Brief survey of New York shareholder law.

New York Shareholder Law Survey

Business Law
Serving The Woodlands

Inspection Rights

Shareholder Inspection Rights

Shareholders in New York close corporations have the same inspection rights as those in ordinary New York corporations. See N.Y. Business Corporation Law § 624 (McKinney 2003). In order to have standing to exercise the inspection right a shareholder must make a demand on the corporation at least five days in advance of the date of the inspection. § 624(b). After making a proper demand, the requesting shareholder is then entitled to inspect and copy the minutes of proceedings of shareholders and the record of shareholders for purposes reasonably germane to the person’s interest as a shareholder. Id. Additionally, shareholders are entitled to request a copy of the corporation’s balance sheet for the preceding fiscal year. § 624(e). Proper purposes for a shareholder inspection demand include determining the corporation’s financial position, investigating corporate mismanagement and ascertaining the propriety of a dividend distribution. Tatko v. Tatko Bros. Slate Co., 569 N.Y.S.2d 783, 784 (N.Y. App. Div. 1991).

The corporation may deny a requested inspection if the shareholder seeking inspection refuses to provide the corporation with an affidavit verifying that the inspection is not for purposes of a business other than the corporation and that in the last five years the shareholder has not sold or offered for sale information gained through a shareholder inspection or aided another in doing so. § 624(c). Additionally, the court may order an inspection under circumstances it deems appropriate. § 624(f).

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Shareholder Oppression

New York law provides for involuntary dissolution of a close corporation by its shareholders if the “directors or those in control of the corporation have been guilty of illegal, fraudulent or oppressive actions toward the complaining shareholders.” § 1104-a(a)

(1). In its analysis of whether corporate dissolution is justified under the circumstances, the court should consider whether there is an alternate means to protect the shareholders’ investment and whether it is reasonably necessary to protect the “rights and interests of any substantial number of shareholders.” § 1104-a(b). After dissolution proceedings have been initiated under this section the corporation must make available for inspection and copying within thirty days the corporation’s books and records for the past three years.” § 1104-a(c).

Although the statute does not define what conduct by the majority constitutes oppression, New York courts have termed oppression to mean “conduct that substantially defeats the ‘reasonable expectations’ held by minority shareholders in committing their capital to the particular enterprise.” In re Matter of Kemp & Beatley, Inc., 473 N.E.2d 1173, 1179 (N.Y. 1984). Reasonable expectations of a minority shareholder may include employment in the corporation, a share of earnings and a voice in corporate management. Id. In assessing whether oppressive conduct has taken place, the court should determine what the majority shareholders knew or should have known regarding the expectations of the minority in joining the enterprise. Id.

However, a minority shareholder’s disappointment with the corporation alone is insufficient to justify a finding of oppression. Id. Instead, oppression should be found “only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner's decision to join the venture.” Id.

Furthermore, majority shareholders in close corporations owe fiduciary duties to the minority interest. Richbell Info. Servs., Inc. v. Jupiter Partners, L.P., 765 N.Y.S.2d 575, 585 (N.Y. App. Div. 2003).

Business Law
Serving The Woodlands
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Derivative Suits

Shareholder Derivative Suits

Shareholders of close corporations may bring derivative suits on behalf of a corporation for wrongs against the corporation. See § 626(a). In order to have standing to bring a derivative action, the plaintiff must have been a shareholder at the time the cause of action arose or received the shares by operation of law from someone who held them at that time. § 626(b). The complaint must state the efforts the shareholder used to obtain appropriate relief from the corporation or give reasons why no such efforts were made. § 626(c). Court approval is required before a suit may be discontinued or settled and notification of affected shareholders may be required at the discretion of the court. § 626(d).

If the complaining shareholder prevails in the action or receives anything as a result of the suit, the court may award the plaintiff reasonable expenses and attorneys’ fees and direct that the shareholder account to the corporation for the remainder of the proceeds. § 626(e). Furthermore, unless the complaining shareholder or shareholders own, either individually or in the aggregate, at least five percent of any class of outstanding shares, or the shares owned are valued at more than fifty thousand dollars, the corporation may request that the plaintiffs provide security for the expenses and attorneys’ fees that may be incurred as a result of the suit. § 627.

New York adheres to the general rule that because a shareholder derivative suit is brought on behalf of the corporation, any recovery obtained belongs to the corporation. Glenn v. Hoteltron Sys., Inc., 547 N.E.2d 71, 74 (N.Y. 1989). This means that in the close corporation context where the wrongdoer is a shareholder, the person responsible for the harm participates significantly in the recovery, albeit indirectly. Id. While that may seem to justify individual shareholder recovery, New York courts have held that the interest of corporate creditors mandates that the recovery remain an asset of the corporation so that innocent creditors are not prejudiced. Id.