Longtime readers of this blog may recall a post I wrote three years ago titled Minority Shareholder Oppression in the #MeToo Era. The post highlighted an apparent first-of-its-kind decision in a judicial dissolution case brought by certified public accountant Diane Straka, a minority shareholder of an accounting firm. The court upheld her claim of oppression by the male, majority shareholders based on their toleration of demeaning behavior directed at Ms. Straka by a senior employee at the firm and other discriminatory conduct concerning her profit-sharing and management role. Central to the court’s decision in Straka was its finding that the majority shareholders “and indeed, any shareholder of any corporation, should know that a female shareholder reasonably expects to be treated with equal dignity and respect as male shareholders forming the majority.”

No one should be under the illusion that the fact pattern presented in Straka presents a singular anomaly in the world of closely held  companies. Nor should anyone underestimate the complexity of the reasons why female business owners who suffer discrimination in its various forms at the hands of their partners don’t come forward, much less sue their partners. Nor should anyone think there are easy legal solutions under existing common and positive law that would resolve the tension between society’s interests in protecting individuals from discriminatory behavior violating our fundamental cultural and legal norms, and promoting the freedom of business owners to order their business affairs and partner relations as they know best to maximize productivity and economic growth.

Which is why it’s important to bring to interested readers’ attention two recent, thought-provoking articles authored by two law professors with legions more knowledge and insight concerning these issues than I possess. Last year, the Indiana Law Review published an article by Professor Meredith Miller of the Touro Law Center entitled Challenging Gender Discrimination in Closely Held Firms: The Hope and Hazard of Corporate Oppression Doctrine, available on SSRN here. More recently, the Houston Law Review published an article by Professor Ann Lipton of the Tulane University Law School entitled Capital Discrimination, available on SSRN here. Continue Reading It’s Time to Address Sex Discrimination Against Women Owners of Closely Held Companies, Say These Two Law Professors

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.

Continue Reading A New Stile: First Department Shakes Up the Shareholder Oppression Claim

The fair value and fair market value appraisal standards applicable in contested buyout and dissenting shareholder valuations cut across state lines, which is one of the main reasons I occasionally highlight significant court decisions in valuation cases from outside New York.

As in other areas of the law concerning the internal affairs of business entities, the courts of Delaware play an outsized role in setting standards for assessing competing valuations in contested appraisal proceedings involving both privately and publicly owned companies.  In this post, I’m putting Delaware aside in favor of four recent cases that reached the Supreme Courts of four different states — Nebraska, Iowa, Indiana, and North Carolina — involving a number of frequently litigated issues in valuation cases, including  discounts.

Nebraska Supreme Court Overturns Application of Discounts In Fair-Value Buyout

Bohac v Benes Service Co., 310 Neb. 722 [Neb. Sup. Ct. 2022]. The Nebraska Supreme Court’s Bohac opinion involves a family-owned farming business in which a sibling schism followed the parents’ death, leading to a dissolution petition, leading to the other siblings’ election to purchase the petitioners’ 14.84% interest under the statutory fair value standard. The trial court valued the shares at approximately $2.9 million after applying discounts for lack of control (DLOC) and marketability (DLOM). On appeal, the petitioners primarily challenged the discounts, the trial court’s non-award of their litigation costs and fees, and payment terms of the award. The respondents’ cross-appeal challenged the trial court’s application of the asset-based approach over the income-based approach. Continue Reading Recent Stock Valuation Decisions Reign “Supreme”

Serving dual roles as urban homestead and non-profit business operation, residential condominiums and co-ops occupy a special niche in the arena of dispute resolution among co-owners of joint enterprises.

As discussed in greater detail here, New York co-ops are governed by the same organizational requirements and management rules of traditional business corporations under the Business Corporation Law including an elected board of directors and appointed officers, with the additional overlay of proprietary leases. New York condominiums, organized as unincorporated associations governed by the Condominium Act codified in the Real Property Law, have no shareholders but nonetheless are required to adopt by-laws providing for the election of a board of managers and officers.

