The business judgment rule insulates decisions made in good faith and in the best interests of the enterprise from being subject to judicial second guessing ordinary business decisions
Majority shareholders that failed to pay dividends to a non-employee minority shareholders in valid exercise of business judgment rule did not engage in wrongful conduct.
Common law dissolution under New York law is available only for a palpable breach of duty so egregious as to disqualify the majority from exercising rights over dissolution.
A minority shareholder subject to a counterclaim has a right to be indemnified against legal fees and an advance of funds for expenses.
A trial court may preclude individual defendants from using corporate funds to defend an oppressed minority shareholder lawsuit.
The decision of controlling shareholders that a corporation will not pay dividends to a former employee and director is subject to the business judgment rule, in this case defeating the shareholder’s claim of oppressive conduct by the majority.
The Fourth Department of the Appellate Division of New York Supreme Court rejected the claim brought by a minority shareholder of a family-owned equipment business in Syracuse, applying the presumption that an action taken in good faith by a business in the best interests of the business should be free from second-guessing by the minority and the Court. (Opinion in Feldmeier v. Feldmeier Equipment, Inc. here.)
John Feldmeier, the son of Robert Feldmeier, who founded Feldmeier Equipment in 1953, resigned his position as president and started a competing business. He was the only shareholder who was not employed by the company. After his resignation, Feldmeier did not receive distributions or dividends. He filed suit against the other officers of the company alleging that they had breached fiduciary duties owed to him by refusing to pay dividends and rewarding themselves with excessive salaries and bonuses.
The defendants contended that the company had never paid dividends and that their income was derived by the payment of salaries and bonuses to the employee-shareholders regardless of their actual holdings. They also filed counterclaims against the plaintiff (the nature of which are not discussed in the opinion.) Both parties moved for summary judgment. The trial court granted the defendants’ motion, holding that the refusal to pay dividends was protected by the business judgment rule. The judge also granted a cross-motion of plaintiff, holding that he was entitled to be indemnified against the cost of defending a counter-claim and enjoining the individual defendants from using the corporation’s funds to pay their individual legal fees.
The plaintiff relied on an expert witness who opined that the compensation of the individual defendants was excessive and that other payments were an attempt to depress the retained earnings. The Defendants countered that their individual compensation had actually been reduced since the resignation of the plaintiff and that their decisions were protected by the business judgment rule. In affirming the grant of summary judgment to the defendants, the Fourth Department held that Plaintiff’s “conclusory and speculative allegations of bad faith, self-dealing and other wrongdoing [are] not sufficient to raise a triable issue of fact or to warrant summary judgment in his favor.” The court held that the trial court had correctly concluded that the business judgment rule applied:
[D]efendants established that each action was a legitimate and good-faith business decision entitled to protection under the business judgment rule, “which provides that, where corporate officers or directors exercise unbiased judgment in determining that certain actions will promote the corporation’s interests, courts will defer to those determinations if they were made in good faith.
The trial court had also granted the defendants’ motion to dismiss the plaintiff’s claim for common-law dissolution, which the appellate court affirmed. Because the plaintiff did not own at least 20 percent of the outstanding stock of the company, he could not bring a statutory oppressed shareholder action under Business Corporations Law 1004-a. While New York does recognize a common law action for dissolution, it is only available to remedy particularly egregious misconduct, which was not present in this action:
[T]he courts’ equitable power [to dissolve a corporation] can be invoked when it appears that the directors and majority shareholders have so palpably breached the fiduciary duty they owe to the minority shareholders that they are disqualified from exercising the exclusive discretion and the dissolution power given to them by statute.
The Fourth Department reversed the trial court is rejecting the plaintiff’s motion for summary judgment on his claim for indemnification, however. Business Corporations Law § 722(a) provides for indemnification of officers and directors for incurred in defending a proceeding for costs and attorney’s fees. The standard is that the director or officer acted in good faith, “for a purpose he reasonably believed to be in … the best interest of the corporation.” Such indemnification, the court held, is available “even though the counterclaims are brought in part by the corporation itself.”
Moreover, the Fourth Department held that plaintiff was entitled to an advancement of his attorney’s fees. To receive an advance of expenses, the court noted, the party seeking indemnification mush who that the has raised “genuine issues of fact or law” in the pleadings. The advance is subject to repayment in the event that the corporation prevailed on its counterclaims.
Finally, the Fourth Department reversed an order denying plaintiff’s request for an injunction to preclude the defendants from using corporate funds to pay for the defense of the dissolution claim. The rationale for such a prohibition, the court noted, was that a corporation is itself a nominal defendant in an action to compel dissolution. The corporation has no standing and the proceedings amount to a dispute between the shareholders.