MINORITY RIGHTS AND DISSOLUTION FOR CORPORATE SHAREHOLDERS AND LLC MEMBERS Overview and Case Law Update

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1 MINORITY RIGHTS AND DISSOLUTION FOR CORPORATE SHAREHOLDERS AND LLC MEMBERS Overview and Case Law Update 2017 NYSBA Presentation June 12, 2017 Presented By: Aaron M. Saykin, Esq.

and Richard E. Honen, Esq. of Phillips Lytle LLP, and by Christopher Massaroni, Esq. and by Dana P. Stanton, Esq.

2 Corporations Minority SH Rights in Corporations Note: A signification portion of the materials in this presentation have been prepared by or are borrowed from other attorneys, including Fatin Haddad, Esq. and Richard E. Honen, Esq. of Phillips Lytle LLP, and by Christopher Massaroni, Esq. and by Dana P. Stanton, Esq. of McNamee, Lochner, Titus & Williams, P.C., who had previously submitted them to the NYSBA. Special thanks, and lots of credit, to them. 2

3 Corporations Dissolution Four Basic Methods for a Minority SH to Dissolve a Corporation Statutory Dissolution under N.Y. Business Corporation Law (BCL) BCL 1103 BCL 1104 BCL 1104-a Common Law Dissolution 3

4 A. BCL 1103: Shareholder s Petition 1. Holders of shares representing at least 10% of outstanding shares can call a meeting to consider a resolution to dissolve the corporation. 2. Resolution must: state that they find that its assets are not sufficient to discharge its liabilities, or that they deem a dissolution to be beneficial to the shareholders; and be approved by a majority of all votes of outstanding shares. 3. SHs then may file a petition for dissolution. 4

5 B. BCL 1104: Shareholder or Director Deadlock 1. Holders of ½ (50%) of outstanding shares may file a petition for dissolution, if: (a) directors are so divided respecting the management of the corporation's affairs that the votes required for action by the board cannot be obtained; (b) shareholders are so divided that the votes required for the election of directors cannot be obtained; or (c) internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders. See In re Dream Weaver Realty, Inc., 70 A.D.3d 941(2d Dep t 2010) (doesn t matter who is at fault) 5

6 B. BCL 1104: Shareholder or Director Deadlock (Con t) 3. Additional ground: any holder of shares entitled to vote at an election of directors of a corporation, may present a petition for its dissolution on the ground that the shareholders are so divided that they have failed, for a period which includes at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired Case Law Update (1): Jedrzejcyk v. Gomez, 116 A.D.3d 632 (1st Dep t 2014) ( [a]lthough no shares in [the corporation] were ever issued, petitioner established prima facie that he was the owner of a 50% interest in [the corporation] and therefore had standing to petition for the corporation s dissolution.... ) Clarified that a petitioner who was never issued stock certificates may still have standing to bring an action for involuntary dissolution under NY BCL Petitioner must provide evidence that, despite not having actual share certificates, he or she has a 50% interest in the corporation. 6

7 B. BCL 1104: Shareholder or Director Deadlock (Con t) Case Law Update (2): In re Greater Capital Region Ass n of Realtors, Inc., No , 50 Misc. 3d (1202)(A), 2015 WL , at *2 (Sup. Ct. Albany County Dec. 18, 2015) Corporation was operating at a profit. Court granted the petition, quoting BCL 1111(b)(2): dissolution is not to be denied merely because it is found that the corporate business has been or could be conducted at a profit. The Court added: Indeed, the ongoing dissension, disagreement and deadlock has created a chaotic and disruptive situation in which [the corporation] is unable to address issues of significance to its current business, much less confront future challenges and opportunities. Court also emphasized in a footnote that the corporation in question was not operated to earn a profit or dividends for its shareholders, which are not-for-profit corporations. 7

8 C. BCL 1104-a: Special Circumstances 1. Holder(s) of at least 20% of outstanding shares may file a petition for dissolution, if: (a) directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders; or (b) property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation; or No SH vote is required. 8

9 C. BCL 1104-a: Special Circumstances (Con t) 2. Court will consider: (a) Whether liquidation is the only feasible means whereby the petitioners may reasonably expect to obtain a fair return on their investment; and (b) Whether liquidation of the corporation is reasonably necessary for the protection of the rights and interests of any substantial number of shareholders or of the petitioners 3. Controlling directors must make books & records available for inspection w/in 30 days. 9

10 C. BCL 1104-a: Special Circumstances (Con t) 4. Court may order valuation of the corporation to be adjusted, and may surcharge controlling directors upon a finding of willful or reckless dissipation of assets/property 5. Majority SHs have the right, within 90 days of the filing of petition, to buy out petitioning SHs for fair value. See BCL 1118(a). 10

11 C. BCL 1104-a: Special Circumstances (Con t) Examples: Oppressive Conduct: Majority gangs up on, and fires or freezes out, minority SH who had a reasonable expectation of continued employment by the corporation. Factual determination. Leading Case: Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63, 73 (1984) ( oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner s decision to join the venture ). See In re Williamson, 259 A.D.2d 362 (1st Dep t 1999) Petitioner s employment was incident of his stock ownership = oppression. But see In re Bitter, 270 A.D.2d 101(1st Dept. 2000) Petitioner employed for less than two years in non-managerial, at-will position. No reasonable expectation, so no oppression. 11

12 C. BCL 1104-a: Special Circumstances (Con t) Case Law Update: Qadan v. Tehseldar, 139 A.D.3d 1036, 1037 (2d Dep t 2016) Supreme Court could require a buy-out of the plaintiff s interest in the corporate defendants... with an alternate option for dissolution should the judgment not be paid by a specified date. See also In re Kemp, 64 N.Y.2d at 74 ( [a] court has broad latitude in fashioning alternative relief.... ) 12

The Break-Up: Considerations in Dissolving and Liquidating a Business

The Break-Up: Considerations in Dissolving and Liquidating a Business Brian D. Gwitt, Esq., Partner, Woods Oviatt Gilman LLP (BGwitt@woodsoviatt.com) Kelly G. Besaw, CPA, CVA, Partner, Chiampou Travis