shareholders agreement

After 35 years, Matter of Kemp & Beatley, Inc. (64 NY2d 63 [1984]), remains the leading authority in New York on oppression-based corporate dissolution. In Kemp & Beatley, the Court of Appeals announced a now-venerable legal rule: “Assuming the petitioner has set forth a prima facie case of oppressive conduct,” a shareholder wishing to “forestall dissolution” must “demonstrate to the court the existence of an adequate, alternative remedy.” In practice, what this means is that courts must consider whether a buyout will provide the petitioning shareholder a “reasonable means of withdrawing his or her investment.”

A recent decision by a Manhattan-based appeals court, Campbell v McCall’s Bronxwood Funeral Home, Inc., 2019 NY Slip Op 00182 [1st Dept Jan. 10, 2019], presents a number of interesting questions about how courts should apply Kemp & Beatley’s pronouncement that courts must consider an “adequate, alternative remedy” to dissolution in the face of a written shareholder’s agreement that provides a formula and method for buying out a shareholder’s stock. Campbell is an epic 12-year litigation with seemingly no end in sight. Continue Reading A Fresh Take on an Old Doctrine – The “Adequate, Alternative Remedy” to Dissolution

The dog days of August are upon us, a perfect time as I do each year to offer vacationing readers some lighter fare consisting of summaries of a few recent decisions of interest involving disputes between business co-owners.

This year’s summaries include a partnership appraisal case from Nebraska in which the usual “battle of the experts” turned into a romp for one side, a New York case in which one side insisted that a written “Shareholder Agreement” was not really a shareholder agreement, and a federal court decision from Illinois in which the court rejected the argument that it should abstain from hearing a statutory dissolution claim.

A Train Wreck of a Valuation Case

If you want a lesson in how not to litigate an appraisal proceeding, look no further than Fredericks Peebles & Morgan LLP v Assam, 300 Neb. 670 [Sup Ct Aug. 3, 2018], in which the Nebraska Supreme Court recently affirmed the appraisal court’s determination, pursuant to the buy-out provisions of a law firm partnership agreement, of the $590,000 fair market value of a withdrawn partner’s 23.25% partnership interest. Continue Reading Summer Shorts: Partnership Appraisal and Other Recent Decisions of Interest

One of three, equal shareholders in a family-owned business licensed by the state liquor authority was convicted of a felony. Under state law the felony conviction of an owner jeopardizes the company’s license and with it, the entire business. The other two shareholders therefore adopted a resolution terminating his employment and simultaneously exercised the company’s option, set forth in their shareholders’ agreement, to redeem his stock at a value to be determined by appraisal.

Problem solved? Not quite. For one thing, the termination of employment was made retroactive about three months, arguably contrary to a provision in the shareholders’ agreement requiring that the purchase option be exercised within 30 days of termination. For another, the company did not obtain the required appraisal or propose a closing until about a year after the termination, whereas the agreement required that the company close on its option to redeem the shares within 90 days of the termination.

The ousted shareholder refused to tender his shares, contending that the company forfeited its purchase option by failing to exercise it in a timely fashion. The company, under pressure of a threatened de-licensing, sued to enforce the buy-out.

Probably you won’t be surprised to learn that, last week, an appellate panel in A. Cappione, Inc. v Cappione, 2014 NY Slip Op 05230 [3d Dept July 10, 2014], affirmed the trial court’s decision in favor of the company, ordering the ousted shareholder to convey his shares but also allowing him to contest the appraised value offered for his shares. The court’s ruling is particularly important in that it ordered the conveyance even assuming the option to purchase was not timely exercised, based on the manifest intent of the shareholders’ agreement to retain managerial control within the family, and the risk to the company of losing its critical license. Continue Reading Stockholder Fired, Forced to Sell Shares After Felony Conviction

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

State laws give voting power and, hence, management control, to majority shareholders in closely-held corporations. The minority shareholder can thus find herself without an effective voice in setting corporate policies for officer and employee compensation, finance, accounting, shareholder distributions, and a host of other decisions affecting the business. When this happens, the minority shareholder who feels she is being treated unfairly may desire to cash out her shares–for which no market likely exists–whether or not she has an available mechanism to do so, such as put rights or a buy-sell agreement.

Most states, including New York, long ago enacted judicial remedies for minority shareholders in cases of “oppressive” conduct by controlling shareholders. The New York statutory scheme, codified in §§ 1104-a and 1118 of the Business Corporation Law, authorizes the court to dissolve a closely-held corporation while giving the controlling shareholders the option to avoid dissolution by purchasing the petitioning owner’s shares for “fair value” which the court will determine if the parties cannot agree on a price. Many states including New York, by statute or common law, empower the court to compel a buy-out of the petitioner’s shares even if the controlling shareholder does not elect to purchase.

Delaware–which ranks 45th among the states in population but #1 in the incorporation of out-of-state entities–is not one of those states. Delaware, known for its management-friendly business laws, does not have a statute protecting oppressed minority shareholders of closely-held corporations. Except in cases of deadlock between two 50/50 shareholders, Delaware does not have a statute authorizing judicial dissolution of a closely-held corporation at the behest of a shareholder. Neither Delaware statute nor case law recognizes an oppressed minority shareholder’s right to be bought out.

The disadvantage of being a minority shareholder in a Delaware closely-held corporation came to the fore last week in Blaustein v. Lord Baltimore Capital Corp., C.A. No. 6685-VCN (Del Ch Apr. 30, 2013), in which Vice Chancellor Noble of the Delaware Chancery Court issued a 49-page opinion holding:

  • the alleged failure by the controlling directors and shareholders to “negotiate in good faith toward a reasonable purchase price” did not breach any implied covenant of good faith and fair dealing arising from a provision in the shareholders’ agreement fixing minimum voting thresholds for board and shareholder approval for discretionary stock redemption, and
  • the defendant controlling directors and shareholders owed no fiduciary duty to the plaintiff as a minority shareholder to accept her “reasonable” repurchase proposal.  Continue Reading Who Wants to Be a Minority Shareholder of a Delaware Closely-Held Corporation?

You’re an attorney.  You’re approached by Mortimer who tells you that he recently formed a new business corporation with Archibald, and that they want to hire you to prepare a shareholders’ agreement.  You also learn that Mortimer is the 51% "money" partner while Archibald is the 49% operating partner.

You’ve prepared many a shareholders’ agreement, and you know that the interests of Mortimer as majority owner and Archibald as minority owner inherently are in conflict on diverse management and financial issues, not to mention restrictions on stock transfer and redemption.  Should you represent both Mortimer and Archibald, or only one of them?  The disparate financial wherewithal and contributions of the two partners only accentuates the conflict.  If you represent Mortimer alone, and Archibald has no attorney of his own, is that a problem?

The rules of professional ethics set forth standards and proscriptions governing the simultaneous representation of multiple clients with conflicting interests.  Under the right circumstances, with appropriate client counseling and disclosure, it may be ethically acceptable to represent both Mortimer and Archibald in the preparation of the shareholders’ agreement.  In all events, it is vitally important that the attorney identify and document exactly whom they’re representing — and whom they’re not representing — in these situations.  The lawyer who fails to do so is taking on risk of a subsequent lawsuit by a disappointed shareholder for malpractice or fiduciary breach.

Continue Reading The Importance of Identifying Your Client — And Who’s Not Your Client — When Preparing Shareholder Agreements