Kemp & Beatley, Inc., Matter of

• Decision Date: 29 November 1984
• Citation: 64 N.Y.2d 63,473 N.E.2d 1173,484 N.Y.S.2d 799
• Court: New York Court of Appeals Court of Appeals
• Parties: , 473 N.E.2d 1173 In the Matter of the Judicial Dissolution of KEMP & BEATLEY, INC. Seymour Gardstein et al., Respondents; Kemp & Beatley, Inc., Appellant.

Page 799

484 N.Y.S.2d 799

64 N.Y.2d 63, 473 N.E.2d 1173

In the Matter of the Judicial Dissolution of KEMP & BEATLEY, INC. Seymour Gardstein et al., Respondents Kemp & Beatley, Inc., Appellant.

Court of Appeals of New York.

Nov. 29, 1984.

Jerome M. Lasky, David B. Eizenman and Ira Schreck, New York City, for appellant

Arthur H. Sobel and Richard L. Herzfeld, New York City, for respondents.

OPINION OF THE COURT

COOKE, Chief Judge.

When the majority shareholders of a close corporation award de facto dividends to all shareholders except a class of minority shareholders, such a policy may constitute "oppressive actions" and serve as a basis for an order made pursuant to section 1104-a of the Business Corporation Law dissolving the corporation. In the instant matter, there is sufficient evidence to support the lower courts' conclusion that the majority shareholders had altered a long-standing policy to distribute corporate earnings on the basis of stock ownership, as against petitioners only. Moreover, the courts did not abuse their discretion by concluding that dissolution was the only means by which petitioners could gain a fair return on their investment.

I

The business concern of Kemp & Beatley, incorporated under the laws of New York, designs and manufactures table linens and sundry tabletop items. The company's stock consists of 1,500 outstanding shares held by eight shareholders. Petitioner Dissin had been employed by the company for 42 years when, in June 1979, he resigned. Prior to resignation, Dissin served as vice-president and a director of Kemp & Beatley. Over the course of his employment, Dissin had acquired stock in the company and currently owns 200 shares.

Petitioner Gardstein, like Dissin, had been a long-time employee of the company. Hired in 1944, Gardstein was for the next 35 years involved in various aspects of the business including material procurement, product design, and plant management. His employment was terminated by the company in December 1980. He currently owns 105 shares of Kemp & Beatley stock.

Apparent unhappiness surrounded petitioners' leaving the employ of the company. Of particular concern was that they no longer received any distribution of the company's earnings. Petitioners considered themselves to be "frozen out" of the company; whereas it had been their experience when with the company to receive a distribution of the company's earnings according to their stockholdings, in the form of either dividends or extra compensation, that distribution was no longer forthcoming.

Gardstein and Dissin, together holding 20.33% of the company's outstanding stock, commenced the instant proceeding in June 1981, seeking dissolution of Kemp & Beatley pursuant to section 1104-a of the Business Corporation Law. Their petition alleged "fraudulent and oppressive" conduct by the company's board of directors such as to render petitioners' stock "a virtually worthless asset." Supreme Court referred the matter for a hearing, which was held in March 1982.

Upon considering the testimony of petitioners and the principals of Kemp & Beatley, the referee concluded that "the corporate management has by its policies effectively rendered petitioners' shares worthless, and * * * the only way petitioners can expect any return is by dissolution". Petitioners were found to have invested capital in the company expecting, among other things, to receive dividends or "bonuses" based upon their stock holdings. Also found was the company's "established buy-out policy" by which it would purchase the stock of employee shareholders upon their leaving its employ.

The involuntary-dissolution statute (Business Corporation Law, § 1104-a) permits dissolution when a corporation's controlling faction is found guilty of "oppressive action" toward the complaining shareholders. The referee considered oppression to arise when "those in control" of the corporation "have acted in such a manner as to defeat those expectations of the minority stockholders which formed the basis of participation in the venture." The expectations of petitioners that they would not be arbitrarily excluded from gaining a return on their investment and that their stock would be purchased by the corporation upon termination of employment, were deemed defeated by prevailing corporate policies. Dissolution was recommended in the referee's report, subject to giving respondent corporation an opportunity to purchase petitioners' stock.

Supreme Court confirmed the referee's report. It, too, concluded that due to the corporation's new dividend policy petitioners had been prevented from receiving any return on their investments. Liquidation of the corporate assets was found the only means by which petitioners would receive a fair return. The court considered judicial dissolution of a corporation to be "a serious and severe remedy." Consequently, the order of dissolution was conditioned upon the corporation's being permitted to purchase petitioners' stock. The Appellate Division affirmed, without opinion. 99 A.D.2d 445, 471 N.Y.S.2d 245.

