USA – NEW YORK Trends and Developments Contributed by: Konstantine Paschalidis, Michael Iakovou and Socrates Xanthopoulos, IX Legal
IX Legal 40 Wall Street, 49th Floor
New York NY 10005 USA
Tel: +212 404 8644 Fax: +332 777 1884 Email: Info@ix-legal.com Web: www.ix-legal.com
Forced Buyout Provisions as a Risk-Reducing Tool for New York Entities Three partners sat in the IX Legal main conference room with our clients, the two largest interest hold - ers in a New York family-run real estate group with a significant portfolio. Although the two relatives maintained a good rapport and managed to resolve disagreements in a practical manner, they sensed tensions brewing within the rising generation set to replace them. One of the clients recently concluded an acrimonious divorce proceeding in which the cli - ent’s spouse claimed a right to interest in the family’s real estate holding company. That experience, com - bined with horror stories from business partners and acquaintances, understandably left the clients on high alert. Although the clients’ goals remained straightforward and achievable, they required systemic collabora - tion between the firm’s litigation, corporate and real estate departments. The clients sought to implement an amendment to the decades-old operating agree - ment they inherited to provide for a fair and objec - tive buyout mechanism while simultaneously keep - ing any potential family scuffles out of the public eye and away from the press. Both individuals remained pensive and concerned about the effect of drawn-out litigation on their family’s legacy. This was the firm’s first example in a growing trend of clients seeking to amend agreements for the purpose of including forced buyout provisions. Litigating forced buyouts Shareholders of New York corporations with at least 20% interest have statutory tools at their disposal to
force the remaining shareholders of the corporation to purchase the interest of the aggrieved sharehold - ers; see NY BCL Section 1104-a. Upon a showing of illegal, fraudulent or oppressive actions towards the petitioning shareholders by those in control, or that the directors, officers or those in control are looting, wasting or diverting the assets of the corporation for improper purposes, the court may order dissolution of the corporation. Built into the same Article of the Business Corpora - tion Law (BCL) is the right of election available to the remaining shareholders or corporation within 90 days of the petition to purchase the petitioners’ shares at “their fair value” (NY BCL Section 1118). Upon such election and subsequent application of the purchas - er, the court stays the petition to determine the value of the petitioners’ shares, effectively converting the nature of the action from one of shareholder oppres - sion or wrongdoing to a valuation hearing. In the con - text of a shareholder dispute, this shift serves as a stop-gap measure to prevent further damaging details of wrongdoing or dissention from leaking. While the Section 1118 election effectively gags the public squabbles of most closely held corporations, for many the damage of a detailed pleading of the inner squabbles provides sufficient harm to image and reputation. Outside of Section 1104-a petitions, shareholders cannot force a buyout, nor can a court “convert over a petitioner’s objection, a dissolution petition that does not afford a buyout option for non- petitioning shareholders” ( Fedele v Seybert , 250 A.D.2d 519, 523 (1st Dept. 1998)). The Limited Liability Company Law lacks the equivalent mechanism of a
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