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Posted: July 31, 2016

Shareholder Agreement’s Buy-Out Terms Not Applicable in Dissolution Proceeding

On July 21, 2016, Justice Knipel of the Kings County Supreme Court issued a decision in Matter of Piazza v. Gioia, 2016 NY Slip Op. 31430(U), holding that a shareholder buyout provision did not apply in a dissolution proceeding, explaining:

Gioia and KCWC argue that the commencement of this proceeding triggered Piazza’s obligation to sell his shares in accordance with paragraph 2 of the shareholders’ agreement. They contend that the court must, therefore, require Piazza to sell his shares to them for the last stipulated value of these shares, which, they assert, is $25,000 per share, as established at the November 28, 2007 shareholders’ meeting.

It is true that shareholders may set forth, in a shareholders’ agreement, that a judicial dissolution proceeding pursuant to Business Corporation Law § 1104-a will be deemed a voluntary offer to sell, or fix fair value, and such an agreement may be enforced. Thus, if a shareholders’ agreement expressly provides that a dissolution proceeding under Business Corporation Law § 1104-a will trigger buy-out rights under the shareholders’ agreement, the commencement of a dissolution proceeding will trigger these rights and the shareholders’ shares will be valued in accordance with the terms of the shareholders’ agreement. However, a shareholders’ agreement which fixes the tenns of a sale which is voluntarily sought and desired by a shareholder is not controlling when the sale is the result of claimed majority oppression or other wrongdoing–in effect, a forced buyout.

In the seminal case of Matter of Pace Photographers [Rosen] (71 NY2d at 747, where the buy-out provisions of the shareholders’ agreement at issue were explicitly limited to the desire of any party to sell, hypothecate, transfer, encumber or otherwise dispose of his shares, the Court of Appeals held that a sale occasioned by a Business Corporation Law § 1104-a petition premised on abuse by the majority does not fall within the contemplation of this shareholders’ agreement regarding a sale of stock by a shareholder to the corporation.

Here, as in Matter of Pace Photographers [Rosen] (71 NY2d at 747), the buy-out provision set forth in paragraph 2 of the shareholders’ agreement were limited to the desire of a shareholder to encumber or dispose of his stock of KCWC. Thus, this provision did not provide that a dissolution proceeding under Business Corporation Lavv § 1104-a would be deemed a voluntary offer to sell, nor did it fix fair value in the event of an election under Business Corporation Law § 1118. Rather, it contemplated a voluntary sale at the convenience of and for the benefit of the selling shareholder, and not a sale occasioned by a Business Corporation Law § 1104-a petition. A dissolution proceeding pursuant to Business Corporation Law § 1104-a, is an involuntary transfer, as opposed to a voluntary sale.

(Internal quotations and citations omitted).

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