Reasonable Expectations

In the last two years, fueled by a series of high profile cases involving media executives, entertainers, and other public figures, #MeToo has gained worldwide recognition as a symbol of the burgeoning movement against sexual harassment and assault, especially in the workplace.

In our country, we have federal, state, and local statutes designed to protect employees against gender discrimination including sexual harassment and hostile workplace environment. Such laws generally do not extend protection to owners of closely held business entities against conduct of the sort by their co-owners.

Perhaps it was inevitable that the heightened consciousness of the #MeToo movement, and the willingness of female complainants to come forward, should find its way into the arena of minority shareholder oppression, leading to a ruling earlier this month in Matter of Straka v Arcara Zucarelli Lenda & Assoc. CPAs P.C., 2019 NY Slip Op 29017 [Sup Ct Erie County Jan. 9, 2019], in which, following an evidentiary hearing, the court upheld oppression allegations by a female minority shareholder of an accounting firm based in large part on her male co-owners’ toleration of offensive, demeaning, and condescending comments made primarily by a senior accountant-employee at the firm. Continue Reading Minority Shareholder Oppression in the #MeToo Era

OppressionAn earlier post on this blog, examining a post-trial decision in Matter of Digeser v Flach, 2015 NY Slip Op 51609(U) [Sup Ct Albany County Nov. 5, 2015], described the minority shareholder’s dissolution claim under Section 1104-a of the Business Corporation Law as a “classic case of minority shareholder oppression.” The Albany-based Appellate Division, Third Department, recently agreed with that assessment in affirming the lower court’s order finding sufficient grounds for dissolution.

The appellate panel’s unanimous decision in Matter of Gould Erectors & Rigging, Inc., 146 AD3d 1128, 2017 NY Slip Op 00228 [3d Dept Jan. 12, 2017], affirmed in every respect Albany County Commercial Division Justice Richard M. Platkin’s post-trial decision to dissolve two affiliated construction businesses. Here’s a quick recap of the case as it unfolded at the trial level.

Background

The story begins with two father-son pairs. The petitioner, Henry A. Digeser, is a 25% shareholder of two New York corporations, Gould Erectors & Rigging, Inc. (“Gould”) and Flach Crane & Rigging Co., Inc. (“Flach Crane”). The respondent, John C. Flach, owns the remaining 75%. Digeser’s father was a close friend and business colleague of Flach’s father, who founded the companies, and served on the businesses’ boards. Eventually, the younger Digeser got involved in the businesses and became an owner. Continue Reading An Oppression How-To: Revoke Employment, Profit Sharing and Control

Guillotine

Capital punishment for the corporation.” That’s how the Maryland Court of Appeals — that state’s highest court — in Bontempo v Lares, 444 Md. 344 [2015], recently referred to the remedy of judicial dissolution made available by statute in most states, including New York, to oppressed minority shareholders of closely held corporations.

I would not go so far as to suggest that our corporate jurisprudence is experiencing something akin to the growing anti-death penalty movement in our criminal jurisprudence, but the thoughtful majority opinion for the Maryland high court in Bontempo marks a heightened regard for the diverse interests at stake when considering an appropriate remedy for oppressive conduct by those in control of the corporation, and highlights the breadth of less drastic, alternative remedies available to trial courts.

Bontempo also merits attention at a more granular level for its discussion of the interplay and distinction between remedies available to an oppressed minority shareholder qua shareholder versus qua fired employee. Continue Reading Less Drastic Measures: Maryland Case Highlights Non-Dissolution Remedies for Oppressed Minority Shareholders

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

 

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?

For the vast majority of non-publicly traded close corporations, there is little or no market for minority shareholders to sell their shares. Likewise, the default rules under the statutes governing close corporations do not require the corporation or the controlling shareholders to redeem or buy out the stock interest of a minority shareholder who seeks an exit.  Most states, including New York, partially alleviated the problem of minority shareholder lock-in by enacting laws that authorize a minority shareholder to sue for judicial dissolution of a close corporation where the majority engages in undefined "oppressive conduct" and, at the same time, that give the majority an elective right to avoid a dissolution contest by purchasing for "fair value" the shares of the suing shareholder.

New York adopted such laws in 1979, codified in Sections 1104-a and 1118 of its Business Corporation Law.  Over the next 30-plus years, the task has fallen to the courts to resolve on a case-by-case basis the myriad shareholder disputes leading to dissolution petitions, using what’s known as the "reasonable expectations" test for gauging majority oppression.  Under this test, first formulated in Gardstein v. Kemp & Beatley, 64 NY2d 63 (1984), oppression exists when the majority conduct "substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the [petitioning minority shareholder’s] decision to join the venture."

Part of the difficulty for courts in these cases is balancing the minority shareholder’s reasonable expectations against the rights and obligations flowing from a shareholders’ agreement — when one exists.  As Professor Larry Ribstein writes in a recently published paper (about which I’ll be posting in coming weeks), "[t]he indeterminacy of close corporation law is especially evident when the oppression remedy meets an actual contract."  To what extent should courts rein in the statutory oppression remedy on account of express contractual provisions dealing with rights of continued employment, distributions, redemption or buyout?  How should courts assess reasonable expectations when the shareholders’ agreement is silent as to the circumstances constituting the alleged oppression?

Continue Reading Contract Trumps Shareholder Expectations in Recent Case Denying Judicial Dissolution of Close Corporation