After 35 years, Matter of Kemp & Beatley, Inc. (64 NY2d 63 ), remains the leading authority in New York on oppression-based corporate dissolution. In Kemp & Beatley, the Court of Appeals announced a now-venerable legal rule: “Assuming the petitioner has set forth a prima facie case of oppressive conduct,” a shareholder wishing to “forestall dissolution” must “demonstrate to the court the existence of an adequate, alternative remedy.” In practice, what this means is that courts must consider whether a buyout will provide the petitioning shareholder a “reasonable means of withdrawing his or her investment.”
A recent decision by a Manhattan-based appeals court, Campbell v McCall’s Bronxwood Funeral Home, Inc., 2019 NY Slip Op 00182 [1st Dept Jan. 10, 2019], presents a number of interesting questions about how courts should apply Kemp & Beatley’s pronouncement that courts must consider an “adequate, alternative remedy” to dissolution in the face of a written shareholder’s agreement that provides a formula and method for buying out a shareholder’s stock. Campbell is an epic 12-year litigation with seemingly no end in sight.
The Corporation and Stockholder’s Agreement
In 1966, three shareholders formed McCall’s Bronxwood Funeral Home, Inc. Three decades later, a founder, Emma Brisbane, and James Alston, son of a founder, each owned 50% of McCall’s stock. In 1998, Brisbane and Alston entered into a written Stockholder’s Agreement. The agreement contained buy-sell provisions for dispositions of stock during lifetime (section 7) and upon death (section 8). The agreement included the following payment formula:
9. PURCHASE PRICE
The purchase price of the shares of the common stock of McCall’s shall be determined by calculating the arithmetic average of the Net Income of McCall’s for the five (5) fiscal years immediately preceding the date of death of a stockholder or the date The Selling Stockholder gives notice of the intention to sell all of his or her shares of stock to McCall’s, and multiplying the quotient thereby obtained by four (4). The calculation of Net Income shall be before the draw and/or salary received by the stockholders during the five fiscal years (see Exhibit A). One half of the value of the shares of common stock of McCall’s calculated pursuant to this formula shall be assigned to the total stock holdings of each stockholder.
Exhibit “A” to the Stockholder’s Agreement contained a sample calculation of the stock payout formula.
In 1995, Brisbane died. The Surrogate’s Court appointed Hugh Campbell, whom according to McCall’s and Alston drafted the Stockholder’s Agreement, as executor of Brisbane’s estate.
The Dissolution Petition
In 2007, Campbell filed a Verified Petition on behalf of Brisbane’s estate alleging a claim for dissolution of McCall’s under Section 1104-a of the Business Corporation Law (“BCL”). The petition alleged Alston was in control of all “day-to-day operations including the financial status” of McCall’s, and used his control to engage in “illegal, fraudulent and oppressive” actions toward Brisbane and her estate, including denying access to financial and tax information. The petition also alleged Alston “looted,” “wasted,” and “diverted” assets.
The First Decision Ordering a Valuation Hearing
McCall’s and Alston did not elect to buy Brisbane’s stock under BCL 1118. Instead, they moved to dismiss the petition. In 2008, former Bronx County Supreme Court Justice John A. Barone issued a Decision and Order. The Court converted the motion to dismiss to a motion for summary judgment, and upon conversion, deferred ruling on the motion, holding that a “full evidentiary hearing” was required on several issues, including “whether sale of the Estate’s interest under the 1998 shareholders agreement will adequately compensate the Estate.” The court appointed a Special Referee to hear and report on that specific issue.
The Cash Tender for Brisbane’s Shares
In 2009, McCall’s attempted to tender to Campbell $393,048 to purchase Brisbane’s shares in accordance with the formula buyout provisions of the Stockholder’s Agreement. The sum represented the amount Alston believed was owed for Brisbane’s stock under the Stockholder’s Agreement. Campbell rejected the tender.
The Second Decision Ordering a Valuation Hearing
In 2010, Justice Barone issued another Decision and Order. “For reasons that remain unclear to the court,” Justice Barone noted, “no Judicial Hearing Officer was ever appointed to conduct the evidentiary hearings” required by his 2008 decision. The court ruled:
It has been the opinion of this court since its earliest involvement in this case that prior to dealing with the many thorny issues arising out of this litigation that an initial hearing should be held to determine the fair value of the stock of the corporation. Since the initial court order of June 18, 2008 directing such hearing presided over by a judicial Hearing Officer was never carried out, the court itself will conduct this hearing. It will be a full evidentiary hearing on the record.
For reasons that are not clear – even after issuing this second decision – a valuation hearing never occurred.
In 2012, Alston filed a Verified Answer alleging affirmative defenses – but no counterclaims – based upon the Stockholder’s Agreement, including that Brisbane “voluntarily entered into a Stockholder’s Agreement in 1998 which governs the valuation and procedure to follow in the event of a death and the resulting sale or transfer” of her stock. The Second Affirmative Defense, tracking the language of Kemp & Beatley, alleged:
Liquidation is not the only feasible means by which the Estate may receive a fair return on its investment. A fair return is provided by a sale conducted in accordance with the formula established by the 1998 Shareholder’s Agreement. . . The rights and interests of the shareholders are best protected by enforcing the 1998 Stockholder’s Agreement, including the mandatory buy-sell provisions of that Agreement.
