Shareholder Oppression in New York

Applicable Statute

New York State’s corporate dissolution statute, NY Business Corporations 1104-a, provides for the involuntary dissolution of a corporation when the “directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders” in a company that is not publicly traded.

New York courts have held that oppressive conduct is distinct from illegal or fraudulent conduct, and thus also a reason for corporate dissolution. 

What is Oppressive Conduct?

In an “oppression” case, the first inquiry of a New York court will be to determine whether the complained of acts are actually “oppressive.”  Though the dissolution statute does not define what oppressive acts are, one of the leading cases on the subject, Matter of Kemp & Beatley, Inc., interprets them as actions which “substantially defeat shareholder expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decisions to join the venture.”  This standard is widely followed.

Oppressive conduct is most often found when there are a number of actions that, when taken together, have the effect of denying the minority shareholder benefits from the company that he or she had the reasonable expectation of.  Often the Court will look at what is motivating the majority’s actions and whether there is an effort to “freeze out” or “squeeze out” the minority. 

“Freeze-outs” denote efforts by the majority to deny the minority of the benefits of share ownership, and “squeeze outs” are efforts to force them out of the company altogether.

Courts in New York have held that minority shareholder’s expectations have been frustrated by, among other things:

  • Removal of a minority shareholder from corporate offices;
  • Refusing to declare dividends to a minority shareholder;
  • Removal of a minority shareholder from his employment in the company;
  • Denial of a minority shareholder’s access to information.

However, these determinations are highly fact specific.  For example, in Matter of Kemp, the court found that that the alteration of a long-standing policy of distributing corporate earnings on the basis of stock ownership constituted oppressive conduct.  The Court based its determination on the fact that the controlling members of the company, after many years of paying dividends, cut off the minority shareholder’s only means of receiving a benefit from the company while continuing to pay themselves distributions through salaries or extra compensation. 

Available Remedies:

The statutory remedy for oppression in New York is dissolution of the company, but courts often view dissolution as a remedy of last resort. 

If a New York court finds that majority shareholders have acted in an oppressive manner toward the minority, it will then separately determines whether dissolution is warranted by the conduct in question.  It will consider whether dissolution is necessary for the protection of the rights and interests of the complaining shareholders.  It will look at the impact on all shareholders and at whether there are other last drastic remedies.  As a practical matter, courts will rarely order dissolution of a profitable and viable business.

Since, New York courts have broad discretion in fashioning remedies, they will often find less severe means of rectifying the wrongs complained of.  New York courts, under their general equity powers, will order buyouts of one shareholder by the others, the payment of dividends and enjoin other deprivations of the benefits of share ownership.   

NY Business Corporations §1118, in fact,  provides that in any proceeding brought under §1104-a,  any other shareholder or shareholders or the corporation, may, within ninety days after the filing of the petition, purchase the shares owned by the petitioners at their fair value.  New York courts have ordered buyouts outside the context of §1118, but have modeled relevant issues and procedures of the buyout after the statute. 

In one illustrative case, Gimpel v. Bolstein, the court found that a majority shareholder’s failure to hold shareholders’ meetings, failure to issue proper stock certificates reflecting the minority shareholder’s actual interests in the corporation, and failure to allow the minority shareholder access to stock ledgers, though improper and oppressive, would not justify dissolution of the corporation.  In that particular case, the court ordered the corporation to either alter its corporate financial structure so as to commence payment of dividends, or to buyout the minority shareholders interest within six months.