Court Refuses to Dismiss Common Law Dissolution Action Even Though Shareholder Lacked Standing to Bring Statutory Dissolution Action

On August 15, 2018, Justice Scarpulla of the New York County Commercial Division issued a decision in Matter of Yu v. Bong Yu, 2018 NY Slip Op. 32009(U), refusing to dismiss an action for common law dissolution of a corporation even though the shareholder lacked standing to bring an action for statutory dissolution, explaining:

Business Corporation Law Section 1104-a provides, in relevant part:

(a) The holders of shares representing twenty percent or more of the votes of all outstanding shares of a corporation, other than a corporation registered as an investment company under an act of congress entitled "Investment Company Act of 1940", no shares of which are listed on a national securities exchange or regularly quoted in an over-the-counter market by one or more members of a national or an affiliated securities association, entitled to vote in an election of directors may present a petition of dissolution on one or more of the following grounds:

(1) The directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders;
(2) The property or assets of the corporation are being looted, wasted, or diverted for non-corporate purposes by its directors, officers or those in control of the corporation.

Patrick has repaid the principal, interest, and collection charges on the 2005 loan and one of the two 2011 loans, but attorneys' fees due on those notes are still in dispute, and the second 2011 loan is still owed in full. Therefore, Patrick's Moklam shares remain pledged in accordance with the stock pledge agreement. As per the stock pledge agreement, Patrick is not entitled to exercise any voting rights at this time. As such, he lacks standing to pursue a dissolution of the corporation pursuant to BCL Section 1104-a. Patrick's arguments in opposition are unavailing because they lack both legal and evidentiary support.

The remedy of common-law dissolution is available only to minority shareholders who accuse the majority shareholders and/or the corporate officers or directors of looting the corporation and violating their fiduciary duty..

Here, Patrick states in the petition that the Yu family was engaged in misconduct in its operation of Moklam, and that corporate assets are being wasted, looted, and/or diverted to the benefit of the Yu family and at Patrick's expense, in breach of the fiduciary duty owed to him. He explains that the Yu family has repeatedly retaliated against Patrick for exercising his rights as a shareholder, has taken steps to put enormous financial pressure on him at a time when they knew very well he was under financial duress, and has denied him any meaningful access to the books and records of Moklam, Guard Hill, and East 38th Street. He alleges that respondents are pursuing a personal vendetta against [him], while at the same time enriching themselves through the acquisition of his shares at a cost far below their fair value, and sets forth specific facts to support his allegations.

At this point in the litigation, Patrick's allegations set forth a reasonable basis to believe that further discovery may reveal further evidence of egregious conduct necessary to sustain the claim for common law dissolution. Accordingly, the claim for common law dissolution will not be dismissed at this time.

(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). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.