In re the Dissolution of Gordon & Weiss, Inc.

32 A.D.2d 279, 301 N.Y.S.2d 839, 1969 N.Y. App. Div. LEXIS 3502

• Court: Appellate Division of the Supreme Court of the State of New York
• Decided: July 1, 1969
• Status: Published

Opinions

Stetjeb, J.

This is a proceeding by one of the two stockholders of a close corporation for the dissolution of the corporation.

* The parties were equal shareholders and both had equal representation on the board of directors. The corporation was in the advertising business. Since its incorporation in 1963 it has prospered to a reasonable extent and is still earning some profits.

Taking the affidavits in opposition at face value, the following facts appear: Since 1967 the petitioner has been trying to get the respondent out of the business. At first the method adopted was an offer to purchase the respondent’s interest at a price deemed to be grossly inadequate. This was followed by sundry illegal measures designed to coerce respondent into acceptance. Several lawsuits resulted from these activities. When petitioner was thwarted in these efforts, this proceeding was initiated.

Special Term, upon finding that there was no issue of fact, ordered dissolution of the corporation, appointed a receiver for the business, and directed the receiver to formulate a plan for the distribution of the corporate assets.

The first objection to the order is that no dissolution can be ordered in any event without a hearing. The statutory proceeding for a dissolution (Business Corporation Law, § 1104 et seq.) does provide for a hearing but this provision is not jurisdictional. It could not he maintained that a dissolution otherwise properly granted was a nullity because there was no hearing. A hearing is only required where there is some contested issue determinative of the validity of the application (semble Matter of Whitehall Art Co., 6 A D 2d 399, 400). Absent such an issue there is nothing in the nature of the proceeding that distinguishes it from any other litigated proceeding in this respect.

Appellant further contends that there is such an issue, namely, the good faith of the petitioner. His claim in this respect is that dissolution is sought to squeeze him out of the business for an inadequate consideration. While his averments do show that petitioner had embarked on a course of conduct which did have that end in view, the institution of this proceeding precludes it. Whatever respondent’s share of the business is, he will get it. Instead of forcing respondent to accept an inadequate consideration for his share of the business, petitioner now applies to the court to make the distribution.

However, this is not the complete answer to appellant’s contention in regard to good faith. He contends that the real reason why petitioner seeks a dissolution is that he does not wish to continue in business with respondent. If this constitutes bad faith, he has undoubtedly raised an issue.

We do not believe it does. This is a service corporation. The services for the clients are performed by the two parties to this proceeding. It is not disputed that they are not working together. The board of directors admittedly does not function because there is either a deadlock or by purposeful absence a quorum cannot meet. No significant corporate action is possible. There has been a consequent decrease in profits and. loss of personnel. Regardless of which of the parties is ultimately responsible, that is the situation.

In the instance of the close corporation, both the Legislature and the courts have come closer to treating the situation as it exists in fact rather than in theory. The enactment of subdivision (3) of section 1111, providing that in cases of deadlock among directors and shareholders dissolution should not “ be denied merely because it is found that the corporate business has been or could be conducted at a profit ’ ’ reflects that change. The earlier thinking stressed the distinction between the corporation as an entity and the shareholders, and as long as the former could continue to function profitably the relationship between the shareholders was of no moment (cf. Matter of Radom & Neidorff, 307 N. Y. 1). It is being increasingly realized that the relationship between the stockholders in a close corporation vis-a-vis each other in practice closely approximates the relationship between partners (see Matter of Surchin v. Approved Business Mach., 55 Misc 2d 888, 890). As a consequence, when a point is reached where the shareholders who are actively conducting the business of the corporation cannot agree, it becomes in the best interests of those shareholders to order a dissolution (Matter of Pivot Pumch & Die Corp., 15 Misc 2d 713; Matter of Whitehall Art Co., 6 A D 2d 399, supra; Matter of Milton Point Realty Co., 13 Misc 2d 277; Prunty, Business Associations, 34 N.Y.U. L. Rev. 1425, 1433). The so-called issue here presented is not whether this condition exists but rather why it exists. That being of no relevance, there is no issue.

As noted, the order provides that the receiver is charged with the duty of formulating a plan of dissolution and distribution of assets, which plan shall be subject to the final approval of the court. We deem this to be a proper application of subdivision (c) of section 1111 of the Business Corporation Law. While the statute does not specifically so provide, the application for approval should be on notice to all parties with a suitable opportunity to be heard. Further, the plan should be submitted as promptly as feasible.

The order of April 29, 1969 should be modified on the law to provide that the application for approval by the court so directed in the 10th ordering paragraph of the order be upon notice to all parties with an opportunity to be heard, and, so as ordered, affirmed without costs.

There is a third shareholder, who apparently owns 10 shares but concededly has no right to vote, and both parties appear to regard his position as purely nominal. The purpose and circumstances of his stock ownership do not appear.