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Why Seeking Dissolution Can Forfeit Your Voting Rights in a New York Corporation

 

There is an inherent tension when the shareholder of a closely held corporation decides that they want out. And the reason for this should be fairly obvious:

 

On the one hand, New York's courts have long held that "[A] shareholder, officer and director of a close corporation, [i]s subject to a standard of honesty and good faith which require[s] that he devote his undivided and unqualified loyalty to the corporation. The fiduciary duty imposed on him prevent[s] him from placing private interests in conflict with those of the corporation." Fender v Prescott, 101 AD2d 418, 422 (1st Dept 1984), affd, 64 NY2d 1079 (1985).

 

On the other hand, we don't want to force shareholders to remain indefinitely in a toxic, or even merely untenable, employment environment, because that would jeopardize them individually.

 

Frequently, the individual shareholder's best (and sometimes, only) option is to seek dissolution of the corporation. But, as suggested by the title to this article, that option is not without risk because it puts the individual shareholder's loyalties to corporation and to self at direct odds with each other.

 

As one of New York's trial courts recently stated,

 

"[W]hen an individual files for dissolution, that individual's ability to carry out his fiduciary duties is clearly compromised. 'An action for dissolution, however, the aim of which is to end the corporate life, cannot possibly benefit the corporation . . .' Fontheim v Walker, 282 AD 373, 375 (1st Dept 1953), affd, 306 NY 926 (1954). Stated more sharply, a shareholder's petition to dissolve the corporation expressly evidences that the disgruntled shareholder "has no further interest in [the] continuation of the corporation aside from being paid for [his] shares". Matter of Delinko, NYLJ Apr 27, 1981, at p. 6, col. 2 (Sup Ct NY Co)."

 

Consequently, the rule that has been adopted by New York's courts has been summarized as follows:

 

"Simply put, without an explicit and unequivocal agreement to the contrary, a shareholder who petitions for dissolution should not have the ability to veto the corporation's election rights. To do so would fly in the face of logic as well as the purposes of the statutory scheme enacted by the Legislature."

 

In other words, if you petition the court to dissolve the corporation, you will likely forfeit your voting rights in the corporation.