Co-op and condo boards are sometimes perceived as entrenched bodies exercising dictatorial powers over building issues affecting finances, unit re-sales, and quality of life, sometimes pitting neighbor against neighbor and ego against ego which, as you might imagine, can generate emotionally charged controversies and litigation over issues that can’t always be measured in dollars, including contested board elections.

We’ve previously written herehere, and here about some of the relatively few reported court decisions in co-op and condo disputes involving access to books and records as well as board representation. Last week, in two separate appeals, Appellate Division panels in the First and Second Departments handed down significant decisions upholding a co-op owner’s common-law right to an unredacted copy of the shareholder list for the purpose of campaigning for a board seat, and affirming a lower court’s post-trial order banning the condominium sponsor and members of her family from holding more than two of six seats on the board of managers for the next six board elections. Let’s take a closer look.

Continue Reading Appellate Rulings Endorse Courts’ Broad Remedial Powers Over Condo and Co-op Board Elections

I can’t say what the number is, but my own experience tells me that a significant percentage of lawsuits by a minority owner of a closely-held company against those in control of the company include a demand for an accounting.  And at the risk of over-generalizing, I’d say that in many if not most of those cases, the accounting demand is not the central focus of the minority owner’s claim; it is a tacked-on, ancillary cause of action, pleaded in general terms and almost as a matter of course.  Sometimes, as this blog has covered, plaintiffs demand an accounting without even realizing what they’re asking for.

An equitable accounting is not a books and records demand.  Rather, it requires the fiduciary—in business divorce litigation, those in control of the company—to prepare detailed and supported schedules of income and expenses over a defined period, followed by the plaintiff’s filing of objections to the accounting, followed by proceedings, often before a court-appointed referee, to hear and recommend or determine the accounting.  Once complete, “the plaintiff gets an order directing payment of the sum of money found due” (Ederer v Gursky, 881 NE 2d 204 [2007]).

The potentially significant undertaking of an accounting might explain why it is so often demanded in business divorce litigation.  By invoking a demand for an equitable accounting, a closely-held business owner raises the specter of a time consuming, expensive, and needling process in which costs will almost certainly be disproportionally borne by the company and those in control.

Continue Reading But What of the Equitable Accounting?

In Congel v Malfitano, New York’s highest court wrote that business partners are free to include in partnership contracts practically “any agreement they wish,” including about “the means by which a partnership will dissolve, or other aspects of partnership dissolution.” This broad freedom of contract, the Court explained, is circumscribed only by “prohibitory provisions of the statutes,” countervailing “rules of the common law,” or “considerations of public policy.”

Two weeks ago, Peter Sluka wrote about one example of public policy prohibiting contracts among closely-held business owners: a recent decision ruling unenforceable a buy-sell provision in an LLC agreement because the contract deemed breach of any provision, no matter how minor, to be “forfeiture for a dollar,” which the Court found “grossly disproportionate,” “unreasonable,” and an “unenforceable penalty.”

This week, we’ll look at another example of public policy curtailing enforcement of agreements among closely-held business owners. A strand of a half dozen New York appellate decisions have held that contractual prohibitions on judicial dissolution proceedings – so-called “anti-dissolution” provisions – are potentially unenforceable depending on how broadly and in what manner they prohibit access to courts. We’ll summarize the state of the law at the end of this article. Continue Reading Anti-Dissolution Provisions and Public Policy

The National Rifle Association has long been a politically charged topic for its fans and critics. For those of you more interested in the politics of the NRA’s ongoing battle with New York’s Attorney General Letitia James, you probably want to look elsewhere. For those of you interested in the AG’s legal basis for seeking judicial dissolution of the NRA under New York’s Not-For-Profit Corporation Law (N-PCL), and in Manhattan Commercial Division Justice Joel Cohen’s reasoning behind his 42-page decision last week dismissing the AG’s dissolution claim, make yourself comfortable.

