Validation Review Associates, Inc., Matter of

• Decision Date: 29 July 1996
• Citation: 223 A.D.2d 134,646 N.Y.S.2d 149
• Parties: In the Matter of VALIDATION REVIEW ASSOCIATES, INC., etc.; Mordecai Berkun, Respondent, David Schimel, Appellant.
• Court: New York Supreme Court — Appellate Division

Page 149

646 N.Y.S.2d 149

223 A.D.2d 134

In the Matter of VALIDATION REVIEW ASSOCIATES, INC., etc. Mordecai Berkun, Respondent David Schimel, Appellant.

Supreme Court, Appellate Division Second Department.

July 29, 1996.

Levitt & Cohen, Williston Park (Steven L. Levitt, of counsel), for appellant.

Gerry E. Feinberg, White Plains (Pamela A. Phillips, on the brief), for respondent.

Before ROSENBLATT, J.P., and RITTER, HART and KRAUSMAN, JJ.

RITTER, Justice.

We are asked to determine the validity of a provision within a shareholders agreement to waive the statutory and common-law right to petition for a judicial dissolution of a closely-held corporation. On the facts presented, we find such a provision to be unenforceable as against public policy.

In 1989 the petitioner, Mordecai Berkun, a licensed physician, and the appellant, David Schimel, a non-practicing attorney, formed Validation Review Associates, Inc. (hereinafter VRA). VRA was formed to provide consulting services to health-care providers concerning the accuracy and appropriateness of classifications relating to medical procedures and services and, in turn, the claims they submitted to insurance companies. In general, Schimel solicited new accounts and handled the contracts and billing. Berkun provided the expert advice. Initially, Berkun owned two-thirds of the voting stock and Schimel one-third, with Berkun's salary being twice that of Schimel's. Subsequently, due to the issuance of nonvoting stock, Berkun's share of voting stock was reduced to 60.32% and Schimel's increased to 39.68%. The parties executed a shareholders agreement which required 75% of the shares to be voted in favor of a proposition to permit its passage and in which they further agreed:

"not to petition, and to use their best efforts to cause the directors of the Corporation not to petition, any court for the judicial winding-up or dissolution of the Corporation whether in the event of an impasse with respect to the operations of the Corporation or otherwise".

Further, the agreement called for a four-person Board of Directors, and Schimel and Berkun each were granted the right to designate two members.

In December 1992, Berkun commenced this proceeding seeking dissolution of VRA on the grounds of dissension and deadlock in its operation (see, Business Corporation Law § 1104). Berkun alleged, inter alia, that the employees of VRA, who were now divided based on their allegiance to either Berkun or Schimel, were working at cross-purposes or in ignorance of each other. This, he alleged, resulted in loss of revenue to the corporation from both improperly maintained existing accounts and lost opportunities for potential new accounts. Berkun further alleged that Schimel was using his position as president and director of VRA to make unilateral decisions concerning, inter alia, the hiring and compensation of employees and increases in his own salary that were either unauthorized by the Board of Directors (which was not functioning) and/or in violation of the shareholders agreement. Schimel moved to dismiss the petition, alleging, inter alia, that it was barred by the anti-judicial dissolution provision of the shareholders agreement. Berkun cross-moved to dismiss Schimel's counterclaims. The Supreme Court, holding that the anti-judicial dissolution provision of the shareholders agreement was void as against public policy, denied Schimel's motion to dismiss, and granted those branches of Berkun's cross motion which were to dismiss six of Schimel's counterclaims. We now affirm.

One method by which shareholders of a close corporation may protect their rights and establish their relationship is through a shareholders agreement (see, Landorf v. Glottstein, 131 Misc.2d 432, 500 N.Y.S.2d 494, affd. 127 A.D.2d 1016, 511 N.Y.S.2d 776; 3 White, New York Corporations, Business Corporation Law p 620.01, at 6-442 [13th ed]. A shareholders agreement is a contract and is to be construed pursuant to general contract principles (see, Lama Holding Co. v. Smith Barney, 215 A.D.2d 314, 627 N.Y.S.2d 33; Schmidt v. Magnetic Head Corp., 97 A.D.2d 151, 468 N.Y.S.2d 649; 3 White, New York Corporations, Business Corporation Law p 620.01[2], at 6-448 [13th ed]. In general, parties may incorporate into their contracts any provisions that are not illegal, unconscionable, restricted by legislation, or violative of public policy (see, 21 N.Y. Jur 2d, Contracts, §§ 137, 141). "An agreement is not necessarily against public policy because it waives a constitutional or statutory right. Generally, parties may agree to waive statutory rights unless a question of public policy is involved" (21 N.Y. Jur 2d, Contracts, § 146, at 554; see also, Matter of Brooklyn Union Gas Co. v. City of New York, 83 A.D.2d 921, 443 N.Y.S.2d 691, affd. 56 N.Y.2d 881, 453 N.Y.S.2d 398, 438 N.E.2d 1113). Public policy may be found, inter alia, "by the expression of the will of the legislature contained in statutory enactments" (21 N.Y. Jur 2d, Contracts, § 144, at 552). Here, the anti-judicial dissolution provision of the parties' shareholders agreement violates public policy as expressed by the Legislature and under the common law.

State statutory law, as it has expanded over the years, permits the incorporation of a broad variety of relationships, including, inter alia, relationships that might have otherwise taken the form of a partnership (see, Ripin v. Atlantic Mercantile Co., 205 N.Y. 442, 98 N.E. 855; Shubin v. Surchin, 27 A.D.2d 452, 280 N.Y.S.2d 55; 3 White, New York Corporations, Business Corporation Law p 620.01, at 6-442 [13th ed]. These "incorporated partnerships" (Ripin v. Atlantic Mercantile Co., supra) sometimes take the form, as here, of a close corporation. With the corporate form, however, comes the potential for deadlock and the oppression of a minority shareholder (see, Ripin v. Atlantic Mercantile Co., supra; F. O'Neal, "Squeeze-Outs" of Minority Shareholders, § 9.05 [1975]. Accordingly, the Legislature has enacted various statutory provisions for the protection of such shareholders (see, Matter of Blake v. Blake Agency, 107 A.D.2d 139, 486 N.Y.S.2d 341, lv. denied 65 N.Y.2d 609, 494 N.Y.S.2d 1028, 484 N.E.2d 671; 4 White, New York Corporations, Business Corporation Law pp 1102-1118, at 11-12-11-96 [13th ed]; 1979 N.Y. Legis Ann, at 143-144; Davidian, Corporate Dissolution in New York: Liberalizing the Rights of Minority Shareholders, 56 St John's L Rev 24 [1981-1982]. These provisions include, inter alia, that the holder or holders of 50% of the shares of a corporation (30% if the certificate of incorporation contains a supermajority provision) may petition for judicial dissolution of a corporation on the grounds that the corporation is deadlocked or divided by dissension to the detriment of the shareholders (see, Business Corporation Law § 1104), and that the holder or holders of 20% of the shares of a closely held corporation may petition for judicial dissolution of a corporation on the grounds that the directors are guilty of illegal, fraudulent, or oppressive acts towards the complaining shareholders, or that the assets of the corporation are being looted, wasted, or diverted to non-corporate purposes...