When a minority shareholder petitions for judicial dissolution under § 1104-a of the Business Corporation Law based on the majority’s alleged oppressive conduct, looting, waste, or diversion of corporate assets, BCL § 1118 kicks in, granting the corporation and the other shareholders the right to halt the dissolution proceeding and to convert it to a stock appraisal proceeding, by electing to purchase the petitioner’s shares for “fair value” determined as of the day before the date on which the petition was filed.

New York’s highest court, in Matter of Pace Photographers, Ltd., described § 1118’s election to purchase as “a defensive mechanism [to § 1104-a] for the other shareholders and the corporation, giving them an absolute right to avoid the dissolution proceedings and any possibility of the company’s liquidation” while, at the same time, “the minority is protected by a court-approved determination of fair value and other terms and conditions of the purchase.”

How is the election exercised? Who can exercise it? Can it be exercised conditionally? When can it be exercised? Once exercised, can it be revoked? Read on for the answers. Continue Reading A Deep Dive Into the Election to Purchase in Dissolution Proceedings

It’s that time of year again, when languid summer days and vacation plans push aside all but the most serious work-related endeavors, and when I share with my readers a few short summaries of recent decisions of interest in business divorce cases.

First, we’ll look at a decision in an LLC dissolution case in which the court dismissed the petition brought by an excluded LLC member for failure to allege adequate grounds. Next up is a case in which the court denied a preliminary injunction to compel certain distributions pending the trial of a corporate dissolution and companion plenary action. In the third case highlighted below, the court summarily dismissed a complaint seeking to recover a share of company profits for the period preceding revocation of an LLC membership purchase agreement.

Minority Member’s Alleged Exclusion From LLC’s Business Operation Does Not Establish Grounds for Judicial Dissolution

Matter of Nunziata (Dinunzlu Group, LLC), Short Form Order, Index No. 4577/13 (Sup Ct Queens County July 25, 2013). The case involves a three-member LLC that owns real property leased to a funeral home operated by a separate corporation owned by the same three individuals. One of the members filed two separate proceedings for dissolution of the LLC and the corporation, alleging that the funeral home was not paying rent to the LLC; that he has been excluded from all aspects and control of the business, and that it is not reasonably practicable for the LLC to carry on its business if the court directs dissolution of the corporation in the other proceeding. Continue Reading Summer Shorts: The Excluded LLC Member and Other Decisions of Interest

In 1979, New York enacted Sections 1104-a and 1118 of the Business Corporation Law, the former giving minority shareholders of close corporations the right to petition for judicial dissolution based on “oppressive actions” by the controlling shareholders, and the latter giving the corporation and non-petitioning shareholders the right to avoid dissolution by electing to purchase the petitioner’s shares for “fair value.”

As originally enacted, Section 1118 did not prohibit the revocation of the election to purchase. This encouraged the electing, controlling shareholders to engage in delay tactics with the aim of forcing the petitioning minority shareholder to succumb to a lesser buy-out price under the threat or actuality of revocation of the election to purchase.

The legislature responded in 1986 by amending Section 1118(a) to provide that “[a]n election pursuant to this section shall be irrevocable unless the court, in its discretion, for just and equitable considerations, determines that such election be revocable.”

The post-amendment case law almost without exception has rejected attempts to revoke elections under Section 1118(a). For instance, in Matter of Pace Photographers, Ltd., 163 AD2d 316, 557 NYS2d 443 (2d Dept 1990), the appellate court affirmed an order denying leave to revoke a buy-out election sought after the court determined that the buy-out price was not dictated by the amount specified in the shareholders agreement. The court found that the electing shareholders’ claimed financial inability to acquire the shares “rang hollow” in view of their earlier assurances that their combined net worth was more than sufficient to effectuate the buy out.

Continue Reading Revoking the Buy-Out Election: It Ain’t Easy