The heyday of common-law dissolution — if it ever had one — is long past, largely displaced by a statutory dissolution remedy for oppressed minority shareholders paired with an elective buy-out option for the respondent majority shareholders.
New York’s version of the statutory remedy, section 1104-a of the Business Corporation Law enacted in 1979, authorized shareholders holding at least 20% of the voting shares in an election of directors to petition for judicial dissolution based on “oppressive actions” and other misconduct by the majority including illegality, fraud, looting, waste, and diversion of corporate assets. Courts subsequently interpreted the undefined term “oppressive actions” as meaning conduct that defeats the minority shareholder’s “reasonable expectations” upon joining the enterprise, such as termination without cause of one’s employment and positions as an officer and director.
A “special solicitude toward the rights of minority shareholders of closely held corporations” was how the New York Court of Appeals in Matter of Kemp & Beatley subsequently described the legislature’s motivation for enacting section 1104-a, the implication being that common-law dissolution didn’t sufficiently protect the locked-in minority shareholder against majority abuse and overreach. Common-law dissolution’s remedial reach simply was too short.
Since section 1104-a’s enactment in 1979, common-law dissolution’s utility effectively is limited to actions by shareholders with less than 20% of the voting shares.
Under the case law, common-law dissolution requires the minority shareholder to show, as articulated by the Court of Appeals in Leibert v Clapp, that “the directors and majority shareholders . . . 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.” In other words, to prevail under the common-law standard the minority shareholder essentially has to show that a rogue majority is operating the company as their personal fiefdom for their sole benefit. Not an easy undertaking.
With that background, let’s take a look at two recent court decisions in which the plaintiffs’ common-law dissolution claims suffered setbacks.