United States: Compelling A Corporate Dissolution

In addition to supplying capital to a contemplated or ongoing business and expecting a fair return on their investment, individuals who own stock in a privately-owned corporation often believe that they will be actively involved in its management and operation. Shareholders enjoy flexibility in memorializing these expectations through agreements setting forth each party's rights and obligations. In the absence of such an agreement, however, the majority shareholders hold the ultimate decision making power.

When a majority acts in such a way as to destroy the minority shareholder's interests and expectations, the minority shareholders are at a disadvantage. As the stock of closely-held corporations generally is not readily salable, a minority shareholder at odds with management policies may be without either a voice in protecting his or her interests or any reasonable means of withdrawing his or her investment.

New York law recognizes this problem and provides a mechanism for the holders of at least 20 percent of the outstanding shares of a privately-owned corporation to petition for its dissolution "under special circumstances." The circumstances that can give rise to this forced liquidation include mistreatment of complaining shareholders by "oppressive" conduct. Courts have concluded that oppressive actions refer to conduct that substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise.

In one case, for example, a company changed its policy of awarding dividends based on stock ownership to one of awarding "extra" compensation based on services rendered to the corporation. The change occurred after one minority shareholder was fired and another voluntarily left his position with the company. New York's highest court, the Court of Appeals, upheld a lower court order dissolving the company. The court found that it was not unreasonable to conclude that the change in policy amounted to nothing less than an attempt to exclude the two shareholders from gaining any return on their investment.

In another case, a court granted a minority shareholder's request for dissolution when he was involuntarily ousted from any involvement in the corporation, of which he was a founding one-third shareholder, by the other two one-third shareholders. The court ruled that the shareholder's employment "was an incident of his stock ownership, cloaking him with a reasonable expectation of continued employment."

Of course, not every action with which a minority shareholder disagrees can form the basis for a dissolution action.

Recently, a shareholder who owned 25 percent of a company's stock sought to have the company dissolved. He had been employed by the company for under two years in a non-managerial, at-will position. The court rejected his petition, however, finding that he could not have had any reasonable expectations of job security or of a right to participate in the corporation's management in view of a shareholders' agreement that made all matters of corporate governance subject to an affirmative vote of two shareholders and gave them the right to repurchase the third shareholder's stock at its initial purchase price.

In another case, a court upheld an arbitrator's refusal to dissolve a corporation, noting that an agreement between the shareholders contained a buy-out procedure that would provide the minority shareholders with a fair return on their investment. Obviously, then, shareholders who wish to limit the risk of court-ordered dissolution of their company should consider adopting an effective agreement among themselves.