When a closely-held business is profitable, self-interested owners naturally want a bigger slice of the pie, especially where the personal relationships among the owners are frayed.  Perhaps that’s why we often discuss the value of freeze-out mergers as a mechanism for those in control of a closely-held corporation or limited liability company to squeeze a minority owner out of the business’ future profits. 

Equity dilution is another common method by which those in control of a corporation or LLC attempt to squeeze out a minority owner.  For one, stock dilution impairs the minority owner’s ability to influence company action by voting his shares, and it lessens the owner’s right to participate pari passu in the distributions or dividends of the company.  Perhaps more importantly, a minority owner can see his or her ownership interest diluted below certain critical thresholds—for instance, the 20% ownership required to petition for dissolution under BCL 1104-a.

Despite the potentially drastic consequences of stock dilution, many closely-held businesses we encounter fail to adequately address the issue of dilution in their governing documents.  And New York caselaw on the issue leaves plenty to be desired.  Let’s interpret those factors as an invitation to review the basics, key caselaw, and the current status of the improper dilution claim.Continue Reading Let’s Talk About Dilution

In this week’s New York Business Divorce, read about the plight of a Brooklyn beer brewing company founder whose co-members allegedly attempted to “freeze out” his interest by way of a forced dilution and ouster from management, and his efforts to fight back with a start-of-the-case preliminary injunction motion.
Continue Reading Court Enjoins Dilution of Brewing Company LLC Membership Interest

Minority shareholder oppression on steroids is one way to describe what happened in Matter of Twin Bay Village, Inc., in which an upstate appellate panel recently affirmed an order dissolving the corporation and setting aside a stock issuance that diluted the minority shareholders. Learn more in this week’s New York Business Divorce.
Continue Reading And the Award For Most Oppressive Conduct By a Majority Shareholder Goes to . . .

A long-running litigation battle between a technology and marketing company and its minority shareholder investors took yet another twist last week when the Appellate Division, First Department, reversed a lower court order upholding the company’s cancellation of the minority shares and the loss of their preemptive rights. Get the full story in this week’s New York Business Divorce.
Continue Reading Appellate Court Cancels Corporation’s Cancellation of Minority Shares

A recent appellate decision in Armentano v. Paraco Gas Corp. reinstated a minority shareholder’s complaint charging the controlling shareholders with diluting his stake by issuing treasury shares to themselves. It’s in this week’s New York Business Divorce.

Continue Reading Minority Shareholder Wins Appeal Challenging Grant of “Bonus” Treasury Shares to Controlling Shareholders

The attorney who prepares a shareholders’ agreement without documenting exactly whom the attorney does and doesn’t represent, and without appropriate disclosure of conflicts when representing multiple shareholders with divergent interests, is asking for trouble, at least, that’s the lesson to be drawn from a recent decision by Justice Carolyn Demarest in Schlissel v. Subramanian, featured in this week’s New York Business Divorce.

Continue Reading The Importance of Identifying Your Client — And Who’s Not Your Client — When Preparing Shareholder Agreements

The baseball season is upon us but there’s no joy in Mudville or, at least, at the Cooperstown All Stars Village baseball camp where the co-owners of a limited liability company are playing hardball litigation. The Third Department umpire recently called a preliminary injunction in favor of the non-controlling team after the controlling member pitched a high-and-inside capital call. Read about it in this week’s New York Business Divorce.

Continue Reading Court Enjoins “Squeeze-Out” Capital Call by Controlling Members of LLC

Have room for one more 2008 top-10 list? This week’s New York Business Divorce highlights the 10 most interesting business divorce cases from last year, with updated case citations and links to previous write-ups.

Continue Reading Top 10 Business Divorce Cases of 2008

This week’s New York Business Divorce looks at a recent decision by Justice Herman Cahn addressing the fiduciary duties of a controlling shareholder who authorizes and issues additional shares to himself without offering the same opportunity to minority shareholders.

Continue Reading Controlling Shareholder’s Dilution of Minority Interest Requires Bona Fide Business Purpose