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Firm News: corporations

WHERE THERE’S A WILL, THERE’S A FAMILY – By ALEXANDER D. FISHER, ESQ.

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Recently, the Firm succeeded in obtaining summary judgment on behalf of our client - a well-known catering establishment in Great Neck, New York - in a case involving a dispute over the ownership rights of shares in a family-owned business.

In this matter, Plaintiff, one of the sons of the deceased founder of the business, sought to block his stepmother from taking shares of the company that had been bequeathed to her by the decedent’s “pour over” will and subsequent trust.  Plaintiff argued that per the terms of a shareholders agreement for the business, which pre-dated the will by almost 20 years, his stepmother was not entitled to hold the shares because the agreement had purportedly limited the right to hold shares to “family members”.  Plaintiff argued that as a spouse of the decedent, his step-mother did not qualify as a “blood” relative, and therefore was not a family member.  He also noted that a separate clause in the agreement required any spouse who was no longer married to a member of the decedent’s family to return her shares in the company, and argued that since the decedent had passed away, his stepmother could no longer be married to him.  He accordingly commenced a declaratory judgment action seeking a declaration that his stepmother was not entitled to hold these shares, and forcing her to sell the shares to the remaining shareholders, including Plaintiff.

In our motion for summary judgment, we argued that there was no language in the shareholders agreement that limited the right to hold shares to “blood” relatives – rather, the agreement limited the right to hold shares to family members.  Accordingly, as the spouse of the decedent at the time of his death, the stepmother was clearly a family member under any reasonable definition of the term.  We noted that the requirement in the agreement requiring divestiture of shares in the company once a spouse was no longer married to a member of the decedent’s family was clearly limited to spouses of the decedent’s relatives – there was no clause requiring the spouse of the decedent himself to return any shares she held.  We also noted that Plaintiff had repeatedly acquiesced to his stepmother receiving the shares, both in a very detailed waiver agreement signed in Florida at the time of the distribution of shares from the trust, and in multiple clear ratifications of his stepmother’s status as a shareholder thereafter.  Furthermore, we argued that per the terms of the waiver, any contest to the terms of the trust were to be made in Florida under Florida law, and that pursuant to the statute of limitations governing such claims in Florida, Plaintiff was barred by the statute of limitations from challenging the terms of the trust.

In his decision, Nassau County Justice Thomas Feinman agreed with our position that Plaintiff’s stepmother unquestionably qualified as a member of the family based upon even a narrow reading of the term “family”.  The Court also found that the terms of the agreement did not contemplate the return of shares held by the decedent’s spouse upon his death, but only those shares held by a spouse of the decedent’s relatives.  Moreover, Justice Feinman noted that Plaintiff had unequivocally waived his right to challenge the grant of shares to his stepmother when he executed the waiver agreement at the time the shares were transferred.  The Court therefore granted our clients summary judgment as to all claims asserted against them.

This decision highlights the value of a well-worded waiver agreement relating to the distribution of property from an estate or a trust, particularly when there may be the potential for inter-family squabbles down the line.  Such an agreement allows the parties finality, and ensures that an aggrieved relative will not seek to undo various grants of property years later.  The decision also illustrates the value of a carefully drafted agreement regarding transfer of shares in a business, and how a seemingly mundane choice of words when drafting agreements can have massive unforeseen consequences a generation later.


The decision, Sessa v Sessa, can be found on this Firm’s website under Publications.

                                                                          -7/19/16


Alex Fisher, corporations, Estates, Sessa v. Sessa, shareholders agreement, Trusts, Wills

Shareholder Disputes: How to Obtain Company Documents, by Stuart F. Gartner

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What can you do if you suspect that shareholders in your company are engaging in fraud or mismanaging the company, yet your requests for corporation records go unheeded? In Novikov v. Oceana Holdings Corp., a case handled by this Firm, the Kings County Supreme Court answered that question: so long as you have a legitimate purpose (such as investigating suspected mismanagement), you can force the company to turn over relevant corporation records.

Our client was a minority owner in a closely held corporation (the "Company") that owned a mixed commercial and residential building ("Building") in the Brighton Beach area of Brooklyn.  Our client had been kept out of the decision making loop by the other shareholders, and received virtually no information from them as to the Company.  Over time, he began to suspect that the other shareholders were engaging in self-dealing and mismanaging the Company.  Among other things, our client believed that one  of the shareholders had taken a substantial loan from the Company that had gone unpaid, and that the other shareholders were paying themselves unreasonable salaries, and had rented a commercial unit in the Building at a below market rent to another, separate company owned by them.  To investigate the suspected misconduct, our client demanded to see Company tax returns, financial statements, and property leases.

The Company refused to give over the documents voluntarily, so this Firm brought a Supreme Court petition on our client's behalf to compel the Company to do so.  The Company opposed the petition, saying that it had already given a redacted Company tax return, and that our client had bad motives for seeking the documents.

The Court granted the petition, ordering the Company to give over to our client unredacted State and Federal tax returns, profit and loss statements, leases, employment and commission agreements, shareholder meeting minutes and lists, and mortgage and loan documents.  (A copy of the decision is found at www.gbglaw.com under Decisions.)  The key to the Court's decision is a well-known point of law:  In addition to a statutory right for certain documents, "[a] shareholder has a common law right to inspect corporate books and records when the request is made in good faith and for a proper purpose....Investigating alleged misconduct by management and obtaining information that may aid legitimate litigation are in fact proper purposes ..." 

(Critically, our client with other counsel had tried previously to compel the Company to produce documents, but was turned away by the Court for failing to show a proper purpose for his request.  Our petition on his behalf included documentary evidence supporting his belief of Company mismanagement.)
 
The lesson offered by the Novikov decision is clear: the Business Corporations Law provides protections for minority shareholders; but whether you succeed in your request to obtain company documents depends on how well you can, prior to commencing a lawsuit, garner relevant facts and articulate a strong basis for your belief that the company is being mismanaged.   -SFG 11/3/2014

    




BCL 624, board of directors, business law, closely held corporation, corporate mismanagement, corporate records, corporations, inspection, limited liability companies, shareholders