New York Family Law Blog
Upon the foregoing papers, petitioners individually, as preliminary executor of the estate of the decedent and as the vested beneficial owner of shares of the respondent 4C Foods Corp. held by certain trusts, moves for an order: (1) pursuant to CPLR 2221 granting leave to renew respondent’s motion to dismiss the Petition that was granted in this court’s order dated December 5, 2012, and upon renewal, denying respondent’s motion to dismiss the petition; and (2), pursuant to CPLR 3025, granting petitioners leave to file and serve an amended petition.
Petitioners’ motion is denied with respect to petitioners’ claims pursuant to Business Corporation Law §§ 623 and 806. With respect to the proposed causes of action premised on the breach of the implied covenant of good faith and fair dealing and breach of fiduciary duty, the motion to amend is denied, but with leave to file an amended pleading containing such causes of action upon the following events: (1) the executor of the estate of the decedent, is barred from transferring voting shares individually; (2) these voting shares are purchased by respondent, its directors and or its majority shareholders; and (3) such causes of action are not otherwise rendered moot by any determination made in the Nassau County declaratory judgment action. The motion for leave to file an amended petition is granted with respect to the proposed declaratory judgment claim in which petitioner seeks a declaration that the January 11, 2013 notice addressing the transfer of voting shares formerly controlled is a nullity. The special proceeding is converted to a declaratory judgment action, but any further proceedings in the action are stayed pending the determination of the Nassau County declaratory judgment action.
In the dismissed petition, petitioners contended that, pursuant to Business Corporation Law §§ 623 and 806, they were entitled to a determination of the value of their shares in respondent and a judgment providing that respondent was required to pay petitioners fair value for their shares.1 Petitioners are a minority group of shareholders of respondent, a closely held family corporation. The minority and majority groups of shareholders have had a contentious relationship for years. In 2007, the majority group passed an amendment to the shareholders agreement that gave the majority shareholders the right to approve or reject any transfer of shares and that allows respondent to buy the shares for which transfer approval has not been granted. This amendment to the transfer provisions was declared legal and enforceable in a previous declaratory judgment action.
At issue in the instant proceeding was a December 2, 2011, resolution that amended the certificate of incorporation and the shareholder’s agreement to provide for a four for one split of the non-voting shares for each shareholder. Although the amendment did not alter the percentage of shares held by the majority and majority shareholders, the split reduced the per share value of each share. Petitioners contended that this amendment would thus allow the majority shareholders to take advantage of the limitation on transfer provisions (Fourth Amendment § 4.3) to pick off petitioners’ voting shares at a reduced price. This issue was not merely hypothetical, in that executor who controlled a portion of the minority shares, was on her deathbed at the time the majority shareholders decided to amend the certificate of incorporation in order to change the number of shares. Further, upon her death in December 2011, and the subsequent probate of her will, the transfer of her shares or those held for her benefit from her estate to the beneficiary, petitioner another minority shareholder, is a transfer that will be governed by section 4.3 of the fourth amendment.
Upon respondent’s declining to recognize the applicability of Business Corporation Law § 623, petitioners commenced the proceeding alleging entitlement to appraisal rights under section 623 and respondent moved to dismiss the petition. In support of the petition, and in opposition to respondent’s motion to dismiss, petitioners had asserted that they were entitled to an appraisal pursuant to section 623 because the amendment adversely altered their redemption and voting rights under Business Corporation Law § 806(b)(6)(B) and (D). In the December 5, 2012 order deciding respondent’s motion to dismiss, the court stated that: “Upon considering the language of the statute as interpreted by the extent court decisions, this court finds that the amendment here does not alter any of petitioners’ rights under section 806(b)(6). In this regard, the splitting of the stock does not affect any right to a preference for purposes of section 806(b)(6)(A) since, prior to the amendment, all of respondents stock was common stock and none of its stock carried with it any preferential rights. With respect to section 806(b)(6)(B), respondent’s limited right to repurchase shares under section 4.3 of the fourth amendment to the shareholders agreement upon a decision by a majority of the shareholders to reject all or part of a transfer is not a redemption right for purposes of the statute.”
