Shareholder Dispute Lawyer in New York

What is a shareholder dispute?

​

A shareholder dispute is a fight among the owners of a corporation, or between owners and those running it, over control, money, information or an exit. Most arise in closely held corporations, where a few people own all the shares and cannot easily sell them.

​

Shareholders own the corporation, but the business is managed under the direction of the board of directors (Business Corporation Law § 701), which the majority usually elects. Typical disputes:

​

• A freeze-out: a minority owner is fired, removed from the board and cut off from any return while the majority pays itself

• Refusal to show the books or financial statements

• Self-dealing, or company money steered to insiders

• Deadlock between 50/50 owners

• Dilution, or a fight over a buy-sell clause after a death or departure

​

Shareholder oppression: dissolution under BCL § 1104-a

​

New York's main remedy for an oppressed minority is a petition to dissolve the corporation under Business Corporation Law § 1104-a. You can file, alone or with other shareholders, if your combined shares carry at least 20% of the votes in an election of directors and the corporation's shares are not listed on an exchange or regularly quoted over the counter. The grounds are illegal, fraudulent or oppressive actions toward the complaining shareholders by those in control, or looting, waste or diversion of the corporation's assets for non-corporate purposes.

​

The statute does not define "oppressive." In Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63 (1984), the Court of Appeals held that oppression arises when the majority substantially defeats expectations that, viewed objectively, were reasonable and central to the shareholder's decision to join the venture, such as a job, a share of the earnings or a role in management. Disappointment alone is not oppression.

​

Dissolution is not automatic. The court considers whether liquidation is the only feasible way for the petitioners to get a fair return and whether it is reasonably necessary to protect the rights and interests of any substantial number of shareholders or of the petitioners (§ 1104-a(b)), and it may not deny dissolution merely because the business is profitable (§ 1111(b)(3)). Under Kemp & Beatley, once oppression is shown, those opposing dissolution must show an adequate alternative remedy. A shareholder who creates the oppression in bad faith to force a dissolution gets no protection.

​

Within 30 days after filing, those in control must make three years of the corporation's financial books and records available to the petitioners (§ 1104-a(c)). On a finding of wilful or reckless dissipation of assets, the court may adjust stock valuations and surcharge those in control (§ 1104-a(d)).

​

Deadlock dissolution under BCL § 1104

​

When owners are evenly split, holders of half the votes can petition to dissolve if the board cannot act, the shareholders cannot elect directors, or dissension between factions is so deep that dissolution would benefit the shareholders (Business Corporation Law § 1104). Any voting shareholder can petition if the shareholders are so divided that they have failed, through at least two consecutive annual meeting dates, to elect directors to replace those whose terms have expired (§ 1104(c)).

​

A deadlock petition needs no proof of wrongdoing, but the buyout election below applies only to § 1104-a cases. Either petition is filed in the Supreme Court in the judicial district of the corporation's office (§ 1112).

​

The buyout election and fair value under BCL § 1118

​

In a § 1104-a case, the corporation or any other shareholder can elect to buy the petitioner's shares at fair value (Business Corporation Law § 1118):

​

• The election is due within 90 days after the petition is filed, or later if the court allows, and is irrevocable unless the court decides otherwise.

• If no price is agreed, the court fixes fair value as of the day before the petition was filed, excluding value arising from the filing but including any § 1104-a surcharge, and may add interest.

• If the election comes after 90 days, the court may award the petitioner's reasonable expenses incurred before the election, including attorneys' fees. In any election, the court may require a bond or other security for the price (§ 1118(c)).

​

In Friedman v. Beway Realty Corp., 87 N.Y.2d 161 (1995), the Court of Appeals held that fair value is the shareholder's proportionate share of the whole business as a going concern: what a willing buyer, at arm's length, would pay for it as an operating company. No minority discount is allowed, but a discount for lack of marketability can apply.

​

For the corporation or a majority owner, electing is a strategic choice: once made, the case is mainly about price rather than blame (Friedman).

​

Forced buyouts of minority shareholders

​

A majority shareholder generally cannot simply force a minority owner to sell, and a minority owner cannot simply force a purchase. A forced sale usually comes from a buy-sell clause (on death, departure, deadlock or a shotgun offer), the § 1118 election, a court-ordered buyout in place of dissolution, or a cash-out merger approved by the required shareholder vote.

​

A shareholder who does not approve a merger, or a sale of substantially all the corporation's assets, generally can demand the fair value of the shares instead (§ 910). The steps in § 623 are strict; if no appraisal proceeding is started in time, dissenters' rights are lost unless the court directs otherwise. Choosing appraisal generally excludes other remedies, except a suit claiming the action is unlawful or fraudulent as to you (§ 623(k)).

​

The same rules govern an S corporation shareholder's buyout; S status is a federal tax election, not a different kind of corporation.

​

Your right to inspect the books and records

​

On at least five days' written demand, a shareholder of record can examine the minutes of shareholder meetings and the shareholder list for a purpose reasonably related to the shareholder's interest, and on written request must receive the annual balance sheet and profit and loss statement (Business Corporation Law § 624). If the corporation refuses, the Supreme Court can order the inspection (§ 624(d)).

​

Derivative suits and claims against directors and officers

​

When directors or officers take money or opportunities from the corporation, the claim belongs to the corporation. If those in control will not sue, you can sue in the corporation's name (Business Corporation Law § 626), generally if you held shares when the transaction happened and still hold them, and your complaint states with particularity your effort to get the board to sue or why you made none. A court must approve any settlement; the recovery goes to the corporation, and a successful plaintiff may be awarded reasonable attorney's fees.

