One of the first business divorce cases that I participated in as a young litigator was a lengthy arbitration over whether a minority shareholder was oppressed under BCL 1104-a.  With those fond memories, evolution of the shareholder oppression doctrine under New York law has won a special place in my heart.

The basics: A shareholder holding at least 20% of voting interests can petition for dissolution on the grounds that those in control of the corporation have engaged in “illegal, fraudulent or oppressive actions,” (BCL 1104-a[a][1]).  That right sits among the minority shareholders’ most valuable ones: it protects against the abuses that can arise in a strict, majority-rules regime.  And courts typically recognize its value, finding contractual attempts to vitiate that right void as against public policy (see Matter of Validation Review Assocs., Inc., 223 AD2d 134 [2d Dept 1996]).

The “reasonable expectations” standard: the New York Court of Appeals says that “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” (Matter of Kemp & Beatley, 64 NY2d 63, 73 [1984]).

With that kind of standard, the key question for litigation in oppression claims is often whether the complaining shareholder’s expectations were reasonable under the circumstances.  A recent decision from Albany County Justice Platkin, Darwish Auto Group, LLC et al. v TD Bank, N.A. et al., 2024 NY Slip Op 51779(U) [Sup Ct Dec. 30, 2024]), and a recently published article by Professors Benjamin Means and Douglas K. Moll, show two sides of a healthy debate about how “contractual” the reasonable expectations inquiry should be. 

The Corporation and Related LLCs.

The dispute in Darwish concerns Walid Darwish’s ownership and operation of two companies: a corporation, Darwish General Corp., and an LLC, Darwish Auto Group LLC.  Together, the companies own and operate ten automotive dealerships in upstate New York, which themselves are organized as separate, wholly-owned LLCs.  Darwish was the sole shareholder of the Corporation and sole member of the LLCs.

Darwish purchased the dealerships with a $62 million loan from several investors affiliated with Potamkin Automotive Group.  In connection with that financing, Darwish agreed to cede control—but not ownership—of the Corporation and the LLC to a three-member governing body consisting of himself and two individuals associated with the lenders.

Specifically, Darwish executed a Shareholder Agreement for the Corporation, which provides that the Corporation shall be managed by the three-member Board of Directors.  He also executed an Operating Agreement for the LLC, which appointed the same three individuals as a management committee.  Both agreements provided that no director or manager may act unilaterally and that a two-thirds vote was required for company action.

Darwish is Ousted.

Only a few months into the arrangement, the Board learned that Darwish had limited its access rights for certain accounts at TD Bank.  The Board issued a resolution placing the accounts under its control.  The Board also directed Darwish to inform the automobile manufacturers that the Board, and not Darwish individually, controls the Corporation, the LLC, and the wholly-owned dealerships.

By August of 2022, the Board caused the Corporation and the LLC to commence suit against Darwish seeking to compel his compliance with the Board’s direction.  Both sides sought preliminary injunctions establishing themselves in control of the Corporation and the LLCs.  Darwish contended that the Shareholder’s Agreement and the Operating Agreement never became operative because he only signed the signature pages of those documents, and those documents were never approved by the manufacturers.  Instead, Darwish argued that the Operating Agreements for the individual dealerships—which in certain places describe Darwish as the sole member—establish his control over the dealerships. 

Darwish also brought claims alleging that the Board had breached its fiduciary duties to the Corporation and the LLC, completely ousted him from any role in the dealerships, and were interested only in selling off the dealerships rather than operating them profitably.

In the early rounds, the Court dealt Darwish several losses (one of which Peter Mahler covered in his annual Winter Case Notes), including by finding that Darwish could not show likelihood of success on the merits of his bid for control of the dealerships.

Darwish’s Oppression Claim.

After accelerated discovery, both sides moved for summary judgment on their claims: the Board sought to cement its control over the Corporation, the LLC, and the dealerships, and Darwish argued that a trial was necessary to resolve the ambiguity between the Shareholder’s Agreement and the dealership operating agreements.

Darwish also creatively argued that the Board’s control over the Corporation to his ouster constituted shareholder oppression.  He insisted that he had reasonable expectations of being an active participant in the management of the Corporation and its dealerships—indeed, the whole deal was designed so that Darwish would run the dealerships as “Dealer Principal.”  He argued that the Board’s operation of those businesses to his exclusion constituted shareholder oppression because it defeated those reasonable expectations. 

But Darwish never sought dissolution.  As best as I can tell, Darwish pushed his shareholder oppression theory in support of his claim for breach of fiduciary duty against the Board, arising from the Board’s ouster of Darwish and later attempts to sell the dealerships. 

