Minority Shareholder Rights
in New York.
A minority owner of a closely held New York corporation cannot outvote the majority and usually cannot sell the shares to anyone else. New York law recognizes that problem. Business Corporation Law 1104-a lets a minority shareholder holding at least 20 percent of the votes ask the court to dissolve the corporation for oppression, and BCL 1118 gives the majority the choice to buy those shares at fair value instead. I represent shareholders in these cases in Supreme Court in the five boroughs, Nassau, Suffolk, Westchester, and Orange counties.
Who BCL 1104-a Protects
The statute applies to corporations whose shares are not listed on a national securities exchange or regularly quoted over the counter, which describes almost every family business, professional corporation, and small company in New York. A petition may be brought by "the holders of shares representing twenty percent or more of the votes of all outstanding shares" entitled to vote in an election of directors (BCL 1104-a[a]). Shareholders holding less than 20 percent cannot use the statute, but they are not without remedies, as explained below.
There are two grounds. The first is that "the directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders" (BCL 1104-a[a][1]). The second is that the corporation's property or assets "are being looted, wasted, or diverted for non-corporate purposes" by those in control (BCL 1104-a[a][2]).
What Counts as Oppression: Kemp & Beatley
The statute does not define "oppressive actions." The Court of Appeals did, in Matter of Kemp & Beatley (Gardstein), 64 N.Y.2d 63 (1984). Two long-time employees of a table linen company owned about 20 percent of its stock. For years the company had distributed its earnings to shareholders in proportion to their stock, in the form of bonuses. After the two left the company, it kept paying the bonuses but stopped basing them on stock ownership, which cut the two former employees off from any return on their shares. The Court held that this was oppression.
The test the Court adopted turns on the shareholder's "reasonable expectations." Oppression arises "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" (64 N.Y.2d at 73). The Court gave examples of what those expectations can be: a shareholder who reasonably expected that ownership would bring "a job, a share of corporate earnings, a place in corporate management, or some other form of security" is oppressed when those in control defeat that expectation and there is no effective way to salvage the investment (id. at 72-73).
The Court also drew the limit: "Disappointment alone should not necessarily be equated with oppression" (id. at 73). And a shareholder who acts in bad faith to manufacture the oppression, as a way to force a dissolution, gets no protection from the statute (id. at 74).
Common Fact Patterns
The cases that fit the statute tend to look alike. The minority owner is fired or pushed out of a job that came with the ownership. Distributions stop, while the majority's salaries and bonuses go up. The minority owner is removed from the board or from the bank accounts. Company money pays personal expenses, or business is steered to a new company the majority owns. Each of these is a fact question, and each is proved with the corporation's own records.
What Happens After the Petition Is Filed
The books open up
Within thirty days after a 1104-a petition is filed, the directors or those in control must make the corporate financial books and records for the three preceding years available to the petitioners for inspection and copying (BCL 1104-a[c]).
The court weighs alternatives
In deciding whether to dissolve, the court must consider whether liquidation is the only feasible way for the petitioners to obtain a fair return on their investment, and whether it is reasonably necessary to protect the rights of the petitioners or a substantial number of shareholders (BCL 1104-a[b]). Once a petitioner makes a prima facie case of oppression, Kemp & Beatley places the burden on the side opposing dissolution to show an adequate alternative remedy (64 N.Y.2d at 73-74). The court can also adjust stock valuations and surcharge those in control for willful or reckless dissipation of assets (BCL 1104-a[d]).
The buyout election
Under BCL 1118(a), the corporation or any other shareholder may elect, within ninety days after the petition is filed or later if the court allows, to buy the petitioner's shares at fair value. The election is irrevocable unless the court decides otherwise. If the parties cannot agree on the number, the court determines fair value "as of the day prior to the date on which such petition was filed," and may award interest from the filing date (BCL 1118[b]). If the election comes after the ninety days, the court may award the petitioner reasonable expenses, including attorneys' fees, incurred before the election (BCL 1118[c][1]). In practice, this is how most of these cases end: not with a liquidation but with a valuation fight and a check.
Rights Every Shareholder Has
Whether or not you reach the 20 percent threshold, BCL 624 gives a shareholder of record the right, on at least five days' written demand, to examine the minutes of shareholder meetings and the record of shareholders for any purpose reasonably related to the shareholder's interest (BCL 624[b]). On written request, the corporation must also give the shareholder an annual balance sheet and profit and loss statement for the preceding fiscal year (BCL 624[e]). If the corporation refuses an inspection, the shareholder may apply to Supreme Court for an order compelling it (BCL 624[d]).
A shareholder below 20 percent, or one whose claim is about harm to the company, may have claims for breach of a shareholders' agreement, for breach of fiduciary duty by the directors and the controlling shareholders, or derivatively on behalf of the corporation. See Breach of Fiduciary Duty.
Talk to a Minority Shareholder Lawyer in New York
Send me the shareholders' agreement, if there is one, the stock certificates or other proof of ownership, and a short account of what has changed. I will tell you whether the facts support a petition, what the buyout election means for your number, and what I would do first.
Phone: 212-233-0666 | Email: fabramson@abramsonlegal.com
Related: Shareholder Disputes and Business Divorce · Dissolution and Deadlock · Frozen Out by Your Business Partners · Breach of Fiduciary Duty · Business Disputes
Attorney Advertising. Prior results do not guarantee a similar outcome. The information on this page is general and is not legal advice. Consult an attorney about the specific facts of your matter. Law Office of Frederic R. Abramson, 160 Broadway, Suite 500, New York, NY 10038. 212-233-0666.
Frequently Asked Questions
How much stock do I need to petition for dissolution based on oppression?
Under BCL 1104-a(a), the petitioners must hold shares representing at least 20 percent of the votes of all outstanding shares entitled to vote in an election of directors, in a corporation whose shares are not listed on a securities exchange or regularly quoted over the counter.
What is oppression under New York law?
The Court of Appeals defined it in Matter of Kemp & Beatley (Gardstein), 64 N.Y.2d 63 (1984). Oppression arises when the majority's conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder's decision to join the venture, such as a job, a share of the earnings, or a role in management. Disappointment alone is not oppression.
Can the majority buy me out instead of dissolving the corporation?
Yes. Under BCL 1118(a), the corporation or any other shareholder may elect, within ninety days after the petition is filed or later if the court allows, to buy the petitioner's shares at fair value. If the parties cannot agree on the price, the court sets it.
As of what date are my shares valued?
Under BCL 1118(b), fair value is determined as of the day before the petition was filed, excluding any element of value arising from the filing itself. The court may award interest from the filing date to the date of payment.