Having written on this subject before, I am always amazed at the extent that shareholders, who are now dissatisfied with one another, will go to when they are no longer of like mind as to how the business should be run. A recent case in the Commercial Part of the Albany County Supreme Court is a perfect example of a litigant’s scorched earth approach to achieve the desired end: in this instance, the dissolution of the corporate entity.
The case is Darwish Auto Group, et. al. v. TD Bank et. al., 2024 WL 5279216 (Sup. Ct. Albany Cty. December 30, 2024) (Platkin, J.) and, while facts in this case are fairly extensive, a brief synopsis is as follows:
Mr. Walid Darwish sought to finance his acquisition of a number of auto dealerships by borrowing $62 million from various lenders affiliated with each other and the Potamkin Automotive Group. Various agreements were drafted between the parties which required joint decision making between three managers, two of which were associated with the lender. These included an operating agreement and a shareholder agreement.
When Mr. Darwish sought to modify access rights to the company’s bank account, the other shareholders/managers as plaintiffs sought preliminary injunctive relief regarding their access to the bank accounts and more as Mr. Darwish seemed to be overriding his fellow shareholders/managers in a variety of decisions as they pertained to the business. Mr. Darwish fought back arguing that he was the aggrieved party asserting counterclaims and third-party claims and seeking his own preliminary injunction.
The parties each moved for summary judgment where Mr. Darwish made a whole host of claims supporting his defense and counterclaims, including that:
- the operating agreements he had signed were not controlling;
- his fellow members should not be considered members or managers at all;
- the agreements were the product of fraud;
- certain governance agreements agreed to by Mr. Darwish were “never effective.” One of the reasons he offered for the agreements being ineffective was that he failed to have an opportunity to review them before signing them-which is an interesting position to take; and
- he was the victim of majority oppression.
In short, the court rejected all of the relief requested by Darwish and granted most of the relief requested by Mr. Darwish’s co-managers/co-shareholders.
What I want to focus on, however, is what I have seen in other cases as a “catchall” argument asserted by minority shareholders when they feel that their ox has been gored by the majority, to wit, that the minority has been subject to oppression under BCL 1104-a(a)(1). BCL 1104-a is the judicial dissolution statute available to corporations in New York. Under BCL 1104-a(a)(1) dissolution is available to “the holders of shares representing twenty percent or more of the votes of all outstanding shares of the corporations” where, inter alia, “the directors of those in control of the corporations have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders.” Now – one may say that one man’s oppression is another man’s legitimate business activity. So, the question is: what is “oppression” under the law?
Oppression occurs when the majority’s conduct substantially defeats the minority’s expectations, when objectively viewed, that were central to the minority shareholder’s decision to join the venture in the first instance. It is clear that the answer to this question is highly dependent upon the particular facts associated with the issue at hand.
Relying heavily on the Court of Appeals decision in the Matter of Kemp & Beatley, 64 N.Y.2d 63 (1984), Justice Platkin acknowledged that courts have made it clear that the majority’s conduct is not oppressive simply because the “minority shareholder’s subjective hopes and desires are not fulfilled.” Rather, oppression “aris[es] only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the [minority shareholder’s] decision to join the venture” Darwish, 2024 WL 5279216 *10.
The Court of Appeals in the Matter of Kemp stated that:
The statutory concept of “oppressive actions” can, perhaps, best be understood by examining the characteristics of close corporations and the Legislature’s general purpose in creating this involuntary-dissolution statute. It is widely understood that, in addition to supplying capital to a contemplated or ongoing enterprise and expecting a fair and equal return, parties comprising the ownership of a close corporation may expect to be actively involved in its management and operation.
Id. at 71.
* * *
Defining oppressive conduct as distinct from illegality in the present context has been considered in other forums. The question has been resolved by considering oppressive actions to refer to conduct that substantially defeats the “reasonable expectations” held by minority shareholders in committing their capital to the particular enterprise.
Id. at 72.
Such that “[a] shareholder who reasonably expected that ownership in the corporation would entitle him or her to a job, a share of corporate earnings, a place in corporate management, or some other form of security, would be oppressed in a very real sense when others in the corporation seek to defeat those expectations and there exists no effective means of salvaging the investment.” Id.
The Court of Appeals reasoned that, due to the nature of close corporations and the remedial purpose of the statute, “utilizing a complaining shareholders ‘reasonable expectations’ as a means of identifying and measuring conduct alleged to be oppressive is appropriate.” Id. at 73. So, courts must consider and investigate what the majority shareholders knew or should have known the petitioner’s expectations to be in entering into the particular enterprise.
However, in Matter of Kemp the Court finally said on the subject:
Id.
So, where are the lines drawn, if they can be at all? The courts do give some guidance. The following factors may help with establishing oppression:
- A long-standing practice such as paying dividends or making distributions which end abruptly:
- Failing to permit shareholders proper access to corporate records;
- A shareholder participated in day-to-day management of the entity for a reasonable period which was ended by the majority suddenly;
- Longstanding employment of a minority suddenly terminated by the majority;
- Locking out the minority shareholder from accessing company property;
- Changing policies to prevent a minority shareholder from receiving a reasonable return on their investment;
- Restricting the minority shareholder’s interaction with customers and employees;
- Did the minority shareholder buy in to the company or receive it without consideration such as a gift or as an inheritance? and/or
- Was the minority shareholder’s stake diluted by an act of the majority?
In sum, one should look to past practices and ask whether the minority shareholder is getting what they bargained for when they became a shareholder or became used to as a shareholder for a decent period of time.