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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: September 1, 2018

Common Law Dissolution Denied; No Evidence of Misconduct or Oppression

On August 22, 2018, the Fourth Department issued a decision in Feldmeier v. Feldmeier Equip., Inc., 2018 NY Slip Op. 05893, affirming the dismissal of an action for common law dissolution of a corporation, explaining:

As plaintiff correctly recognized, he could not seek judicial dissolution under Business Corporation Law § 1104-a because he owned less than 20% of all outstanding shares of the Corporation. Nevertheless, he could seek common-law dissolution. Predicated on the majority shareholders’ fiduciary obligation to treat all shareholders fairly and equally, to preserve corporate assets, and to fulfill their responsibilities of corporate management with scrupulous good faith, the courts’ equitable power [to dissolve a corporation] can be invoked when it appears that the directors and majority shareholders have so palpably breached the fiduciary duty they owe to the minority shareholders that they are disqualified from exercising the exclusive discretion and the dissolution power given to them by statute. Despite the different standards for statutory and common-law dissolution, courts have permitted common-law dissolution actions to proceed where there are colorable claims of oppression and looting, which are grounds for statutory dissolution under section 1104-a (1) and (2). Oppression occurs when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the minority shareholder’s decision to join the venture. Plaintiff contends that, in addition to breaching their fiduciary duty, the individual defendants engaged in looting by awarding themselves excessive compensation, which had the effect of oppressing him and depriving him of a fair return on his stock in the Corporation. As noted above, we conclude that defendants established as a matter of law that there were no breaches of fiduciary duty. We further conclude that defendants established as a matter of law that the majority shareholders did not oppress plaintiff or otherwise effect an unlawful diversion of large portions of the Corporation’s earnings to benefit themselves. To establish the waste of corporate assets based upon excessive compensation, the objecting stockholder must demonstrate that no person of ordinary sound business judgment would say that the corporation received a fair benefit. If ordinary businessmen might differ on the sufficiency of consideration received by the corporation, the courts will uphold the transaction. This inquiry turns on whether there is a great disparity in values between the assets expended and the benefits received. In other words, the shareholder must prove that the challenged compensation bore no relationship to the value received by the company, rendering it unjustifiably excessive. Here, as noted, the individual defendants were paid less after plaintiff resigned and the money was, instead, reinvested in the Corporation, which grew substantially. We therefore conclude that defendants met their initial burden on the motion with respect to the common-law dissolution cause of action, and plaintiff failed to raise a triable issue of fact. Contrary to plaintiff’s contention, this is not a situation where the compensation policy was changed after the minority shareholder left the employ of the Corporation. Indeed, it is plaintiff who seeks to change the established compensation policy of the Corporation.

(Internal quotations and citations omitted).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.

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