64 N.Y.2d 63, 473 N.E.2d 1173, 484 N.Y.S.2d 799
Kemp & Beatley, Inc. is a New York corporation engaged in the design and manufacture of table linens and tabletop items whose 1,500 outstanding shares are held by eight shareholders.1 Petitioner Dissin worked at the company for 42 years until resigning in June 1979, having served as vice-president and a director while acquiring 200 shares.2 Petitioner Gardstein was hired in 1944 and worked for 35 years in material procurement, product design, and plant management until his employment ended in December 1980; he holds 105 shares.3
After their departures, Dissin and Gardstein received no further distributions of corporate earnings, although both had previously obtained returns on their stock through dividends or extra compensation.4 In June 1981 the two petitioners, together owning 20.33 percent of the stock, commenced a proceeding in Supreme Court seeking judicial dissolution under Business Corporation Law § 1104-a on the ground that the board had engaged in fraudulent and oppressive conduct rendering their shares virtually worthless.5
Supreme Court referred the matter for a hearing conducted in March 1982 at which petitioners and company principals testified.6 The referee found that corporate management had rendered petitioners' shares worthless by its policies, that petitioners had invested expecting dividends or bonuses tied to stock ownership, and that the company maintained an established buy-out policy for departing employee shareholders; the referee recommended dissolution subject to a buy-out opportunity.7
Supreme Court confirmed the referee's report, concluding that the corporation's altered dividend policy had denied petitioners any return on their investments and that liquidation was the only feasible means of providing a fair return, but conditioned the dissolution order on the corporation's right to purchase petitioners' shares.8 The Appellate Division affirmed without opinion, after which the Court of Appeals took the case.9
Whether the directors or those in control of the corporation were guilty of oppressive actions toward the complaining shareholders within the meaning of Business Corporation Law § 1104-a?10
The statutory concept of oppressive actions refers to conduct that substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise.11 A court must investigate what the majority shareholders knew or should have known to be the petitioner's expectations. Oppression arises only when majority conduct substantially defeats expectations that were objectively reasonable under the circumstances and central to the petitioner's decision to join the venture.12
Yes. Petitioners Dissin and Gardstein had received distributions of corporate earnings based on their stockholdings during their long employment at Kemp & Beatley.13 After their departures the company changed its policy so extra compensation was awarded only for services rendered and no longer on the basis of stock ownership, thereby excluding petitioners from any return.14 The referee found and Supreme Court confirmed that this policy rendered petitioners' shares worthless and defeated their reasonable expectations of receiving dividends or bonuses tied to stock ownership.15
The directors or those in control of the corporation were guilty of oppressive actions toward the complaining shareholders within the meaning of Business Corporation Law § 1104-a.16
Whether the lower courts properly exercised their discretion in ordering dissolution subject to an opportunity for the corporation to purchase the petitioners' shares?17
The appropriateness of an order of dissolution is vested in the sound discretion of the court.18 Once oppressive conduct is found, the court must consider whether liquidation is the only feasible means to protect the complaining shareholder's expectation of a fair return. The court must also consider whether dissolution is reasonably necessary to protect the rights or interests of any substantial number of shareholders.19 Every order of dissolution must be conditioned upon permitting any shareholder to elect to purchase the complaining shareholder's stock at fair value.20
Yes. After finding oppressive conduct the referee and Supreme Court determined that liquidation was the only means by which petitioners could obtain a fair return on their investment given the deterioration in relations between the parties.21 The dissolution order was properly conditioned on the corporation's opportunity to purchase petitioners' shares at fair value and respondents offered no feasible alternative remedy.22
The lower courts properly exercised their discretion in ordering dissolution subject to an opportunity for the corporation to purchase the petitioners' shares.23