Questions of Fact Regarding Dissension, Deadlock and Financial Viability Preclude Corporation's Summary Dissolution

On January 22, 2018, Justice Scarpulla of the New York County Supreme Court issued a decision in Matter of Ades v. A&E Stores, Inc., 2018 NY Slip Op. 30128(U), denying summary dissolution of a New York corporation, explaining:

A shareholder owning at least one-half of the votes of the outstanding shares of a corporation entitled to vote in an election of directors may petition the court for dissolution based on at least one of the following grounds:

(1) That the directors are so divided respecting the management of the corporation's affairs that the votes required for action by the board cannot be obtained.
(2) That the shareholders are so divided that the votes required for the election of directors cannot be obtained.
(3) That there is internal dissension and two or more factions of shareholders are so divided that dissolution would be beneficial to the shareholders.

The petition for dissolution may be granted summarily- a hearing is only required where there is some contested issue determinative of the validity of the application..

Once a petitioner has established a prima facie showing of entitlement to dissolution, it is entirely within the court's discretion whether to issue an order granting dissolution, and the ultimate remedy of dissolution and forced sale of corporate assets should only be applied as a last resort.

Dissolution is generally appropriate where the complained of internal dissension and/or deadlock impedes the daily functioning of the corporation, thereby posing an irreconcilable barrier to the continued functioning and prosperity of the corporation.

Where the undisputed facts show that genuine dissension and/or deadlock exists, it is irrelevant who is at fault for the underlying conflict, and a hearing is not required. Rather, the critical consideration is the fact that dissension exists and has resulted in a deadlock precluding the successful and profitable conduct of the corporation's affairs.

However, even if dissension and/or deadlock do exist, allegations that a petitioner acted in bad faith by creating the underlying disputes to justify dissolution constitute a defense to a dissolution proceeding, and a hearing is required.

Here, there is no dispute that Ades and Erani disagree as to whether A&E should be dissolved or whether it should continue to operate. However, A&E is not a service corporation, and because neither Ades nor Erani are responsible for A&E's day-to-day operations, this disagreement is not dispositive of the fundamental issue of whether the conditions of the statute have been satisfied such that the extraordinary step of judicial dissolution is warranted.

Further, Ades contends that he wants to either sell or liquidate A&E while it is still profitable so that h~ may recoup his investments and avoid any personal financial loss. This alone, however, is not a basis for dissolution under BCL § 1104.

Despite Ades's contention that no hearing is required and that this application should be summarily granted because there is no dispute that Ades and Erani cannot work together, I cannot determined whether dissolution is appropriate on the papers alone because of the parties's conflicting submissions and allegations. Material issues of fact exist as to whether the dissension and deadlock alleged by Ades exists and whether Ades acted in bad faith by manufacturing the complained-of disputes and dissension to financially harm A&E and justify dissolution.

If dissension and/or deadlock do exist - and dissolution is not barred by Ades's alleged bad faith - material issues of fact also exist as to the profitability and financial viability of A&E and whether the proposed dissolution would benefit the shareholders. Accordingly, I order an evidentiary hearing to resolve these material issues of fact. BCL § 1109.

(Internal quotations and citations omitted).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Indeed, Schlam Stone & Dolan partner Jeffrey M. Eilender and associate Lee J. Rubin were contributors to the recently-released 2017 Supplement to Litigating the Business Divorce by Kurt Heyman and Melissa Donimirski. Contact Jeffrey Eilender at jeilender@schlamstone.com or Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.