Because the court found that the amendment at issue here was not an adverse alteration of the certificate of incorporation for purposes of Business Corporation Law § 806(b)(6), it also found that petitioners do not have a right to appraisal under Business Corporation Law § 623. This court noted, however, that: “Respondent has not presented a business justification for increasing the number of shares, and, as such, petitioners’ concern that the majority shareholders may intend to take advantage of the reduced per share value of the corporation in order to pick off their voting shares may not be unreasonable. Nevertheless, the amendment at issue here is simply not one of the enumerated changes that would allow an appraisal action. It would appear that petitioners’ claim would be better addressed if and when the majority shareholders use section 4.3 of the fourth amendment to force a selective purchase by respondent of a portion of the shares to be transferred from the decedent’s estate to petitioner in order to reduce the minority shareholders’ voting stake in respondent. At that time, petitioner may have an argument that any such limitation on the transfer by the majority shareholders would violate the fiduciary duty majority shareholders of a closely held corporation owe the minority shareholders.”
In moving to renew the motion to dismiss and to amend the petition, petitioners allege that the majority shareholders have now taken the action that the petitioners feared would be made possible by the amendments to the certificate of incorporation and shareholders agreement discussed above. Namely, as executor of the estate, gave notice, pursuant to the stock transfer provisions (Fourth Amendment § 4.3), of his intent to transfer the shares held by the estate to the beneficiary. While, in their response, dated January 11, 2013, the majority shareholders allowed the transfer of the non-voting shares, they declined to allow the transfer all of the voting shares to him unless the court, in a declaratory judgment action respondent has commenced in Nassau County, found that it was improper to disallow such a transfer. Petitioners contend that they are entitled to renewal and leave to amend the petition because this refusal to transfer the voting shares shows an actual violation of their rights under Business Corporation Law § 806.
Initially, the court need not decide whether renewal can be predicated on facts occurring after the submission of a motion. The new facts here, however, do not alter the court’s conclusion that the stock split amendment to the certificate of incorporation was not an adverse alteration for purposes of Business Corporation Law § 806(b)(6). Namely, in reaching its conclusion, the court emphasized that the stock split amendment simply did not alter any of the stockholder rights that are deemed to constitute adverse actions against shareholders under section 806(b)(6). In doing so, the court recognized that majority shareholders could use the amendment here to pick off voting shares at a reduced price, but found that such an alteration was more attenuated than those courts had found to constitute adverse amendments under section 806(b)(6).
Relying on the same facts alleged with respect to the Business Corporation Law claims, petitioners also seek to amend the petition to add causes of action for breach of fiduciary duty against the majority shareholders (proposed third-claim for relief) and the board of directors (proposed fifth claim for relief), breach of the implied covenant of good-faith and fair dealing against the majority shareholders (proposed fourth claim for relief) and declaratory judgment declaring that the conditional nature of respondent’s January 11, 2013 response to the stock transfer request renders it a nullity (proposed sixth claim for relief). Initially, with respect to these claims, the court notes that the actions of the majority shareholders may implicate the implied covenant of good faith and fair dealing.
Nevertheless, at this time, petitioners’ causes of action based on the breach of the covenant of good faith and fear dealing and the breach of fiduciary duty are premature, as petitioners still have not alleged grounds from which any cognizable damage may be inferred.
Given that the breach of the implied covenant of good faith and fair dealing and breach of fiduciary duty causes of action are premature, petitioners’ motion to amend is denied with respect to those claims on the current facts. On the other hand, in the event that, following the resolution of the declaratory judgment action, the transfer is ultimately barred, the voting shares are purchased by the directors/majority shareholders and petitioners’ assertions are not otherwise mooted by the declaratory judgment action, petitioners’ causes of action may be cognizable at that time. As such, petitioners are thus granted leave to submit an amended pleading if these conditions have been met.
The claim seeking a declaration that the January 11, 2013 notice (i.e. respondent’s notice declining to allow the transfer of the voting shares) is a nullity is not palpably insufficient or patently devoid of merit. Petitioners are thus granted leave to amend. There are, however, no grounds supporting the claim as a special proceeding. Accordingly, the court exercises its authority to convert the proceeding to a declaratory judgment action, and petitioners are directed to file and serve the amended pleading in the form of a complaint rather than a petition.
The court notes, however, that the issues relating to the validity of the January 11, 2013 notice may necessarily be decided as part of the declaratory judgment action that has already been commenced in Nassau County. As such, and in order to avoid the waste of judicial resources and to avoid the possibility of inconsistent decisions, this court exercises its authority to stay this action until the resolution of the Nassau County declaratory judgment action. Petitioners thus should not file or serve any amended pleading until this stay is lifted by the court. In addition, while the court does not have the power to order a joint trial or consolidation of actions sua sponte, the parties may find it advisable to move for such relief given the overlapping factual and legal issues that are before this court and the Supreme Court in Nassau County.
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