50% Shareholder Must Bring Derivative Action, Not Action in Name of Corporation, Against Other 50% Shareholder

On November 9, 2017, Justice Ramos of the New York County Commercial Division issued a decision in U-Trend N.Y. Inv. L.P. v. US Suite LLC, 2017 NY Slip Op. 32502(U), holding that a 50% shareholder could not bring an action in the name of the corporation against the other 50% shareholder and instead must bring a derivative action, explaining:

Where there are only two stockholders each with a 50% share, an action cannot be maintained in the name of the corporation by one stockholder against another with an equal interest and degree of control over corporate affairs. The proper remedy in such a circumstance is a shareholder's derivative action. Thus, if it is ultimately determined that Aura and U-Trend both had equal control of HSI, U-Trend's derivative claim, in the name of HSI without naming any HSI directors as defendants, would render its claim non-viable.

(Internal quotations and citations omitted).

This decision touches on two areas of commercial litigation that are a significant part of our practice: derivative actions (where a shareholder brings an action on behalf of a corporation) and business divorce (a break-up between the owners of a closely-held business. Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding either of these issues.