The NRA of today hardly resembles the organization at its birth in 1871 as a New York not-for-profit corporation, initially funded with a $25,000 legislative grant, whose stated purpose was “the improvement of its members in marksmanship, and to promote the introduction of a system of army drill and rifle practice . . . and for those purposes to provide a suitable range in the vicinity of the City of New York.” The NRA’s vastly expanded mission as stated in its current bylaws includes protecting the American citizen’s constitutionally guaranteed and “God-given inalienable right” to keep and bear arms. Since the 1970s the NRA has been best known to the public as a politically potent gun rights advocacy group with a powerful lobbying arm. As of a few years ago its membership surpassed 5.5 million.

Many years ago the NRA relocated its headquarters to Fairfax, Virginia, but it remains legally domiciled in New York as a Section 501 tax-exempt, not-for-profit corporation and charitable organization subject to the New York AG’s oversight Continue Reading New York Judge Spares NRA “Corporate Death Penalty”

Two principles often guide courts’ interpretation and enforcement of contracts.  First, courts respect parties’ freedom of contract, mostly.  So long as an agreement is not illegal or violative of a strong public policy, parties are free to create whatever deal they wish.  Second, the plain language of a written agreement is the best evidence of what the parties intended their deal to be.

In business divorce litigation, we see these principles at work in disputes over the enforcement of an LLC’s operating agreement.  And while they can be stated with disarming simplicity, rarely is their application quite as simple.

This week’s post considers a duo of recent decisions applying these contractual principles to hotly-contested disputes between LLC members over the terms of their operating agreement.  In the first case, the court considered whether to enforce an operating agreement as written despite evidence that the parties actually intended a different deal.  In the second, the court considered whether to enforce an operating agreement where its buyout terms were grossly unfair.  The cases’ different outcomes highlight the outer limits of the parties’ freedom of contract in LLC operating agreements.

Continue Reading The Operating Agreement Controls, Unless Public Policy Says Otherwise

A limited partnership without a general partner cannot lawfully continue. That’s why it’s critical that the limited partnership agreement thoughtfully address general partner succession and, when triggered, the agreement’s succession provisions be faithfully followed. Otherwise, the limited partnership is subject to a court order declaring nonjudicial dissolution of the partnership at the behest of the limited partners.

In late 2020, we wrote about a court decision in the hotly contested Weinstein case ordering nonjudicial dissolution of a limited partnership following the involuntary withdrawal of the sole general partner. Weinstein involved a family-owned, realty-holding New York limited partnership. The general partner’s involuntary withdrawal was triggered not by a death event, but by the filing of a dissolution proceeding and the appointment of a receiver, without a subsequent election by the partners to replace the general partner and to continue the partnership.

Last week, in Verdone v Verdone, 2022 WL 454048 [N. Car. Ct. App. Feb. 15, 2022], the North Carolina Court of Appeals affirmed a trial court’s order granting summary judgment declaring nonjudicial dissolution of another family-owned, realty-holding limited partnership formed under Delaware law. The court in Verdone declared that the limited partnership automatically dissolved under the express terms of the partnership agreement when the sole general partner resigned and purported to name an LLC controlled by one of her four children — each of whom was a limited partner — as the new Managing General Partner. The appellate court’s opinion, finding that the purported succession without the consent of all the limited partners was invalid, also features the court’s rejection of the defendant siblings’ contention that the North Carolina court lacked subject matter jurisdiction to consider a claim for dissolution of a Delaware limited partnership.

Continue Reading General Partner’s Resignation Triggers Nonjudicial Dissolution of Limited Partnership

The chorus to one of Neil Young’s most sublime songs is “Helpless, helpless, helpless.”

If composed in song, the chorus to a recent valuation decision by Manhattan Commercial Division Justice Andrea J. Masley would be “Worthless, worthless, worthless.”

Justice Masley’s valuation decision in Quattro Parent LLC v Rakib, 2022 NY Slip Op 30190(U) [Sup Ct, NY County Jan. 14, 2022] is noteworthy for two reasons.

First, it is an extraordinarily rare example of a business valuation performed by a court solely on paper submissions without a trial.

Second, it is a rare example of a valuation case pitting a veteran appraisal expert on one side against a fact witness with no expert on the other. Sound lopsided? Let’s see who prevailed in this unorthodox battle of valuation expert versus layperson. Continue Reading Valuation Decision Finds LLC “Worthless, Worthless, Worthless”