At issue in this appeal is the scope of section 1104-a of the Business Corporation Law. Specifically, this court must determine whether the provision for involuntary dissolution when the "directors or those in control of the corporation have been guilty of * * * oppressive actions toward the complaining shareholders" was properly applied in the circumstances of this case. We hold that it was, and therefore affirm.

II

Judicially ordered dissolution of a corporation at the behest of minority interests is a remedy of relatively recent vintage in New York. Historically, this State's courts were considered divested of equity jurisdiction to order dissolution, as statutory prescriptions were deemed exclusive (see Hitch v. Hawley, 132 N.Y. 212, 217, 30 N.E. 401). Statutes permitting judicial dissolution of corporations either limited the types of corporations under their purview (see L.1817, ch. 146, §§ 1-4; see, also, Matter of Niagara Ins. Co., 1 Paige Ch. 258) or restricted the parties who could petition for dissolution to the Attorney-General, or the directors, trustees, or majority shareholders of the corporation (see Hitch v. Hawley, 132 N.Y., at pp. 218-219, 30 N.E. 401, supra; see, generally, Business Corporation Law, §§ 1101-1104).

Minority shareholders were granted standing in the absence of statutory authority to seek dissolution of corporations when controlling shareholders engaged in certain egregious conduct (see Leibert v. Clapp, 13 N.Y.2d 313, 247 N.Y.S.2d 102, 196 N.E.2d 540; Fontheim v. Walker, 282 App.Div. 373, 122 N.Y.S.2d 642, affd. no opn. 306 N.Y. 926, 119 N.E.2d 605). Predicated on the majority shareholders' fiduciary obligation to treat all shareholders fairly and equally, to preserve corporate assets, and to fulfill their responsibilities of corporate management with "scrupulous good faith," the courts' equitable power can be invoked when "it appears that the directors and majority shareholders 'have so palpably breached the fiduciary duty they owe to the minority shareholders that they are disqualified from exercising the exclusive discretion and the dissolution power given to them by statute.' " (Leibert v. Clapp, 13 N.Y.2d, at p. 317, 247 N.Y.S.2d 102, 196 N.E.2d 540, supra, quoting Hoffman, New Horizons for the Close Corporation, 28 Brooklyn L.Rev. 1, 14.) True to the ancient principle that equity jurisdiction will not lie when there exists a remedy at law (see Brady v. McCosker, 1 N.Y. 214, 217), the courts have not entertained a minority's petition in equity when their rights and interests could be adequately protected in a legal action, such as by a shareholder's derivative suit (see Matter of Nelkin v. H.J.R. Realty Corp., 25 N.Y.2d 543, 550, 307 N.Y.S.2d 454, 255 N.E.2d 713; cf. Leibert v. Clapp, 13 N.Y.2d, at p. 317, 247 N.Y.S.2d 102, 196 N.E.2d 540, supra ).

Supplementing this principle of judicially ordered equitable dissolution of a corporation, the Legislature has shown a special solicitude toward the rights of minority shareholders of closely held corporations by enacting section 1104-a of the Business Corporation Law. ¹ That statute provides a mechanism for the holders of at least 20% of the outstanding shares of a corporation whose stock is not traded on a securities market to petition for its dissolution "under special circumstances" (see Business Corporation Law, § 1104-a, subd. ). The circumstances that give rise to dissolution fall into two general classifications: mistreatment of complaining shareholders (subd. par. ), or misappropriation of corporate assets (subd. par. ) by controlling shareholders, directors or officers.

Section 1104-a (subd. par. ) describes three types of proscribed activity: "illegal", "fraudulent", and "oppressive" conduct. The first two terms are familiar words that are commonly understood at law. The last, however, does not enjoy the same certainty gained through long usage. As no definition is provided by the statute, it falls upon the courts to provide guidance (see Goncalves v. Regent Int. Hotels, 58 N.Y.2d 206, 218, 460 N.Y.S.2d 750, 447 N.E.2d 693).

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 (O'Neal, Close Corporations §§ 1.07-1.09; Davidian, Corporate Dissolution in New York: Liberalizing the Rights of Minority Shareholders, 56 St. John's L.Rev. 24, 26; Note, Involuntary Dissolution of Close Corporations for Mistreatment of Minority Shareholders, 60 Wash.U.L.Q. 1119, 1139-1143; Ann., 56 A.L.R.3d...