New York Shareholder Rights BOOM
While a“majority interest”(50+%) shareholder (“majority shareholder”) of a New York corporation holds significant rights, such rights are not without limits. In the absence of a shareholders agreement, the rights of shareholders of a New York corporation – including “minority interest” shareholders (“minority shareholder(s)”) – are governed by the New York Business Corporation Law (“BCL”) and New York common law. These laws provide minority shareholders with signifi- cant rights that the majority shareholder must understand. The majority shareholder therefore should always consider the need for a sharehold-
Right to Inspect Corporate Books and Records: Under the BCL, any shareholder has the right to review certain documents— such as financial statements, shareholder lists, and the minutes from shareholder meetings, provided the request is for“[a]ny
purpose reasonably related to such person’s interest as a shareholder.” Under New York common law, shareholders also have the right to review the corporation’s other books and records, so long as the inspection is sought in good faith.
RighttoAnnualMeeting:
BCLSection602provides that a shareholders meeting “shall be held annually for the election of directors and the trans iN THIS ISSUE
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SHAREHOLDER RIGHTS UNDER NEW YORK LAW
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FIRM NEWS, APPEARANCES & ARTICLES
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?Partner Anthony V. Curto focuses his practice on corporate and commercial, tax, trusts and estates and entertainment matters.
Important NewYork
Labor Law Amendment:
All New York employers need to be aware of an amendment to NewYork's Labor Law that took effect on October 27, 2009. Under an amendment to Labor Law §195 employers are now required to notify all newly hired employees in writing at the time of hir- ing of their rate of pay, including over- time rates for employees eligible to receive overtime pay, and the regular payday designated by the employer. The employer is required to obtain a written acknowledgment from each newly hired employee that they have been provided with the required information.
Partner Russell G. Tisman is available to prepare the required notices and acknowledgment forms and to advise you on overtime eligibility issues, along with other regulatory obligations imposed on employers.
ers agreement.
Rights and Obligations of Shareholders under New York Law in the Absence of a Shareholders Agreement
While the BCL and New York common law tend to favor the majority shareholder, minority shareholders are provided with several important rights and certain important obligations are imposed on the majority shareholder so that he is in a position to control the corporation. These rights and obligations include:
Fiduciary Duties of Board of Directors: The Board of Directors of a New York corporation is appointed at the direction of the majority share- holder and in most closely-held corporations the Board consists of the majority shareholder and/or its designees. The directors, however, have fiduci- ary duties to all of the shareholders of the corpo- ration. These include the duty of loyalty and the duty of care.
Right to Petition for Judicial Dissolution: BCL
Section 1104-a provides that shareholders hold-
ing at least 20% of the voting stock may petition
the court for the dissolution of the corporation if:
(a) the directors have been guilty of“illegal, fraud-
ulent or oppressive actions” towards the com-
plaining shareholders; or (b) the property or
assets of the corporation are being“looted, wasted, or diverted for non-corporate purposes.” The court then determines if involuntary dissolution is warranted to provide the petitioners with a fair return on their investment and to protect the rights and interests of the petitioners or shareholders generally. In the event a Section 1104-a action is commenced, BCL Section 1118 provides that any non-petitioning shareholder may elect to purchase the shares of the petitioner(s) at their fair value.
action of other business.” While a minority share- holder’s voting interest may not be sufficient to effect any corporate change, the annual meeting requirement does provide a forum for a minority shareholder to speak directly to management, raise issues and ask questions.
Rights and Obligations Often Addressed in a Shareholders Agreement
In evaluating the need for a shareholders agree- ment, the majority shareholder should always con- sider the following matters:
Restrictions on Right to Transfer Shares: In the absence of a shareholders agreement, a sharehold- er generally has the right to transfer its shares. In a closely-held corporation, it is almost always con- templated that the ownership of the corporation be tightly controlled, and that shares not be freely transferable. Failure to regulate the transfer of shares could result in the shares ending up in the hands of an ex-spouse or other family member of the shareholder, a creditor of the shareholder, or worst yet, even a competitor. It is common for a corporation (or the other shareholders) to have a “right of first refusal”to purchase the subject shares in the event of any proposed transfer.
Rights Upon Termination of an Employee- Shareholder: In the absence of an agreement to the contrary, a shareholder generally has the right to continue its share ownership regardless of death, disability, retirement, or termination of employment with the corporation. In certain termination situations – e.g., termination of an employee shareholder for cause – it is typically not desirable to allow the ex-employee, who perhaps now has an axe to grind with the corporation, to continue to own its shares. 2-5456
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agreements contain provisions that define the various rights and obligations of the corporation and the share- holders in the event of a shareholder’s death, disability, resignation, retirement, termination of employment for cause or without cause, and the shares becoming subject
basis. Therefore, it is often important for a majority share- holder to have “drag along” rights i.e., the right in the event the majority shareholder wishes to sell its shares to a third-party buyer, to force (or drag along) the minority shareholder to sell its shares on the same terms and con-
its shares. If such a further obligation is to exist, a provi- sion in the shareholders agreement or a separate capital contribution agreement will be necessary.
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to an involuntary transfer order (e.g., pursuant to a divorce or bankruptcy).
Drag Along Rights: While a majority shareholder typ- ically can cause the disposition of the corporation’s busi- ness in an“asset sale”transaction, it typically cannot do so unilaterally in a“stock sale”transaction. Stock sale trans- actions are often preferred from a seller’s perspective as they can be structured on a tax deferred“stock for stock”
ditions. As a counter-balance, minority shareholders often seek “tag along”rights i.e., the right to participate (or tag along) in any sale by the majority shareholder of its shares.
Capital Contribution Obligations: Absent an agree- ment to the contrary, there is no obligation for a share- holder to make additional capital contributions to the cor- poration beyond the shareholder’s initial contribution for
This article enumerates many of the common issues that every majority shareholder should consider at the outset of the participation of a minority shareholder or share- holders in a NewYork corporation. Of course every situ- ation is unique, and a majority shareholder should exam- ine all of its concerns about having minority shareholders so that expectations can be protected.
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