Minority Shareholder Lacks Standing to Sue for Dissolution

• New York’s BCL requires at least 50 percent of shares to petition for dissolution based on deadlock, unless there has been a failure to elect directors.

•  The fact that a shareholders agreement required the election of two deadlocked directors was not a basis to waive the statutory requirement.

• Parties avoid claims of wrongdoing and oppressed shareholder action that could trigger mandatory sale of minority interest.

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Judicial Dissolution Petition Requires 50 Percent Shareholder

A minority shareholder in New York will have a difficult time pursuing a claim for dissolution because of a deadlocked board of directors or a deadlock among the shareholders.  New York law permits a cause of action for judicial dissolution based on deadlock, but only by shareholders with holdings of 50 percent or greater, unless the shareholders are unable to elect directors.

The statute can be harsh in its application, as demonstrated by a trial judge’s decision to dismiss a petition for dissolution under BCL § 1104, the provision of the New York Business Corporations Law that creates a statutory cause of action for judicial dissolution. (We discuss the issue of deadlock in more detail in our series on the topic, here and here.)

That decision, Balkind v. Nickel, in the Supreme Court, New York County, involved two directors and shareholders, whose appointment as directors was required by their shareholder agreement.  The plaintiff petitioner Balkind owned 59 percent of Lanson Properties, Inc. and the defendant Nickel owned 51 percent.  Balkind sued for judicial dissolution and Nickel moved to dismiss, claiming that Balkind did not have standing under the statute as a 49-percent owner.  The trial judge granted the motion.

The corporation owned a single piece of property that they had been trying to sell for the prior two years.  The property was largely vacant, had no property manager, and one of the shareholders was purportedly funding the mortgage at a cost of $45,000 a month.  They had agreed on the sale of the property but had been unable to agree on an offer that had been made the prior year.

Under the circumstances, any action of the board required the consent of both directors and both shareholders.  The unanimity requirement made clear that the board was deadlocked, and the facts recited in the opinion describe circumstances in which the deadlock was causing ongoing harm to the corporation.

Business Corporations Law § 1104 Permits Petition for Dissolution Based on Deadlock

New York statutory law, however, did not permit a petition for dissolution under those circumstances.  Unless the Certificate of Incorporation has a different requirement, a party owning at least half the shares entitled to vote may petition for dissolution of a New York corporation on the following grounds:

(a) … the holders of shares representing one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors may present a petition for dissolution on one or more of the following grounds:(1) That the directors are so divided respecting the management of the corporation’s affairs that the votes required for action by the board cannot be obtained.

(2) That the shareholders are so divided that the votes required for the election of directors cannot be obtained.

(3) That there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders.

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(c) Notwithstanding any provision in the certificate of incorporation, 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 or would have expired upon the election and qualification of their successors.

Inability to Elect Directors is Grounds for Judicial Dissolution

Because the shareholder agreement dictated that the two shareholders would serve as the only directors, the provision that permits any shareholder to sue for dissolution on the basis of the inability elect directors at two consecutive annual meetings could not apply did not apply.

Since the election of directors was not an issue, Balkind as the minority shareholder tried to rely on the statutory provisions that required her to have at least half the shares entitled to vote.    On this point, the Court held, the statute did not give her standing to pursue such a claim.

Contrary to Balkind’s position, BCL § 1104 is clear – to petition for judicial dissolution, petitioners must be “the holders of shares representing one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors . . ..” Under the plain meaning of the statute, Balkind, as the holder of 49% of the voting stock, does not have standing, and New York courts strictly interpret and apply the statute.

New York law permits judicial dissolution under other limited circumstances.  Either the shareholders or the directors can adopt a resolution that the corporation is insolvent or that a dissolution will be beneficial to the shareholders, after which the directors or shareholders may petition for dissolution. See BCL § 1103 and BCL § 1104.

New  York law also provides a shareholder that owns at least 20 percent of the outstanding shares may bring an action under BCL § 1004-a for involuntary dissolution as an oppressed shareholder, when:

(1) The directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders;

(2) The 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.

Balkind likely did not sue as an oppressed shareholder, however, because BCL § 1118 provides the non-petitioning shareholder to purchase the interest of the minority oppressed shareholder for fair value.  Once the election is made, it is irrevocable unless the court finds good cause to excuse to rescind the election.  Similarly, once the election is made, the petitioner similarly cannot without court approval withdraw its oppression claim and is obligated to complete the sale.

Thus, if Balkind had elected to proceed as an oppressed minority, she would have been subjected to the compelled repurchase of the minority interest in the business.