paying corporation suddenly terminate a minority shareholder from employment, cut off her compensation and health insurance, and vote to remove her as a director, those facts might constitute shareholder oppression even though they are insufficient to state a claim for breach of fiduciary duty (see, e.g., Matter of Wiedy’s Furniture Clearance Center Co., 108 AD2d 81 [3d Dept 1985]).
It’s not clear whether the Court in Stile intended to recognize a monetary cause of action for shareholder oppression independent of another tort. The briefing does not contain a compelling argument for such a novel expansion of New York jurisprudence on shareholder oppression. Defendants in their brief pointed to BML Properties and argued that there is no common law damages claim for shareholder oppression, but the Estate’s brief simply relied on BCL 1104-a cases—which would only seem to bolster Defendants’ point that there is no independent oppression claim outside of BCL 1104-a.
As is often the case, we’re left awaiting subsequent guidance from the courts before we can say for sure whether Stile is the watershed moment in minority shareholders’ rights that it has the potential to be.