OppressionNew York and most other states have judicial dissolution statutes protecting minority shareholders in close corporations against “oppressive actions” by controlling shareholders and directors. In many of those states, including New York, courts define oppression as conduct that defeats the minority shareholder’s “reasonable expectations.” The reasonable-expectations standard necessarily is a flexible one that allows courts to address the myriad circumstances under which minority shareholders, who generally lack exit rights and whose shares have no public market, face squeeze-out or freeze-out by the majority.

If I had to describe the classic case of minority shareholder oppression, it would be (1) an owner-operated business (2) that pays no stock dividends (3) in which the majority shareholder terminates the minority shareholder’s employment (4) thereby cutting off the minority shareholder’s sole source of economic benefits in the form of salary and bonus (5) while also removing the minority shareholder from the board of directors (6) thereby depriving the minority shareholder of any voice in company management.

I’ve pretty much just described the circumstances present in Matter of Digeser v Flach, 2015 NY Slip Op 51609(U) [Sup Ct Albany County Nov. 5, 2015], a post-trial decision handed down earlier this month by Albany County Commercial Division Justice Richard M. Platkin in which the court concluded that the petitioning minority shareholder established grounds for dissolution of two affiliated construction companies. Continue Reading A Classic Case of Minority Shareholder Oppression

Nassau County Commercial Division Justice Vito M. DeStefano (pictured) last month handed down an important ruling in Schlossberg v Schwartz, 43 Misc 3d 1224(A), 2014 NY Slip Op 50760(U) [Sup Ct, Nassau County May 14, 2014], addressing rights of indemnity and advancement when a company brings claims against its own officer or director for alleged misconduct undertaken in a corporate capacity. The scholarly decision, which traces the convoluted history of the governing Business Corporation Law (BCL), rejects the company’s position that its bylaws and the BCL preclude advancement and indemnification for intra-company claims, i.e., claims brought directly by the company against an officer/director, as opposed to extra-company claims, i.e., claims brought by outside, third parties.

Schlossberg also is noteworthy:

  • for upholding the right to seek advancement and indemnity for expenses incurred in the defense of the company’s counterclaims, on an apportioned basis, in a suit initiated by a minority shareholder, director and former officer asserting direct and derivative claims against the controlling shareholder, inter alia, for breach of fiduciary duty, breach of contract and common law dissolution; and
  • for its numerous citations to decisions of the Delaware Chancery Court, which rightfully boasts an advanced jurisprudence in the area of indemnification and advancement.  Continue Reading Court Upholds Former Officer’s Right to Seek Indemnity and Advancement in Intra-Company Dispute

Housing cooperatives, or “co-ops” as they’re commonly known, occupy an unusual niche among forms of joint stock enterprises. Like any corporation, the tenant-shareholders have a common interest in maximizing for everyone’s benefit the value of the co-op’s assets, i.e., the apartment building and its common elements, but being neighbors who live above, below and beside one another, the tenant-shareholders also have intrinsically competitive interests regarding rights of access, use, development, transferability, etc., that can have a direct, disparate impact on quality of life and the resale value of their individual apartment units.

In large co-ops, where no single tenant-shareholder has a significant percentage of voting power, the centralized management authority of a democratically elected board of directors, exercised pursuant to the co-op’s by-laws, can regulate and mute any divergence between common and individual stockholder interests. Such centralized management, as in any corporation with widely dispersed ownership, effectively compartmentalizes decision-making at the board and shareholder levels.

But not all co-ops are large. In Manhattan and other parts of New York City there are many small co-op properties, including converted walk-up tenements and industrial loft buildings, with as few as four, five or six units where each tenant-shareholder may have a seat on the co-op’s board of directors and material voting power, thereby melding into one the theoretically distinct realms of director and shareholder authority and likewise conflating common and individual concerns.

Which also means that relations between tenant-shareholders in small co-ops can fall victim to the same kinds of infighting and dissension that afflict any small, closely held, owner-operated business enterprise. Some years ago I wrote about a Brooklyn co-op shareholder who petitioned for judicial dissolution of a five-unit co-op on grounds of oppressive conduct by the majority shareholders, which led to a statutory buy-out and contested valuation proceeding (read here and here). A Manhattan appellate panel’s decision last month in Akasa Holdings, LLC v Sweet, 2014 NY Slip Op 01822 [1st Dept Mar. 20, 2014], illustrates another kind of co-op shareholder dispute involving a battle for board control of a four-unit co-op, pitting one tenant-shareholder owning a majority of the voting shares against the other three tenant-shareholders. Continue Reading Legal Battle Over Board Seats Splits Neighbors in Manhattan Co-op