Commercial Division Blog

Posted: August 5, 2016 / Categories Commercial, Contracts, Motion to Dismiss; Motion for Judgment on the Pleadings

Fact Questions Regarding Board's Good Faith Valuation of Shares Precludes Dismissal

On July 25, 2016, Justice Singh of the New York County Commercial Division issued a decision in Saleeby v. Remco Maintenance, LLC, 2016 NY Slip Op. 31447(U), holding that questions of fact precluded dismissal of a claim that a board's valuation of shares was not made in good faith, explaining:

The gravamen of the case is whether the value of plaintiffs Class B interest as determined by the Board was done in good faith, pursuant to the definition of Fair Market Value ("FMV") in Section 1.1 of the LLC agreement. . . .

The definition of Fair Market Value pursuant to the agreement gives the Board sole discretion in determining the factors to be used but also limits their determination to one that is done in good faith. Plaintiff contends that valuing his interest at zero dollars, the board's determination was not in good faith. Remco counters that the Board had sole discretion to determine the value of Class B shares. While the Board has "sole discretion" in determining the factors and value of the shares, the contract does provide that it be done in "good faith". New York courts have held that "good faith" is the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes. Black's Law Dictionary defines "acting in good faith" as "(b)ehaving honestly and frankly, without any intent to defraud or to seek an unconscionable advantage." Whether the determination in this case was made in good faith is an issue that cannot be decided on a motion to dismiss.

(Internal quotations and citations omitted).