A 20% or greater shareholder in a closely held New York corporation may commence a special action for dissolution of the corporation on the grounds that those in control have either committed “illegal, fraudulent or oppressive actions toward the complaining shareholder” or have “looted, wasted or diverted for non-corporate purposes the corporation’s assets.” Business Corporation Law §1104-a. New York’s Business Corporation Law §1118 is a corollary to Section 1104-a.It grants non-petitioning shareholders, as well as the corporation itself, the right to avoid dissolution by timely electing to purchase the petitioning shareholder’s shares at their fair value. In re Matter of Penepent Corporation, Inc., 96 N.Y 2d 186, 191 (2001). Pursuant to Section 1118, an election may be made “at any time within ninety days after the filing of a 1104-a petition for dissolution or at such later time as the court in its discretion may allow.” Business Corporation Law §1118.
In shareholder oppression litigation, whether or not discounts are applicable is important in determining the buy-out price. A “minority discount” is based upon a lack of control. Most states do not apply “minority discounts” in an oppressed shareholder sale because the sale is not an arm’s length voluntary transaction but in reality an “involuntary” occasioned by way of remedy for the misconduct of the purchaser. See, Balsamides v. Protameen Chemicals, 160 N.J. 352 (1999). The New York Court of Appeals (the highest Court in New York) held, “in determining fair value, a minority shareholder’s stock should not be further discounted because of its minority status.” In re Matter of Penepent Corporation, Inc., 96 N.Y 2d at 194. In making that determination, the New York Court of Appeals found “[t]o impose upon petitioning minority shareholders a penalty because they lack control would violate two ‘central equitable principles of corporate governance.’ First, a minority discount would deprive minority shareholders of their proportionate interest in the corporation as a going concern. Second, it would result in shares in the same being treated unequally.” Id.