Summary
In Kruger a minority shareholder alleged that for several years a majority shareholder had been taking substantial salaries and bonuses, leaving the corporation with only minimal net income.
Summary of this case from Matter of Nelkin v. H.J.R. Realty Corp.Opinion
Submitted May 20, 1965
Decided July 9, 1965
Appeal from the Appellate Division of the Supreme Court in the Second Judicial Department, DANIEL G. ALBERT, J.
Jack Korshin for appellants.
Edward S. Bentley and Robert T. Aller for respondents.
Order affirmed, without costs, upon the majority opinion at the Appellate Division.
Concur: Judges DYE, VAN VOORHIS, SCILEPPI and BERGAN. Chief Judge DESMOND and Judge FULD dissent in the following opinions in each of which Judge BURKE concurs.
The majority opinion of the Appellate Division proceeds on the mistaken assumption that the plaintiffs are demanding dissolution of this two-man corporation solely because the defendant majority stockholder is taking for himself a bonus and salary in such amounts as to reduce the net corporate profit below the amount necessary to provide dividends to plaintiffs on their common stock. That is an understatement of the grounds for liquidation urged by plaintiffs and accepted as fact in the Special Term opinion. The undisputed fact is that this corporation in recent years has had net profits of only about 1 or 2% annually on the value of its assets; that there is (as testified by the majority stockholder) no prospect of the corporation ever making enough profit to pay any dividend to its common stockholders; that plaintiffs' 46% of the common stock is, therefore, both unprofitable and unsalable; and that the corporation does not and cannot serve any purpose beyond paying a salary to defendant Arthur A. Gerth. The main point is not that Gerth's salary plus bonus is exorbitant but that the corporation is being kept alive solely to pay that salary plus bonus. Since there is no likelihood of any appreciation of the assets or of any future growth or increment, liquidation is the only means whereby all the stockholders as stockholders can get something out of the corporation. It is obvious that if Mr. Gerth should die or become incapacitated so as to be unable to earn his salary, no stockholder, minority or majority, would vote to keep the corporation in business in order to pay Mr. Gerth's successor a salary. As to the equities, the plaintiffs are the executors of the deceased 46% common stockholder and the latter's widow who is the income beneficiary under his will has no prospect of collecting any income.
That a minority stockholder may sue for dissolution when the directors and majority stockholders have breached their fiduciary duties to the minority is settled by Leibert v. Clapp ( 13 N.Y.2d 313). The authorities cited and approved by us in the Leibert opinion (particularly Gaines v. Adler, 15 A.D.2d 743, and the case cited therein; Drob v. National Mem. Park, 28 Del. Ch. 254, 270, 271; Hornstein, A Remedy for Corporate Abuse, 40 Col. L. Rev., at p. 220 et seq.) require a court of equity to intervene and grant relief in such a case as this. The modern and just rule as explained in the cited Columbia Law Review article is that a court of equity should wind up the affairs even of a solvent going corporation when gross mismanagement or fraudulent or inequitable conduct causes real danger of imminent loss to stockholders which danger cannot be prevented except by liquidation, and where the circumstances have created a real exigency and liquidation will serve a beneficial purpose to all stockholders.
Such small corporations, being really partnerships between two or three people who contribute their capital, skills, experience and labor should be treated by a court of equity as partnerships in many respects. A large corporation or one that has some prospect of becoming large is really an institution separate and distinct from its owners serving a separate purpose in our society by providing employment, accumulating capital for proper purposes and adding to community wealth and community service. Even if such a large or growing corporation is temporarily operating at a loss there may be quite reasonable expectations that its position will improve. Not so with the two-man corporation which owns no valuable trade secrets, market advantages or growth probabilities but simply continues to exist as the form in which two individuals pool their efforts. When one of those two dies and everything indicates that the corporation can never do more than pay a salary to the survivor, the reason for corporate existence is gone and the court of equity should make a dissolution decree fashioned to fit the facts and providing for an appropriate form of dissolution and sale of the assets whether to the survivor or by public auction or otherwise as may appear just.
The Appellate Division order should be reversed, with costs to abide the event, and the action remitted to the Supreme Court for further proceedings not inconsistent with this opinion.
Although I agree with the Chief Judge that there should be a reversal, I do not find it necessary, in reaching such a result, to rely on Leibert v. Clapp ( 13 N.Y.2d 313).
The enterprise before us is a "close corporation" in the strictest sense, that is, one in which, regardless of the distribution of the shareholdings, "management and ownership are substantially identical". (Israels, The Close Corporation and the Law, 33 Cornell L.Q. 488.) In such a case, it seems almost self-evident, the fiduciary obligation of the majority to the minority extends considerably beyond what would be its reach in the context of a larger or less closely held enterprise. Here the relationship between the shareholders is very much akin to that which exists between partners or joint venturers.
Each case must, of course, be determined upon its own facts but there is no inherent reason why a court of equity cannot treat the participants in a genuine close corporation, insofar as their relationship inter sese is concerned, as they regard themselves — as partners or joint venturers. On this analysis, they become not only entitled to the benefits of the relationship but equally subject to its burdens, including the power of a court of equity to dissolve the venture and, in so doing, to impose terms. Thus, it is my opinion, particularly in view of the increasing trend to legislative and judicial recognition of the distinctive character of the genuine close corporation, that the analogy of the relationship between the participants themselves — wholly apart from that of their corporate creature to the world at large — to an informal joint venture with the shares of the corporation as its asset is apposite and useful. (See Conway, The New York Fiduciary Concept in Incorporated Partnerships and Joint Ventures, 30 Fordham L. Rev. 297.)
Although I recognize that this view runs counter to decisions in this court (see Weisman v. Awnair Corp. of America, 3 N.Y.2d 444, 449), it reflects a growing trend throughout the country (see, e.g., De Boy v. Harris, 207 Md. 212; La Varre v. Hall, 42 F.2d 65; Conway, The New York Fiduciary Concept in Incorporated Partnerships and Joint Ventures, 30 Fordham L. Rev. 297, 320) and is likewise the view expressed in Judge DESMOND'S dissent in the Weisman case ( 3 N.Y. 2 d, at pp. 451-452).
See, e.g., Business Corporation Law, §§ 616, 620, 709, 1002, by which the Legislature has greatly enlarged the power and freedom of shareholders to contract with respect to internal corporate government.
The concept of joint venture is not a rigid one; "it does not require", one thoughtful writer on the subject has noted, "an explicit agreement applying the label 'joint venture' to the activity or series of activities in question; and * * * the closest analogy is to a partnership at will." (Israels, The Sacred Cow of Corporate Existence, 19 U. of Chi. L. Rev. 778, 792.) As the same writer went on to say, "[f]rom that analogy flows the power of the Chancellor to dissolve and liquidate as in a partnership * * * in any manner calculated to produce a fair result". Although the court would be empowered to direct that the stock (the asset of the venture) be voted for dissolution, such an extreme step may not be necessary to accomplish a fair result. For example, a practical solution might be found in a procedure under which either interest may purchase the shareholdings of the other, at an appraised value found by the court and upon terms set by it. Flexibility of remedy, tailored to all the facts and circumstances of the case, including the good faith of the parties on both sides, their conflicting interests and motivations, if any, is the key. (Cf. Partnership Law, § 69, pursuant to which a court in partnership accounting may penalize partner for inequitable conduct.)
I would reverse the order appealed from and remand the case to Special Term for further proceedings.
Order affirmed.