​

Under § 720, directors and officers can be made to account for violating their duties in managing corporate assets, and an unlawful transfer can be stopped before it happens, or set aside if the recipient knew it was unlawful. A direct claim is for harm to you personally, such as being denied a payment other owners received; see how direct and derivative claims differ and breach of fiduciary duty claims.

​

Emergency orders: injunctions and receivers

​

In a dissolution case, the court can at any stage appoint a receiver and make orders to preserve the corporation's property (§ 1113), and can bar the corporation and its directors and officers from transferring corporate property without its permission (§ 1115). Outside one, the general rules on injunctions and temporary receivers apply. Avoid self-help such as emptying accounts or changing locks.

​

Shareholders' agreements, buy-sell clauses and arbitration

​

Start with the shareholders' agreement, certificate of incorporation and bylaws: buy-sell triggers and price formulas, transfer limits, deadlock procedures and dispute clauses. A signed written agreement on how shares will be voted is valid (§ 620(a)), and a written agreement to arbitrate is enforceable (CPLR 7501). Whether a particular claim, including a dissolution petition, must be arbitrated depends on the clause's wording.

​

Business divorce: corporations, LLCs and partnerships

​

"Business divorce" is the everyday name for co-owners separating by buyout, dissolution or a negotiated split. The rules depend on the entity:

​

• Corporations: the rules on this page, including the § 1104-a petition and § 1118 election.

• LLCs: no oppression ground or statutory buyout election; see LLC member disputes.

• Partnerships: the Partnership Law's own exit and dissolution rules; see partnership disputes.

​

Deadlines in shareholder disputes

​

• Buyout election: 90 days after a § 1104-a petition is filed, unless the court allows more (§ 1118(a)).

• Dissent from a merger: usually a written objection before the vote (§ 623(a)), then short deadlines for the appraisal proceeding (§ 623(h)).

• The corporation's claims, including derivative claims, against directors, officers or stockholders for an accounting, fraud, waste or injury to corporate property: six years (CPLR 213(7)).

• Breach of a shareholders' agreement: six years (CPLR 213(2)). A direct fiduciary claim for money damages alone: generally three years (CPLR 214(4)); six years if it genuinely seeks equitable relief, such as an accounting, or fraud is essential to it (CPLR 213(1), (8)).

• If you are sued in an action, such as a derivative or contract suit: generally 20 or 30 days to answer or appear, depending on service (CPLR 320(a)). A dissolution petition instead comes with an order to show cause that sets a hearing at least four weeks after the order issues; answering papers are due before the hearing (BCL § 1106; CPLR 403).

​

How shareholder disputes are resolved, and what it costs

​

Many disputes end with a demand letter and negotiation or mediation, or through a buy-sell or arbitration process already in the agreement; the rest go to court. Bring the governing documents, stock records, minutes, tax returns and K-1s, financial statements and key emails and texts.

​

When choosing a shareholder dispute lawyer, ask who will handle your case and whether that lawyer litigates in the Commercial Division and in arbitration. At Yassi Law P.C., Reza Yassi handles each matter personally. Shareholder disputes are billed at $450 an hour under a written engagement letter; contingency or hybrid fees are offered only as exceptions in special cases. The first consultation is free.

​

Guides on this topic

​

• What happens when your business partner won't play fair?: what a business divorce is and the options when a co-owner freezes you out.

• Direct vs. derivative claims: whether a claim belongs to the owner or the company, explained for LLC members.

• When New York courts pierce the corporate veil: when the owners behind a corporation are personally liable for its debts.

​

Frequently asked questions

​

Can a majority shareholder force out a minority shareholder in New York?

Not just by deciding to. A forced sale needs a buy-sell clause, a § 1118 election, a court order, or a cash-out merger in which a dissenter can usually demand fair value (BCL §§ 910, 623). Firing a minority owner and cutting off any return can itself be oppression under § 1104-a.

​

Can a minority shareholder force a buyout?

Not directly, unless an agreement gives that right. Shareholders holding, alone or together, at least 20% of the votes in a corporation whose shares are not publicly traded can petition for dissolution; the corporation or other shareholders may then elect to buy the shares at fair value (BCL § 1118), which carries no minority discount (Friedman v. Beway Realty Corp.).

​

What is the remedy for shareholder oppression in New York?

A petition under BCL § 1104-a, which can end in dissolution, a buyout at fair value or other relief the court fashions, plus a possible surcharge for wilful or reckless dissipation of assets.

​

Can shareholders sue a director for breach of fiduciary duty?

Yes: derivatively, on the corporation's behalf, when the corporation was harmed (BCL §§ 626, 720), or directly when the shareholder was harmed personally.

​

Can you sue the shareholders of a company?

Usually not for the company's debts, because shareholders are generally not personally liable for them, unless a court disregards the corporate form; see when New York courts pierce the corporate veil. Inside a close corporation, majority shareholders owe the minority a duty to treat all shareholders fairly, and a breach can be sued on.

​

Are shareholder disputes arbitrable?

Often. A written arbitration agreement is enforceable (CPLR 7501), so if the shareholders' agreement has a clause covering the dispute, it usually goes to an arbitrator.

​

How do you dissolve a corporation in New York?

If the owners agree, by a shareholder vote (BCL § 1001) and a certificate of dissolution delivered to the Department of State (§ 1003), which files it only with the required State tax consent, and in some cases New York City's, attached (§ 1004). If they disagree, a shareholder may petition the Supreme Court under § 1104 or § 1104-a.

​

If you are being frozen out of a corporation you co-own, are facing a dissolution petition, or need to value or sell your shares, contact the office or call (646) 992-2138 for a free consultation with Reza Yassi.