Commercial Division Blog

Posted: January 25, 2019 / Categories Commercial, Business Divorce

Disrespectful and Disproportionate Treatment of Female Shareholder Oppression Justifying Dissolution Under BCL

On January 9, 2019, Justice Nowak of the Erie County Commercial Division issued a decision in Matter of Straka v. Arcara Zucarelli Lenda & Assoc. CPAs P.C., 2019 NY Slip Op. 29017, holding that disrespectful and disproportionate treatment of a female shareholder was oppression sufficient to justify a corporation's dissolution, explaining:

A minority shareholder may petition the Court for dissolution of the corporation in which he or she owns at least 20% of the outstanding shares, and where the majority shareholders have engaged in illegal, fraudulent, or oppressive actions towards the petitioning shareholder. The term "oppressive" has not been statutorily defined, but disappointment alone should not necessarily be equated with oppression. Instead, the Court of Appeals has held that oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner's decision to join the venture. A court considering a petition alleging oppressive conduct must investigate what the majority shareholders knew, or should have known, to be the petitioner's expectations in entering the particular enterprise.

This court finds that Arcara, Zucarelli and Lenda, and indeed, any shareholder of any corporation, should know that a female shareholder reasonably expects to be treated with equal dignity and respect as male shareholders forming the majority. Straka has demonstrated that she was not. The shareholders' slow and inadequate response to Urbanek's demeaning behavior marginalized Straka, as did the lack of respect provided to her as the head of IT at the corporation. Furthermore, Zucarelli and Lenda promised but failed to foster collaboration by the former staff members of Brody Weiss.

This court also finds that Straka's reasonable expectation for fair compensation was frustrated by the use of the earnings matrix, particularly by allocating expenses of Weiss and Urbanek to all four shareholders while allocating their revenues only to Zucarelli and Lenda. Also, Straka demonstrated that the earnings matrix was used to allocate corporate profits as salaries to the remaining shareholders as opposed to dividends. When the majority shareholders of a close corporation award de facto dividends to all shareholders except a class of minority shareholders, such a policy may constitute oppressive actions and serve as a basis for an order made pursuant to section 1104-a of the Business Corporation Law dissolving the corporation.

Finally, the action taken to add Paul Eusanio as a shareholder in January 2017, without notice to Straka, constituted oppressive conduct by adversely affecting Straka's share in the corporation without her knowledge or consent. The corporation had initially alleged that Eusanio was made a shareholder at the March 7, 2017 shareholders meeting that Straka failed to attend. The testimony at the hearing contradicted that claim, but even if true, the February 22, 2017 notice provided to Straka was sufficient only to elect Eusanio as a director, not to add him as a shareholder and dilute Straka's interest in the corporation. Dilution of a minority shareholder's interest is permissible only when the shareholder is given an opportunity to supply capital and thereby maintain her percentage interest in the corporation. Any special action taken at a shareholders meeting, such as the issuance of shares or possible dilution of another shareholder's percentage of ownership in the corporation, that is not expressly stated in a notice to all shareholders, is null and void.

The Court of Appeals has held:

once oppressive conduct is found, consideration must be given to the totality of circumstances surrounding the current state of corporate affairs and relations to determine whether some remedy short of or other than dissolution constitutes a feasible means of satisfying both the petitioner's expectations and the rights and interests of any other substantial group of shareholders.

A court has broad latitude in fashioning alternative relief. Considering the size and nature of the business of the corporation, the court finds that a buyout of Straka's shares would satisfy her expectations and the rights of the remaining shareholders.

(Internal quotations and citations omitted).