USA – NEW YORK Trends and Developments Contributed by: Konstantine Paschalidis, Michael Iakovou and Socrates Xanthopoulos, IX Legal
BCL Section 1118, and “does not expressly authorize a buyout in a dissolution proceeding”, although a court may permit an equitable buyout of interests to avoid dissolution, in the appropriate circumstance ( Mizrahi v Cohen , 104 A.D.3d 917, 920 (2d Dept. 2013) (inter - nal citations omitted); see also Lyons v Salamone , 32 A.D.3d 757 (1st Dept. 2006), noting the lack of LLC law authorising a buyout but noting that the court may find an equitable method of liquidation or the other party is to purchase the interest in lieu of dissolution). Assuming a court will save their business from dis - solution is a desperate if not foolhardy strategy for an entity’s controlling interest holders. A more prudent course of conduct is to prevent the risk of dissolution altogether by creating a forced buyout provision in the context of a shareholder agreement or operating agreement, or by amending the existing agreement to guarantee its compliance with the framework of Courts must enforce agreements when they are set down in “a clear, complete document” ( W . W . W . Assocs . v Gianconteri , 77 N.Y.2d 157, 162 (1990). In the context of a buyout provision, the same guide - lines prevail ( Rosiny v Schmidt , 185 A.D.2d 727 (1st Dept. 1992)). Indeed, in Rosiny , the First Department reversed a trial decision preventing a forced sale of defendants’ shares pursuant to the terms of the share - holders’ agreement. The Rosiny shareholder agree - ment contained a post-mortem buyout for the defend - ant shareholders at a value of the greater of the book value as of the month preceding the operative date or USD200 per share, and the Rosiny court rejected defendants’ contentions of unconscionability in plain - tiff’s interpretation of the buyout provision. relevant court analyses. Buyouts in agreements There are limits to what courts tolerate, however, and the First Department has rejected a draconian USD1 buyback clause in an operating agreement for any breach of the agreement ( Atlantis Mgt . Group II v Nabe , 216 A.D.3d 526 (1st Dept. 2023)). Similarly, the Second Department has rejected a buyout provi - sion with a blank space for purchase price and no mechanism for valuation ( Stein v McDowell , 74 A.D.3d 1323 (2d Dept. 2010)). The Stein court found that “[t] he omission of the price from the buyout provision
meant that the shareholders’ agreement contained no buyout provision”. Moreover, a court will nullify a buyout provision when it is not timely exercised; see Urban Archeology Ltd . v Dencorp Invs . Inc ., 12 A.D.3d 96 (1st Dept. 2004) (finding that the failure to exercise the buyback within 90 days as contemplated expressly in the parties’ agreement constituted a fatal waiver that the trial court lacked authority to reinstate). To the extent par - ties modify buyout provisions, courts review the modi - fications under the same rubric as the original terms ( Milgrim v Backroads , Inc., 91 Fed.Appx. 702 (2d Cir. 2002)). Parties negotiating and drafting buyouts must give thought to their application, and to how courts will weigh the fairness of the methodology therein. The opportunity to craft a buyout provision presents a chance to also determine the venue of any challenge and thus the ability to shift disputes from the courts to arbitration. Arbitration with clauses in the context of a buyout Article 75 of the Civil Practice Law and Rules (CPLR) establishes the enforceability of a “written agreement to submit any controversy … to arbitration” (CPLR Section 7501; see also 9 U.S.C. Section 1 et seq for the Federal Arbitration Act). Indeed, a “party will not be compelled to arbitrate … absent evidence which affirmatively establishes that the parties expressly agreed to arbitrate their disputes” ( Waldron v God- dess , 61 N.Y.2d 181, 183 (1984)). In the context of a dispute among interest holders, the same analysis applies and the court is bound to review the agree - ment arbitration and ensure that it is “clear, explicit and unequivocal and must not depend upon implica - tion or subtlety” ( Sutphin Retail One , LLC v Sutphin Airtrain Realty , LLC , 143 A.D.3d 972, 973 (2d Dept. 2016), citing Waldron at 183–84). Assuming the applicability of an arbitration provision, a party “aggrieved by the failure of another to arbitrate may apply for an order” under CPLR Article 75 (CPLR Section 7503). Although a motion to compel arbitration succeeds in the appropriate circumstances, it stays rather than dismisses any underlying pending action; see In re Princeton Info , Ltd ., 235 A.D.2d 234 (1st Dept. 1997), reversing the dismissal with prejudice of a BCL Section 1104 action to reinstate the proceeding
1143 CHAMBERS.COM
Powered by FlippingBook