Notwithstanding we’ve had no more than a dusting of snow thus far in my downstate New York neck of the woods, welcome to another edition of Winter Case Notes in which I visit my backlog of recent court decisions of interest to business divorce aficionados by way of brief synopses with links to the decisions for those who wish to dig deeper.

This year’s synopses feature cases involving minority shareholder oppression claims in a father-daughter dispute previously reported on this blog; an appellate decision affirming the dismissal of a books and records action involving Delaware LLCs; one case granting and another denying claims for advancement and indemnification of legal expenses; the dismissal of claims alleging wrongful transfer of the plaintiff’s LLC membership interest; and a decision compelling arbitration of a claim for wrongful removal of the plaintiff as a manager and member of an LLC.

Oppression of the “Gifted” Minority Shareholder

By “gifted” I’m referring not to the natural talents or intellect of a minority shareholder, but to her ownership of shares by way of a gift from a family member. Under the governing reasonable-expectations standard, can such a shareholder, who made no investment and has no involvement in the company’s business affairs, successfully petition for dissolution based on a claim of oppression by a majority shareholder based on the latter’s denial of her shareholder status? Continue Reading Winter Case Notes: Oppression of the “Gifted” Minority Shareholder and Other Recent Decisions of Interest

They say this summer has been unusually cool in the Northeast, but it’s been a hot one for business divorce litigation, judging from the number of recent court decisions involving various and sundry disputes among co-owners of closely held businesses. So, once again, it’s time for my annual summertime post featuring a few, short summaries of recent decisions of interest in business divorce cases.

First, we’ll look at a decision by Justice Melvin Schweitzer in a battle between 50/50 ownership factions over control of an international translation services company with over 3,000 employees. Next up is Justice Carolyn Demarest’s ruling denying a change of venue in a corporate dissolution case. Last is a decision by Justice Marcy Friedman in which she addressed an interesting statute of limitations defense in a drawn-out dissolution case.

Shareholder of Parent Corporation Has Standing to Sue Derivatively to Remove Subsidiary’s Director But Not for Dissolution

Elting v Shawe, 2014 NY Slip Op 32126(U) [Sup Ct, NY County July 24, 2014]. It’s not everyday you encounter business divorce litigation on the scale of this case, involving a firm with over 3,000 employees and revenues over $350 million. The subject company is a closely held Delaware holding corporation owned 50/50 by two individuals who also comprise its two-director board, and its wholly owned New York subsidiary providing international translation services. One owner-director sued the other for alleged financial and management abuses, asserting direct and derivative claims seeking the defendant’s removal as an officer and director of the subsidiary under BCL §§ 706 (d) and 716 (c), and also seeking deadlock dissolution of the subsidiary under BCL § 1104 (a). Continue Reading Summer Shorts: Director Removal and Other Recent Decisions of Interest

 

Thirty years ago, in Matter of Kemp & Beatley, Inc., New York’s highest court defined minority shareholder oppression as “majority conduct [that] substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture.” For example, the court wrote,

A shareholder who reasonably expected that ownership in the corporation would entitle him or her to a job, a share of corporate earnings, a place in corporate management, or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment. [64 NY2d 63, 73]

One of the rarer applications of the reasonable-expectations test in corporate dissolution proceedings occurs when the controlling shareholder denies outright the petitioner’s status as a shareholder. The few such reported cases usually feature corporations that never followed corporate formalities, never issued stock certificates, and have no written shareholders’ agreement. The Pappas case, about which I wrote here and here, is a good example of a case in which the respondent’s repudiation of the petitioner’s stock interest was the primary factor supporting the court’s finding of oppressive conduct. As the court in Pappas wrote, it is “difficult to recognize a more reasonable shareholder expectation than that its interest will not be repudiated in its entirety, and that legal action would be required to compel its acknowledgment.”

The complaining shareholders in Pappas had been employed by, and actively involved in the management of, the subject businesses, hence they offered a multi-faceted picture of oppressive conduct by the controller. But what about a putative minority shareholder who has no involvement in the business other than as a passive investor or donee of shares? Such a shareholder cannot allege loss of employment or exclusion from a role in managing the corporation’s affairs. Is the controller’s denial of the petitioner’s shareholder status, by itself, enough to establish oppressive conduct under Kemp‘s reasonable-expectations standard?  Continue Reading Is Denial of Shareholder Status Shareholder Oppression?