Shareholder Oppression Claim Requires Trial

Claims of Shareholder Oppression Are Disputed by Majority Owner

A motion for judicial dissolution of a retail business based on the claims that the majority owner had oppressed the minority shareholders should be denied when the facts are in dispute.  An evidentiary hearing is necessary to resolve the disputed issues.   Ho v. Nest & Ginseng, Inc., 950 N.Y.S.2d 494 (Queens Feb. 28, 2012).

Two minority shareholders each holding 25 percent of the corporation brought suit as oppressed shareholders against the 50 percent owner of the business, which operated a J Mart in a shopping mall in Flushing, Queens, seeking dissolution of the business under Business Corporation Law 1104-a.

BCL 1104-a permits the dissolution of a corporation on application of the holders of 20 percent or more of the business based on the oppressive conduct of the majority or the directors of the corporation.  The petitioners in this action alleged that the majority shareholder, Yuk Yung Yu, was operating the business in a suspicious manner and that he had been promoting the sale of her stock in the corporation in violation of the shareholders agreement.

Illegal, FraudUlent or Oppressive Conduct Justifies Dissolution

Yu, the majority shareholder, claimed that the petitioners had not made out a case of any illegal, fraudulent or oppressive conduct that would justify dissolution and, moreover, that the petitioners had engaged in wrongful conduct and were planning to open a competing store.

The trial court noted that oppressive acts that would justify dissolution under New York law are acts that substantially defeat the reasonable expectations of the minority shareholders in forming the business.  At the same time, the minority shareholder cannot seek dissolution if their own acts frustrate the reasonable expectations of the business owner.

The dissolution of a corporation is the “ultimate remedy,”  requiring the forced sale of corporate assets and should only be applied as a last resort, the Court noted.

The Court also denied the appointment of a temporary receiver pending a final decision on the merits.  The appointment of a temporary receiver requires a showing that the receiver is necessary for the conservation of the property in dispute and protection of the parties’ interest.  The petitioners had failed to meet that burden.

We welcome questions and comments.