No Oppression for Loss of the Control that You Bargained Away, Says the Court.

On December 30, 2024, Albany County Commercial Division Justice Richard Platkin issued an order that mostly granted summary judgment to the Board (Darwish Auto Group, LLC et al. v TD Bank, N.A. et al., 2024 NY Slip Op 51779(U) [Sup Ct Dec. 30, 2024]).  The Court rejected Darwish’s arguments that the Shareholder’s Agreement and the Operating Agreement were not effective or were superseded by the individual dealership operating agreements. 

Addressing Darwish’s claims of shareholder oppression, the Court begged perhaps the most interesting question: it assumed without expressly deciding that “principles of minority shareholder oppression under BCL 1104-a(a)(1) bear on the effectiveness and/or enforceability of the Governance Agreements.”  So it remains unclear, after the First Department’s cryptic decision in Stile v C-Air Customhouse Brokers-Forwards Inc., 2022 NY Slip Op 02244 (1st Dept April 5, 2022) (discussed here), whether the shareholder oppression doctrine has any business outside of a dissolution proceeding under BCL 1104-a. 

In addressing whether Darwish was an oppressed shareholder, the Court gives us much more.  The Court held that Darwish willingly subjected himself to the three-member, majority rules regime that lawfully orchestrated his ouster.  Thus, he could not have reasonable expectations of rights beyond those given to him in those agreements:

Darwish could not have had any reasonable expectation of ownership, management or employment rights beyond those conferred in the comprehensive written agreements of April 18, 2022. . . By executing the [Shareholder’s Agreement and the Operating Agreement] with the Lenders to obtain that financing, Darwish relegated himself to a minority role in the management of the Companies and Dealerships.”

The Court continued:

[T]he claimed oppression arises directly from the contractual promises that Darwish made to the Lenders to finance his purchase of these ownership interests.  Insofar as Darwish is oppressed by the ownership, governance and management structure to which he assented, his complaint is one of self-oppression.”

In reading the Court’s opinion here, I’m reminded of another decision from Justice Platkin, which similarly held that employee-shareholders subject to a written, at-will employment agreement, were not oppressed when their employment was terminated, Laurilliard v McNamee Lochner, P.C., 79 Misc 3d 1220(A) (Sup Ct Albany Co 2023) (discussed here), and an Appellate Division decision of the same ilk, Kavanaugh v Consumers Beverages, Inc., 205 NYS3d 637 (4th Dept 2024) (discussed here).

A Counterpoint.

While Darwish hardly seems surprising on its facts, in the interest of healthy debate, I’ll allow myself to wonder out loud if Professors Benjamin Means (a prior NYBD interviewee) and Douglas K. Moll (a prior podcast guest) offer a counterpoint.

The Professors’ recent publication, Against Contractual Formalism in Shareholder Oppression Law, 57 U.C. Davis L. Rev. 1867 (2024), makes the compelling argument that equating a shareholder’s “reasonable expectations” with the express, bargained for rights of the parties’ governing agreements too-much dilutes the shareholder oppression doctrine.

Insisting that contract rules place sharp limits on the minority shareholder’s reasonable expectations, the Professors argue, can produce too-harsh results that fail to account for potentially significant factors, such as the trust that closely-held business owners often put in their co-owners, or evolutions in the shareholders’ relationship since the execution of the governing documents.  The Professors opine:

Courts that adopt a formalistic approach substitute an easier question for a harder one.  Instead of asking whether an expectation was reasonable under the circumstances, they ask whether contract law principles preclude the plaintiff’s complaint. . . If contracts are the sole basis for creating reasonable expectations in closely held corporations . . . then there is no longer a meaningful difference between courts that accept the shareholder oppression doctrine and those that reject it.”

(Id. at 1871-73).

There’s plenty of appeal to that argument.  After all, the shareholder oppression doctrine arose as a counterweight to the abuses that a strict, majority-rules regime can bring about.  But if the only “reasonable expectations” are those expressly bargained for at the outset, “the reasonable expectation standard becomes indistinguishable from the contractarian model it was meant to supplant” (id. at 1912).   

None of that is to suggest that the outcome in Darwish should have been any different.  But there’s little doubt that Darwish continues the trend toward contractual formalism in shareholder oppression cases.  That may produce more clarity: like in the world of limited liability companies, minority owners get what they bargained for and little more.  And at the same time, for the reasons outlined by Professors Means and Moll, it may be troubling.  A healthy debate indeed.