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Court-Ordered Dissolution Remains “Last Resort”

On October 11, 2016, in Matter of Skoler, 2016 BL 348290 (Sup. Ct. N.Y. Cnty.), Justice Lawrence K. Marks of the Commercial Division issued a decision regarding the strictures of judicial dissolution pursuant to Section 1104(a) of the New York Business Corporation Law (“BCL”).  Petitioners sought judicial dissolution of County Group Inc. (“County Group”), a small, closely held New York domestic corporation.  Petitioners hold 50% of the issued stock in County Group, and the “Responding Shareholders,” who opposed judicial dissolution, hold the remaining 50%.  The Responding Shareholders cross-moved to dismiss the petition.

The property effectively served as a vacation home to the shareholders—each 25% share entitled the shareholder to a proprietary lease to a designated bungalow on the property; the corporation was neither formed nor ever intended to be profitable.  Petitioners primarily argued that the shareholders disagree about most things related to the property, including the management of the corporation’s asset—e.g., the property’s upkeep and maintenance.  The Responding Shareholders countered that it is, in fact, Petitioners who have mistreated the property and failed to cover their share of the costs.

Dissolution under Section 1104(a) of the BCL is possible if holders of shares representing one-half of the votes of all outstanding shares of a corporation entitled to vote in an election of directors demonstrate that at least one of three delineated grounds for dissolution is met: (1) “the directors are so divided respecting the management of the corporation’s affairs that the votes required for action by the board cannot be obtained”; (2) “the shareholders are so divided that the votes required for the election of directors cannot be obtained”; or (3) “there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders.”[i]

Petitioners argued that all three grounds were met.  The Responding Shareholders contended that the entire petition was a thinly veiled attempt by Petitioners to force dissolution so they could subsequently purchase the property at a public sale for less than its fair market value.

The Court determined that Petitioners failed to meet their burden.  Although the Court acknowledged friction between the parties, such infighting was not sufficient to give rise to court-ordered dissolution under BCL § 1104: “[D]espite the current state of the relationships, the obligations of the corporation are being met.”[ii]  The Court reached this decision because the parties continue to derive benefit from the property, taxes and insurance have been paid, and basic upkeep of the property has been maintained.  Therefore, the “ultimate,” “last resort” remedy of court-ordered dissolution would not be proper.[iii]

This decision sets forth a succinct overview of the law governing judicial dissolution under the BCL—an issue that is often misunderstood.

 

[i] 2016 BL 348290, at *2.

[ii] Id. at *4.

[iii] Id. (quoting Matter of Yoet Ngor Ng, 174 A.D.2d 523, 526 (1st Dep’t 1991)).