New York Business Corporation Law § 1104-a empowers a holder of 20% or more of a closely held corporation’s stock to petition for that corporation’s dissolution on the grounds that, inter alia, the controlling shareholders have committed “illegal, fraudulent or oppressive actions toward the complaining shareholders.”[1] 

But a finding of shareholder oppression does not automatically result in court-ordered dissolution.  New York law instructs that, in determining whether involuntary dissolution is warranted, a court must consider two factors: “(1) whether liquidation ‘is the only feasible means whereby a petitioner may reasonably expect to obtain a fair return on her investment; and (2) whether liquidation . . . is reasonably necessary for the protection of the rights and interests of any substantial number of shareholders or of the petitioners.’”[2]  In practical terms, a court “has discretion to deny a petition for dissolution upon a showing of shareholder oppression, provided . . . that an ‘adequate, alternative remedy’ exists.”[3]

Because the mere allegation of shareholder oppression may suggest that continued co-existence is untenable, an “adequate[] alternative remedy” typically involves the controlling shareholders buying out the petitioner’s shares at their fair value and under conditions approved by the court.[4]  However, a recent and novel decision by Queens Commercial Division Justice Leonard Livote shows that, at least in instances where continued co-existence appears possible, a simple money damages award may prove sufficient to address proven—albeit minor—claims of shareholder oppression.[5]

Background

The decision concerns a collection of New York-based businesses (the “Companies”)—including two real-estate holding companies, Maysa Realty Corp. and Jamal Kamal Corp. (the “Subject Corporations”)—owned by five brothers.  After an eleven-day evidentiary hearing, the Court found the following facts in support of its decision.

In 1988, following the death of the shareholders’ father, the eldest brother, Jamal Hammad, became President of two companies then existing and, within seven years, had grown the family business into ten different corporations.  Jamal continued to run the Companies for another fifteen years, but his day-to-day involvement diminished as he began to concentrate more on other businesses overseas. 

In 2011, another brother, Nedal Hammad, was unanimously selected as President of the Companies, and in 2013, Jamal sold all his shares to his four brothers, thereby making them each a 25% shareholder in the Companies.

The Companies’ performance dipped under Nedal’s leadership.  In 2014, Nedal formed a new entity called Highcrest Management Corp. (“Highcrest”), of which he owned 50% and which he intended to use to provide centralized management services to the Companies.  The Companies, in return, paid Highcrest a management fee and covered Nedal’s benefits and expenses. 

According to the Court, the three remaining brothers eventually grew concerned that Nedal was “using Highcrest to drain money from the [C]ompanies and enrich himself.”[6]  In 2016, they approached Jamal, urged him to re-join the Companies as a shareholder, and subsequently each transferred 5% of their shares to him. 

In February 2017, Jamal and his three brothers sent Nedal a list of fourteen demands, including that he cease all further payments to Highcrest.  But Nedal continued to make those payments and also authorized shareholder distributions from the Subject Corporations.  Nedal’s brothers did not cash their distribution checks and returned any distribution money they received earlier that year.

In August 2017, the brothers removed Nedal as President of the Subject Corporations and, in his place, appointed Jamal.  Under Jamal’s authority, the brothers took steps to address Nedal’s prior transactions, including:

• reclassifying Nedal’s 2017 distributions—totaling $192,500—into loans to Nedal from the Subject Corporations, on the ground that the distributions made that year were “unaffordable”;[7] and
• reclassifying the 2017 management fees paid to Highcrest—totaling $59,825—into loans to Nedal from the Subject Corporations, on the ground that the payments were “unauthorized” and “constituted self-dealing.”[8]

Following his removal, Nedal filed a petition under BCL § 1104-a seeking judicial dissolution of the Companies, including the Subject Corporations.

Analysis

In resolving the petition for dissolution, the Court first considered whether Nedal had demonstrated oppression by his brothers and concluded that he had—at least as to one of the actions complained of. 

“Oppressive action,” as the term is used in BCL § 1104-a, refers to conduct that “substantially defeats the reasonable expectations” of the minority shareholder that were “‘central’” to her or his decision “‘to join the venture.’”[9]  In Nedal’s case, it was not oppressive for his brothers to remove him as President of the Companies, because that position was “not a reasonable expectation of his stock ownership.”[10]  Nor was it oppressive for his brothers to reclassify the 2017 distributions as loans, because all shareholders were treated equally insofar as they returned any distributions made that year. 

But the Court did find the requisite oppression in the brothers’ decision to reclassify the $59,825 Highcrest payments into loans payable solely by Nedal.  The Court reasoned that the reclassification lacked justification because the brothers did not investigate or prove their allegations of self-dealing and made no inquiry into the value of management services that Highcrest has provided the Companies.  The Court also observed that one of the brothers, Samir, owned the other 50% stake in Highcrest but had not been the subject of the reclassification.

This finding did not necessitate dissolution of the Companies, though.  The Court explained, “‘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.’”[11] 

Under the circumstances, the Court concluded that dissolution was not warranted because the brothers had intended only to “remedy” or “equalize” what they perceived to be Nedal’s own unauthorized conduct, and did not “intend” “any future oppressive conduct” toward him.[12]  He would be permitted to “share in future distributions” and, thus, his reasonable expectations as shareholder would not be frustrated moving forward.

Still, acknowledging that the brothers’ improper re-classification of the $59,825 in Highcrest payments into loans payable only by Nedal “cannot be left unaddressed,” the Court determined that the “appropriate remedy” was simply to award Nedal damages in the amount of those payments.[13] 

Conclusion

Hammad serves as a useful reminder of the discretion courts have in resolving petitions for dissolution in oppressed shareholder suits.  Justice Livote ruled that—at least in cases involving minor instances of oppression where minority and controlling shareholders appear capable of continued co-existence moving forward—such petitions could be resolved by denying dissolution and awarding money damages as compensation for past transgressions.