Claims for Judicial Dissolution Not Easily Withdrawn

New York’s oppressed shareholder statute has a unique provision that was initially intended to prevent the oppressed shareholder from destroying a viable business.  That is because the New York statute otherwise gives the court only two options: send the oppressed shareholder away or force the dissolution of the business.

Other states give court’s more discretion, and a judge also has the ability to force a sale of an interest.  New York’s statutory scheme, however, takes a different approach.  (See our discussion here of some of the quirks of New York’s oppressed shareholder statute:  Business Divorce New York Style.)  One of the wrinkles in the statute, however, is that once a litigant invokes the oppressed shareholder provision in Business Corporations Law § 1104-a, it’s very difficult to stop the process.

Peter Mahler’s New York Business Divorce blog reports on an decision by a trial judge in Nassau County’s commercial part who declines to allow the plaintiff to withdraw a claim under BCL 1104-a.  In that case, the plaintiff tried to get out of the substantive and procedural limitations that flow from the conclusory assertion of a claim under 1104-a.

We had a not-so-different experience recently, when we realized after appearing on an application for a temporary restraining order in Westchester County that we had made a significant error in pleading an 1104-a claim because the assets all had been transferred from the business.  We amended the complaint to delete the claim and the next day the defendant made its purchase election. The question is does the fact that we tried to find the exit before the buyout election matter?

In the case reported on at Peter Mahler’s blog, a month after filing a lawsuit alleging a variety of corporate misconduct included a claim by the plaintiff for dissolution under BCL 1104-a.  A month later, after the defendant had exercised its election to buy the plaintiff’s interest under BCL § 1118, the plaintiff tried to back out of the claim.  At this point, the only way out of that cause of action was with the Court’s permission under BCL § 1116. The Court denied the request.

In the case in which we recently appeared, adversary counsel asserted at the return date on our application for a temporary restraining order that the business had no assets because they had been sold to a purchaser who took in good faith.  That significantly changed the complexion of the case.

First, although we were pursuing a hybrid action – meaning that we had claims for dissolution based on oppressive conduct joined with other theories – it seemed clear that a stay and pursuit of a valuation would likely not be productive from our perspective.  Second, we believed that we were likely to be impaired in discovery and other aspects of the mater, such as a demand for a jury trial, if this were primarily a petition and not claim at law for damages.

The defendants had not answered, so we filed an amended pleading as of right under CPLR § 3025.  The defendants then responded by making an election under BCL § 1118 and requested an immediate stay.  The case was resolved, but the timing raises an interesting issue.  Do the provisions of BCL Article 11, which govern judicial dissolution, the prevent the withdrawal or amendment of an oppressed shareholder claim without court approval, apply when there has been no answer or election of the buyout remedy.

CPLR § 3025 permits a plaintiff to amend their pleading as of right before the defendant has answered.  On the other hand, BCL § 1107 requires court approval of an amendment that withdraws a claim for dissolution.  Our view was that the statute speaks only imposes limits on an amendment to the petition after the buyout election has been made.  (See In re Petition of Levitt).  The election to purchase shares is irrevocable except with court approval.

The cases all point to the strategic considerations that should be made before filing a petition for dissolution.  Once a claim for oppressive conduct is asserted, it may be difficult to withdraw.  Similarly, once an election is made by the majority to buy the shares of the minority, that offer cannot be withdrawn except in rare circumstances.

“Marriage is tough, business relationships may be tougher.” Wise words from someone who should know — Nassau County Supreme Court Justice Timothy S. Driscoll , who presided over matrimonial cases before joining the Commercial Division where he has adjudicated some of the thorniest business divorce cases such as the […]