That Deadlocked Corporation Continued to Operate at a Profit Not Grounds for Refusing to Dissolve Corporation

On August 22, 2019, the Fourth Department issued a decision in Matter of Cellino v Cellino & Barnes, P.C., 2019 NY Slip Op. 06365, holding that the fact that a deadlocked corporation continued to operate at a profit was not grounds for refusing to dissolve the corporation, explaining:

[W]e reject respondents' contention that the court erred in denying their motion insofar as it sought summary dismissal of the amended petition on the ground that dissolution would not benefit the shareholders because the PC has continued to function effectively and prosperously. The determination whether a corporation should be dissolved is within the discretion of the court, and the benefit to the shareholders of a dissolution is of paramount importance in making that determination. Although respondents submitted evidence demonstrating that the PC has continued to conduct business at a profit, dissolution is not to be denied in a proceeding brought pursuant to Business Corporation Law § 1104 simply because the corporate business has been conducted at a profit or because the dissension has not yet had an appreciable impact on the profitability of the corporation.

Here, the record contains ample evidence of dissension and deadlock between petitioner and Barnes, and we conclude that, in opposition to respondents' showing that the PC continues to operate profitably, petitioner raised issues of fact whether dissension and deadlock have so impeded the ability of the PC to function effectively that dissolution would benefit the shareholders. In a close corporation like the PC, the relationship between the shareholders is akin to that of partners and when the relationship begins to deteriorate, the ensuing deadlock and dissension can effectively destroy the orderly functioning of the corporation. When a point is reached at which the shareholders who are actively conducting the business of the corporation cannot agree, dissolution may be in the best interests of those shareholders, and we agree with the court's determination that a hearing should be held to give the parties an opportunity to present their evidence on this controverted issue.

(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.