shareholder oppression

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

Last week, this blog wrote about a decision by Manhattan Commercial Division Justice Saliann Scarpulla in the burgeoning Yu family melee, in that case pitting one brother against the other and their sister over dissolution of two single-asset real estate holding LLCs. In her decision, Justice Scarpulla denied dissolution of the LLCs, despite the plaintiff’s allegations that his brother and sister had a personal “vendetta” against him, which they carried out by amending the operating agreement to remove the plaintiff as a manager, authorizing a mandatory capital, and, when he was unable to meet the capital call, foreclosing on his membership interest.

This week, we look at a companion decision by Justice Scarpulla, issued the same day as the first, expanding the intra-family brouhaha to include the three siblings’ parents. In Matter of Yu v Bong Yu, 2018 NY Slip Op 32009(U) [Sup Ct, NY County Aug. 15, 2018], the court considered the important but novel question of what impact, if any, does a shareholder’s assignment of voting rights under a stock pledge agreement have on his or her standing to sue for statutory dissolution of the business as well as under the common law. Continue Reading Stock Pledge Agreement Defeats Minority Shareholder’s Standing to Sue for Statutory But Not Common-Law Dissolution

When you want to sue to dissolve a business in New York on behalf of the estate of a deceased shareholder, to which court should you go: Supreme or Surrogate’s Court?

For many practitioners, the Commercial Division of the Supreme Court, a specialized court in New York focusing on complex business-related disputes, is the venue of choice. Most types of disputes have a minimum monetary threshold for eligibility in the Commercial Division. Manhattan’s threshold is the highest – $500,000.  The rules of eligibility for cases to be heard in the Commercial Division, which you can read here, have three exceptions to the monetary threshold – one of which lists “[d]issolution of corporations, partnerships, limited liability companies, limited liability partnerships and joint ventures — without consideration of the monetary threshold.” In part because there is no monetary threshold for dissolution proceedings, practitioners in the several New York counties that have a Commercial Division usually litigate business dissolution disputes in the Commercial Division.

But once in a blue moon a dissolution case will wind up in the Surrogate’s Court. Continue Reading Surrogate’s Court Declines to Order Demise of Fashion Business

Over the years I’ve litigated and observed countless cases of alleged oppression of minority shareholders by the majority. Oppression can take endlessly different forms, some more crude than others in their execution, some more draconian than others in their effect.

If there was an award for the crudest and most draconian case of shareholder oppression, Matter of Twin Bay Village, Inc., 2017 NY Slip Op 06024 [3d Dept Aug. 3, 2017], decided earlier this month by an upstate appellate panel, would be a serious contender.

The case involves a bitter dispute between two branches of the Chomiak family over a lakefront resort called Twin Bay Village located on beautiful Lake George in upstate New York. In 1957, the husband-and-wife founders, Stephan and Eleonora Chomiak, opened the summer resort on land they owned. They and their two sons, Leo and Vladimir, together ran the business until 1970 when they transferred ownership of the land and business to newly-formed Twin Bay Village, Inc. owned 26% by each parent and 24% by each son. Continue Reading And the Award For Most Oppressive Conduct By a Majority Shareholder Goes to . . .

crazyWhenever I contemplate New York’s unusual case law on the discount for lack of marketability (DLOM) in statutory fair value buy-out proceedings, I cast my eyes westward, to the far banks of the Hudson River, and take comfort in the fact it could be worse — I could be in New Jersey.

A “business appraiser’s nightmare” is how Chris Mercer described New Jersey’s “bad behavior discount” in his commentary on the Wisniewski v Walsh case decided a little over a year ago by a New Jersey appellate court, in which it affirmed the trial court’s application of a 25% DLOM seemingly plucked out of thin air, and notwithstanding what the trial court itself admitted were “strong indicators of liquidity,” for the stated purpose of penalizing the selling shareholder for his oppressive behavior toward the other shareholders — behavior that in no way harmed the corporation’s business or affected its marketability!

Now comes another New Jersey trial court decision in another fair value buy-out case, and guess what? The court applied the same 25% DLOM without any discussion of the factors supporting its application or quantification other than the court’s finding that the selling shareholder was guilty of oppressive conduct against the purchasing shareholder.

In Parker v Parker, 2016 N.J. Super. Unpub. LEXIS 2720 [Dec. 22, 2016], two brothers, Richard and Steven Parker, took over from their parents and for the next 25 years operated as 50/50 owners a wholesale flower business and a separately incorporated wholesale plant business which eventually became a garden center. Richard ran the flower business and Steven the garden business as separate fiefdoms with minimal overlap. Continue Reading Has New Jersey Gone Off Its DLOM Rocker?

