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Current Developments in the Commercial Divisions of the
New York State Courts by Schlam Stone & Dolan LLP
Posted: November 10, 2018

Minority Shareholders Must Give Other Shareholders an Opportunity to Buy Their Shares

On October 24, 2018, Justice Emerson of the Suffolk County Commercial Division issued a decision in Matter of Marro (Marjod Realty Corp.), 2018 NY Slip Op. 51502(U), holding that minority shareholders were required to give other shareholders an opportunity to purchase their shares, explaining:

Business Corporation Law 1104-a provides that the holders of 20% or more of the outstanding shares of a closely held corporation have the right to petition for a judicial dissolution under special circumstances. Business Corporation Law § 1118 is a defensive mechanism for the nonpetitioning shareholders. It gives them the an absolute right to avoid the dissolution proceedings and any possibility of the corporation’s liquidation by electing to purchase the petitioners’ shares at their fair market value and upon terms and conditions approved by the court. The corporation and the remaining shareholders have the unconditioned right, within 90 days of the petition (and later within the court’s discretion), to avoid the potential drain and risk of dissolution proceedings by simply offering to buy out the minority’s interest, and the minority is protected by a court-approved determination of fair value and other terms and conditions of the purchase.

In a proceeding pursuant to Business Corporation Law 1104-a, the court has broad latitude in fashioning alternative relief. Before dissolution is ordered, the court is required to consider whether liquidation of the corporation is the only feasible means whereby the petitioning shareholders may obtain a fair return on their investment and whether it is reasonably necessary to protect the rights and interests of a substantial number of shareholders. Judicial dissolution is a remedy of last resort, and a buy-out pursuant to Business Corporation Law § 1118 is generally preferable to dissolution because it maintains the viability of the corporation. Absent exceptional circumstances, courts will ordinarily exercise their discretion to authorize a buy-out.

The petitioners’ only objection to Marjod Realty Corp.’s exercise of its right to purchase the petitioners’ shares pursuant to Business Corporation Law § 1118 is that it is untimely. The petitioners proffer no substantive reason why Marjod should not be allowed to purchase their shares. A buy-out of the petitioners’ shares is clearly preferable to liquidation of the corporation. It would allow the petitioners to obtain a fair return on their investment while protecting the rights and interests of the remaining shareholders. Accordingly, the motion is granted.

(Internal quotations and citations omitted) (emphasis added).

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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