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Current Developments in the Commercial Divisions of the
New York State Courts
Posted: January 4, 2017

Absent Fraud, Board’s Judgment as to Value of Consideration Received for Shares is Conclusive

On December 28, 2016, the Second Department issued a decision in KNET, Inc. v. Ruocco, 2016 NY Slip Op. 08853, reversing a grant of summary judgment and holding that there were questions of fact regarding whether a board’s issue of shares was improper, explaining:

The court invalidated all but 500,000 of the shares of Interceptor issued to Ruocco and all of the shares of Interceptor issued to Sylvester based upon defendants’ undisputed failure to provide sufficient consideration for their shares. . . .

With respect to the contention that Ruocco and Sylvester were improperly issued shares in Interceptor, consideration for shares may consist of money or other property, tangible or intangible; labor or services actually received by or performed for the corporation for its benefit or in its formation. In the absence of fraud in the transaction, the judgment of the board or shareholders, as the case may be, as to the value of the consideration received for shares shall be conclusive“. Here, issues of fact exist as to whether Ruocco and Sylvester were improperly issued shares in Interceptor since the parties’ submissions indicate that Ruocco was the founder of the corporation and performed services in the formation of Interceptor, that Ruocco and Sylvester invested in the company, and that Sylvester’s shares may have been a gift from Ruocco.

(Internal quotations and citations omitted) (emphasis added).

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