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

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

winding roadThe Delaware Supreme Court last week refused to rehear its affirmance of Chancery Court’s post-trial decision in a case called Zutrau v Jansing. The Appellate Division of the New York Supreme Court last May affirmed a post-trial decision in a closely related case involving the same parties. The two appellate decisions effectively close out a tenaciously fought, seven-year litigation saga involving a minority shareholder’s largely unsubstantiated, multi-faceted attack on the majority shareholder’s management and financial stewardship of a small, New York-based Delaware corporation specializing in proxy servicing.

The litigation history includes an initial books-and-records proceeding in New York followed by serial suits in New York and Delaware asserting a variety of claims for unlawful termination of the minority shareholder’s employment; direct and derivative claims for breach of fiduciary duty; breach of contract; and a challenge to the validity and fairness of a reverse stock split that cashed out at fair value the minority stockholder’s shares while litigation was pending concurrently in New York and Delaware courts. [Disclosure: The defendants are clients of my firm which served as co-counsel in the New York litigation and acted as lead counsel in connection with the reverse stock split.]

The case spawned a plethora of pretrial motions, lengthy trials in New York Supreme Court and Delaware Chancery Court, and appeals in both jurisdictions. Ultimately, the courts rejected the plaintiff’s claims for unlawful termination of her employment and contract breach, rejected the bulk of her claims against the majority shareholder for breach of fiduciary duty, upheld the validity of the reverse stock split, and upheld the company’s fair value appraisal with modest adjustments. Continue Reading Business Divorce Case Reaches End of Long and Winding Road

VennDo controlling shareholders of a close corporation have an affirmative duty of financial disclosure when negotiating a buy-out of a minority shareholder? If so, what’s the source of the duty? Is it part of, or appurtenant to, a common-law fiduciary duty of loyalty or care? Or might it derive from the statutory right to seek judicial dissolution for the controllers’ oppressive acts?

Those weighty questions are prompted by a decision last month in which the court denied a motion to dismiss a minority shareholder’s counterclaim against the majority shareholders for breach of fiduciary duty in connection with a disputed buy-out agreement. The court’s decision in PF2 Securities Evaluations, Inc. v Fillebeen, 2015 NY Slip Op 30436(U) [Sup Ct NY County Mar. 26, 2015], invoked in tandem the majority shareholders’ fiduciary duty and the minority shareholder’s rights to be “free of oppressive conduct” and “in the event of a consensual buy-out . . . to receive a fair market value for his stock after fair and complete disclosure and valuation.”

The case involves a financial consulting firm called PF2 that uses mathematical models to evaluate collateralized debt obligations (CDOs). The defendant co-founded the company in 2007 and held a one-third stock interest. According to PF2’s complaint (read here), the defendant was responsible for developing the mathematical models and collecting data to evaluate CDOs. The complaint alleges that in 2012, as a result of the defendant “failing to fulfill his role as a director/partner of PF2,” the company negotiated “a generous buyout and employment contract” with the defendant “through various conversations and emails.” The complaint’s gravamen is that the defendant wrongfully competed with PF2 and misappropriated its proprietary information both before the buy-out when he was still a shareholder and afterward while he was in PF2’s employ. Continue Reading Blurring the Lines Between Oppression, Duty of Disclosure, and Fiduciary Breach

Tom Rutledge (pictured) is an extraordinary combination of practicing lawyer, scholar, bar leader, lecturer, and prolific writer on business organizations. He’s a member of Stoll Keenon Ogden PLLC resident in its Louisville, Kentucky office and, among his many extra-curricular activities, is chair of the ABA Business Law Section’s Committee on LLCs, Partnerships and Unincorporated Entities. When Tom questions engrained notions about shareholder oppression in closely held businesses, people take notice.

I, for one, took notice of Tom’s thought-provoking article in the July-August 2014 issue of the Journal of Passthrough Entities entitled “Minority Shareholder Oppression? — The Problem is Not With the Answer But Rather With the Question.” Targeting legal doctrine that, Tom contends, improperly treats the majority’s termination of a minority shareholder’s at-will employment as an act of oppression, the article takes issue with what Tom calls the “classic prevailing analysis of shareholder oppression” under which courts are expected

to modify the contractual terms of the corporate form to create and enforce rights not afforded by the statute and not, as to the venture at hand, negotiated for and incorporated into the agreements comprising the venture.

In other words, the “classic formula under which the ‘oppression’ of minority shareholders and members is framed,” as Tom puts it, in the case of the terminated minority shareholder places the remedial cart before the rights-and-obligations horse. It does so, first, by failing to acknowledge the “separate and distinct” legal relationships that arise from the “corporate contract” as opposed to the “employment relationship” and, second, by encouraging ex-post judicial modification of the former by deeming oppressive conduct (i.e., termination of an at-will employee) that is fully sanctioned by the latter’s governing principles.  Continue Reading You’re Fired! No, I’m Oppressed!