Recent New York Decision Grants Injunction Pending Litigation of Minority Shareholder Oppression Claims
In a recently issued opinion in Feinberg v. Silverberg, 2011 NY Slip Op 32299 (Nassau Co. 2011), Nassau County Supreme Court granted injunctive relief preventing Defendant from continuing oppressive acts. The case strongly supports the proposition that when an oppressed shareholder stands to lose his stake in control and management of a corporation, money damages are not sufficient compensation and an injunction provides greater equity as relief.
L&E is a closely held corporation founded by Feinberg, Plaintiff, and Silverberg, Defendant, who are both 50% shareholders. Feinberg is the President and Treasurer; Silverberg is the Vice President and Secretary. Victor Hecht, another named Defendant, is the Chief Financial Officer of L&E, and Brian Barney is an employee with responsibilities involving the business of L&E in Asia.
The Court made inquiries into the likelihood of success, irreparable injury, and the balance of equities. It determined that Feinberg has submitted documentary evidence which strongly supports his allegations that he has been shut out of the corporation. While the Court recognized that economic loss does not constitute irreparable harm as it can be compensated, it determined that the withholding of a salary or of dividends and distributions creates a non-compensable injury to Feinberg’s rights because the he has a right to participate in decisions regarding compensation and any distributions. Specifically, the Court stated:
Generally the courts of this state have recognized that when the control and management' of a close corporation is at stake, money damages for violations of a shareholders' agreement or corporate by-laws are insufficient and the element of irreparable injury is established. (Yemini v. Goldberg, 60 AD3d 935 [2d Dept. 2009]). Additionally, where as here, the payment of compensation to one of the owners of the corporation is at stake, money damages may be insufficient. (See Davis v. Rondina, 741 F.Supp. 1115, 1125 [S.D.N.Y.1990] [holding that damages could not compensate plaintiff for "loss of the opportunity to continue to manage the company which she has helped to build and for which she has guaranteed substantial loans"]
In its inquiry into the balance of equities, the court determined that Silverberg's allegations that Feinberg would run L&E to the ground or is guilty of gross-mismanagement are not the sort of allegations that excuse oppressive conduct among shareholders. While it found that the balance of equities tips strongly in favor of Plaintiff, the Court held that “it cannot order the removal of Silverberg, despite his oppressive conduct, since Silverberg is still a 50% owner of L&E and the harm from loss of control and management in L&E is admittedly not capable of compensation, such that the equities cannot outweigh the injury to Silverberg from depriving him of his rights under the Shareholder Agreement and By-laws. The proper motion for such relief must be the Appointment of a Receiver under CPLR § 6401, supposing that such a receiver is qualified and will preserve the interests of all parties in the corporation pending the resolution of this case.”
Accordingly, the Court denied Plaintiff’s request to “[enjoin] Silverberg from any further involvement with L&E and [enjoin] Silverberg from access to corporate documents, finances, books and records, confidential and proprietary information, and corporate meetings.”
However, the Court did grant the following injunctive relief, enjoining:
(1) Silverberg from preventing or interfering with Feinberg's duties and rights as shareholder and President, Treasurer, and Director of L&E;
(2) Silverberg from further depriving Feinberg of compensation payments from L&E as such payments were authorized prior to February 1, 2011;
(3) all defendants from further violations of the Shareholders Agreement and Bylaws of L& E;
(4) all defendants from interfering with the Board of Directors' functions under Article 4, Section 2 of the By-Laws;
(5) all defendants from interfering with plaintiffs access to L&E's books and records, valuable papers, and other materials;
(6) Victor Hecht from continuing as a signatory on the bank accounts of L&E and L&E's affiliates; and
(7) Brian Barney from continuing as a signatory on the bank accounts of L&E and L&E's affiliates.