The Summary Judgment Decision
In 2013, Alston and McCall’s moved for summary judgment dismissing the petition, arguing that Campbell’s attempt to dissolve was “a deliberate effort to bypass the Stockholders’ Agreement he drafted” and which “provides the petitioner with a fair return on its investment.” Alston and McCall’s asked the court to hold that the “tender of $393,048 effectively accomplished the purchase of the Estate’s shares.” You can read here the memorandum of law in support and memorandum of law in opposition to summary judgment.
In 2016, Bronx County Supreme Court Justice Elizabeth A. Taylor issued a Decision and Order. In the heart of the decision, the Court held:
[U]nder the totality of the circumstances, a remedy short or other than dissolution constitutes a feasible means of satisfying both petitioner’s expectations and the rights and interests of the other shareholder. The 1998 agreement between Brisbane and Alston, Jr., reflects that Brisbane’s expectations and the rights and interests of Alston, Jr., will be vindicated by enforcement of that agreement. Additionally, under the totality of the circumstances, petitioner will obtain a fair return on Brisbane’s investment under paragraphs seven, eight and nine of the 1998 agreement. Therefore, respondent[s] are entitled to summary judgment dismissing the BCL § 1104-a involuntary dissolution petition.
The Appellate Decision
Brisbane’s estate appealed. You can read the appeal briefs here, here, and here. You can watch the oral argument, involving a particularly lively bench, here. Campbell‘s argument begins at the 54 minute mark.
On January 10, 2019, the First Department decided Campbell. Rejecting the Supreme Court’s ruling that the payment formula in the Stockholder’s Agreement conclusively provided adequate compensation under the circumstances, the appeals court ruled that an evidentiary hearing was required. As the Court explained, quoting Kemp & Beatley:
A court has discretion to deny a petition for dissolution upon a showing of shareholder oppression, provided the respondent shows that an ‘adequate, alternative remedy’ exists, such as a buy-out under the shareholders’ agreement that would provide a fair return on the corporate investment. . . .
Because the Funeral Home and defendant Alston failed to substantiate that their buy-out offer under the 1998 corporate shareholders’ agreement would provide decedent’s Estate with a fair return on the decedent’s investment, and the Estate has presented substantial evidence that the buy-out offer was grossly inadequate, we remand for an evidentiary hearing on the value of the Estate’s interest in the Funeral Home.
Observations About Campbell
A few thoughts about Campell.
First, is there any distinction between the common-law concept of an “adequate alternative, remedy” to dissolution and the statutory concept of “fair value” under BCL 1118? In Campbell, the Court treated the concepts as seemingly interchangeable – that is, for the petitioner to have an “adequate” remedy, he or she would have to get a “fair” price for his or her stock. In Congel v Malfitano, 31 NY3d 272 , the Court of Appeals found a meaningful distinction between the statutory term “value” under the Partnership Law and “fair value” under the BCL. In the Congel Court’s view, “value” meant potentially something less than “fair value.” One might argue that a buyout could be “adequate” under Kemp & Beatley with it necessarily being “fair” under BCL 1118. Especially where the parties entered into a contract knowingly agreeing to the buyout formula.
Second, in determining stock value, to what extent should courts defer to a written shareholder agreement with pricing and payment terms for a buyout of a shareholder’s stock? Every business lawyer in New York knows the rule that “when parties set down their agreement in a clear, complete document, their writing should as a rule be enforced according to its terms” (W.W.W. Assoc., Inc. v Giancontieri, 77 NY2d 157 ). But it is well-settled that in statutory fair value proceedings, a “shareholders’ agreement fixing the terms of a sale voluntarily sought and desired by a shareholder does not equally control when the sale is the result of claimed majority oppression or other wrongdoing — in effect, a forced buyout” (Matter of Pace Photographers, Ltd., 71 NY2d 737 ). Under Pace, buy-sell agreements are evidence of value in statutory appraisal proceedings, but they are not binding.
Third, in Campbell, to what extent did the Court actually depart from the parties’ agreement? Watching the oral argument, it seems the Court accepted McCall’s and Alston’s argument that the buy-sell provisions in the Stockholder’s Agreement applied to the buyout of Brisbane’s stock. The decision to order a hearing, however, seemed driven by two salient facts.
Key fact #1: the Court was troubled by Justice Barone’s issuance of multiple orders directing a valuation hearing, which inexplicably never occurred. Key fact #2: Campbell argued that there were conflicting tax returns filed by McCall’s, one set showing a profit, the other showing a loss. Based on these conflicting returns, the Court seemed to find that there was, at the very least, a triable issue of fact about the financial data used by McCall’s for its 2009 tender to calculate McCall’s “Net Income” under Section 9 of the Stockholder’s Agreement. Lacking a precise definition in the contract of Net Income, the Court’s decision to require a valuation hearing does not seem to be outright rejection of the contractual buyout formula, but rather, an expression of doubt about the correctness of the financial inputs used by McCall’s and Alston to determine value.
Finally, one can’t help but wonder – how in the world are the parties in Campbell still litigating a buyout 14 years after Brisbane’s death? When will it ever end? Unfortunately for all, they are headed back to the lower court for the precisely the evidentiary hearing Justice Barone ordered more than a decade ago.