Usually, in the early, heady days of a closely held business enterprise, optimism and cooperation rule the day. In fact, such optimism can be such a driving force that the business owners fail to create important shareholder agreements that could set forth rules to be followed in the event of a dispute. The owners may think that a dispute among them is virtually impossible; after all, they share “the dream.” Alas, just as in matrimony, where formerly committed spouses turn against each other, so also in small businesses can early unanimity turn to discord.
Minority Shareholders Are Particularly Vulnerable
When disputes among small business shareholders erupt, those with minority ownership positions are the most vulnerable. A minority shareholder may find himself or herself removed from the corporation’s board of directors. He or she may even find himself or herself out of a job. With no expectation of income from the corporation’s operations and the unlikelihood of dividends, the minority shareholder may appropriately feel that his or her shares are worthless.
Oppression Is Difficult, But Not Impossible, to Prove
New York generally applies the “reasonable expectations of the shareholder” test to determine whether or not the majority has oppressed a minority shareholder. Under the rule established in Matter of Kemp & Beatley, Inc., 64 NY2d 63, 73, 473 N.E.2d 1173, 484 N.Y.S.2d 799 (1984), oppression is deemed to arise only when the conduct of the majority “substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture” [64 NY2d at 73].
For example, if the shareholder has never been employed by the business, he or she cannot typically complain if the business chooses not to hire the shareholder. Likewise, where the shareholder has always been a passive investor and has never sought day-to-day responsibilities, it would be difficult to establish a claim of oppression. But where a minority shareholder’s employment is terminated and the majority prevented active participation in the corporation, a charge of oppression could be possible.
Petition for Dissolution of the Corporation
Provided that they make up at least 20 percent of the votes of all outstanding shares of the corporation, an oppressed shareholder (or shareholders) may petition New York courts for an order of corporate dissolution on one or more of the following grounds:
- The directors or those in control of the corporation have been guilty of illegal, fraudulent, or oppressive actions toward the complaining shareholders.
- The property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers, or those in control of the corporation.
N.Y. Bus. Corp. Law § 1104-a (a)(1) and (a)(2).
Valuation of Minority Shareholder’s Interest
Instead of actually shutting down the business, the court usually requires a statutory buyout of the oppressed shareholder’s interest at a “fair” value. What is fair, of course, can be subject to discussion and debate. There is a sound argument that a controlling interest is more valuable, on a per share basis, than a minority position. New York courts do not, however, ordinarily allow for such a minority interest discount. They do, however, usually allow for some discount for lack of marketability.
Skilled Legal Counsel is a Must in Corporate “Divorce”
A business breakup can be much more complex than the breakup of a marriage. Multiple parties have conflicting rights. Fiduciary obligations must also be considered. And, just as every business enterprise has unique characteristics, every business “divorce” presents unusual and unique problems. The attorneys at E. Stewart Jones Hacker Murphy are a seasoned team of business litigators who can protect your personal interests, and the business entity.
We are one of the most highly respected law firms in upstate New York and the capital district. With offices in Albany, Troy, Saratoga Springs, and Schenectady, we have been representing clients for more than 100 years. Make the right call. Call us now at (518) 274-5820 or complete our online form. The E. Stewart Jones Hacker Murphy Law Firm has an attorney available to assist clients 24 hours a day, seven days a week, 365 days a year – even on holidays.