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

pizzaA self-described “world-renowned Neapolitan pizza chef” won a round in court earlier this month in a dispute with his business partner over control of a popular pizzeria located in Manhattan’s Greenwich Village. The court’s opinion by Manhattan Commercial Division Justice O. Peter Sherwood in Manzella v Caporuscio, 2015 NY Slip Op 31870(U)[Sup Ct NY County Oct. 6, 2015], granted summary judgment for the chef/majority member on his counterclaim against the minority member for breach of fiduciary duty and modified a prior Consent Order to authorize termination of the minority member’s employment for cause.

The case involves a Greenwich Village restaurant called Keste Pizza and Vino founded in 2009 by pizza chef Roberto Caporuscio. Since 2012 the business is co-owned by Caporuscio and Sandra Manzella as 55% and 45% members, respectively, of Keste Group LLC. Keste has a fairly standard operating agreement for member-managed LLCs, giving Caporuscio as majority member the controlling vote with a few exceptions requiring unanimous consent such as the admission of a new member.

Keste’s operating agreement (read here) doesn’t mention much less guarantee a member’s “employment” by the LLC. What it does say — which apparently stiffened spines on both sides in the lead-up to litigation — is that “[n]otwithstanding anything to the contrary contained in the provisions of this Agreement, the Members agree that Caporuscio and Manzella shall have primary responsibility for running the day-to-day operations of the Company” (¶ 4.1). Continue Reading Pizza Chef with Bigger Piece of LLC Pie Allowed to Terminate Minority Member’s Employment

The cringe-worthy phrase, “legal equivalent of a proctology exam,” gained notoriety about ten years ago when its use by an attorney in a pre-litigation demand letter was cited by a federal judge as partial justification for a $50,000 sanction award which was later reversed on appeal. The phrase involuntarily leapt to mind when I read the recent post-trial decision by Suffolk County Commercial Division Justice Emily Pines in Suffolk Anesthesiology Associates, P.C. v. Verdone, 2012 NY Slip Op 50728(U) (Sup Ct Suffolk County Apr. 25, 2012), a bare-knuckles contest pitting an expelled physician-shareholder of a large Long Island anesthesiology practice against the 11 other physician-shareholders.

The parties’ very public charges and counter-charges of improper financial dealings, conflicts of interest and potentially serious healthcare law violations, none of which ultimately swung the case outcome, if nothing else offer a compelling argument for inclusion of a binding arbitration clause in the shareholder and employment agreements, thereby ensuring that the airing of the practice’s allegedly “dirty linen” will be confined to a private, confidential setting.

The Verdone case also offers healthcare transactional attorneys a cautionary lesson on drafting mandatory buyback provisions triggered by a shareholder’s departure from the practice, to avoid a draining battle as took place in Verdone over whether the expelled shareholder was terminated with or without cause.

Continue Reading Anesthesiology Practice Undergoes “Legal Equivalent of a Proctology Exam” in Shareholder Dispute