Commercial Division Blog

Posted: December 27, 2015 / Categories Commercial, Business Divorce

Corporation Dissolved Based On Deadlock, Dissension and Division

On December 18, 2015, Justice Platkin of the Albany County Commercial Division issued a decision in Matter of the Dissolution of Capital Region Multiple Listing Service Inc., 2015 NY Slip Op 51857(U), ordering the judicial dissolution of a New York Corporation based on "dissension, disagreement and division" among the shareholders and directors. The decision provides a primer on judicial dissolution under the Business Corporation Law.

Justice Platkin explained the standards for dissolution under BCL §§ 1104(a)(1) and (a)(3):

Judicial dissolution of a business corporation is authorized where "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" (Business Corporation Law § 1104 [a] [1]). Dissolution also is available where "there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders" (Business Corporation Law § 1104 [a] [3]).

The dissension, disagreement and division within the corporation must pose an irreconcilable barrier to its continued functioning and prosperity. But the underlying reason for the dissension is of no moment, nor is it at all relevant to ascribe fault to either party. Rather, the critical consideration is the fact that dissension exists and has resulted in a deadlock precluding the successful and profitable conduct of the corporation's affairs. In determining whether to grant dissolution, the benefit to the shareholders is of paramount importance, and dissolution is not to be denied merely because it is found that the corporate business has been or could be conducted at a profit.

(Citations omitted).

Next, the Court explained the evidence adduced at an evidentiary hearing that "convincingly demonstrates an extremely high level of dissension, division and discord between [the shareholders] that has left the Board, which consists of six directors appointed by each shareholder, deadlocked and unable to act on all but the most ministerial of matters":

[T]he Board has been unable to obtain the votes necessary for action on matters of significance to CRMLS, including: approval of the minutes of prior Board meetings; changes to the CRMLS by-laws mandated by the National Association of Realtors ("NAR"); the retention of counsel for CRMLS in an action commenced by GCAR seeking a declaration of rights with regard to ownership of the listing data provided to CRMLS . . .; and various matters of corporate governance and day-to-day administration of the corporation.

This deadlock of the CRMLS Board and its inability to act extends well beyond the discrete issues upon which Board votes were taken and deadlock ensued. Rather, GCAR has established persistent, sweeping and escalating divisions on the part of CRMLS directors that prevent the Board from taking any meaningful new action or, for that matter, even agreeing upon what transpired at its prior meetings. In other words, the credible proof at trial shows a corporate board that has been paralyzed by division and deadlock for years.

The Court further finds that there is no reasonable prospect that the votes needed for action by the CRMLS Board action could be obtained by the convening of additional meetings. It is evident that the convening of additional Board meetings would be futile, even if a quorum were obtained. . . .

The paralysis of the CRMLS Board is a direct outgrowth of the extreme division and dissension that has developed over a long period of time between the two shareholders, each of which owns one-half of the stock in the MLS joint venture. The minutes of shareholders' meetings and the credible trial testimony establish that GCAR and SSSAR are unable to agree on fundamental issues affecting CRMLS business and affairs, including: corporate governance; the day-to-day administration of CRMLS; the selection of an administrator, counsel and accountant; access to corporate funds and property; and the NAR-mandated changes to the CRMLS by-laws. As a result, the shareholders are embroiled in numerous disputes, including: the DJ Action; SSSAR's complaints to NAR regarding GCAR's administration of CRMLS; threats of personal litigation against GCAR leadership; and highly charged allegations of criminality and other wrongdoing. GCAR has further shown that the conflict between the shareholders escalated to the point of physical intimidation, threats and verbal hostility at several meetings in May 2014.

In addition to the specific issues that have engendered dissension and division, the Court credits the more generalized testimony put forward by GCAR's witnesses regarding the shareholders' differing visions of the future of CRMLS and the technological and business changes necessary to ensure the corporation's continued success and vitality. Given the longstanding acrimony between the shareholders, CRMLS has been unable to enter into a long-term arrangement with a vendor for the data processing services that are critical to the success of its MLS, instead being forced to maintain the status through month-by-month agreements. Nor can CRMLS explore significant technological changes or collaborative and/or regional opportunities with other multiple listing services as presently divided.

Indeed, the ongoing dissension, disagreement and deadlock has created a chaotic and disruptive situation in which CRMLS is unable to address issues of significance to its current business, much less confront future challenges and opportunities. All of this poses an irreconcilable barrier to the continued functioning and prosperity of CRMLS, even while the corporation remains financially solvent as a result of the fees being paid to it by GCAR's member brokers.

(Citations omitted).