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SHAREHOLDERS’ DERIVATIVE ACTION IS EQUITABLE IN NATURE, MOTION TO STRIKE DEMAND FOR A JURY TRIAL SHOULD HAVE BEEN GRANTED.

The First Department, reversing Supreme Court, determined defendant's motion to strike plaintiff's demand for a jury trial in this shareholders' derivative action should have been granted. The court noted that a motion to strike a demand for a jury trial can be made anytime up to the opening of trial:

Supreme Court erred in finding that plaintiff in this shareholders' derivative action was entitled to a jury trial, since the claims brought in his capacity as a shareholder were “derivative and therefore equitable in nature” … . Contrary to plaintiff's contention, the motion was not untimely, since a motion to strike a demand for a jury trial may be made at anytime up to the opening of trial … , and we find no prejudice in defendants' delay of a few months, following the restoration of the case to the calendar, in making their motion. Moyal v Sleppin, 2016 NY Slip Op 04107, 1st Dept 5-26-16

CORPORATION LAW (SHAREHOLDERS' DERIVATIVE ACTION IS EQUITABLE IN NATURE, MOTION TO STRIKE DEMAND FOR A JURY TRIAL SHOULD HAVE BEEN GRANTED)/CIVIL PROCEDURE (SHAREHOLDERS' DERIVATIVE ACTION IS EQUITABLE IN NATURE, MOTION TO STRIKE DEMAND FOR A JURY TRIAL SHOULD HAVE BEEN GRANTED)/SHAREHOLDERS' DERIVATIVE ACTION (SHAREHOLDERS' DERIVATIVE ACTION IS EQUITABLE IN NATURE, MOTION TO STRIKE DEMAND FOR A JURY TRIAL SHOULD HAVE BEEN GRANTED)/JURY TRIAL, MOTION TO STRIKE DEMAND FOR (SHAREHOLDERS' DERIVATIVE ACTION IS EQUITABLE IN NATURE, MOTION TO STRIKE DEMAND FOR A JURY TRIAL SHOULD HAVE BEEN GRANTED)

LIABILITY SHOULD NOT HAVE BEEN FOUND ON THE PART OF THE CORPORATE PRINCIPALS WHO COMMITTED OPPRESSIVE ACTS AGAINST PLAINTIFF SHAREHOLDER.

The Second Department, reversing (modifying) Supreme Court, determined that liability should not have been found on the part of the corporate principals who committed oppressive acts against the complaining (plaintiff) shareholder:

The Supreme Court also should not have found liability on the part of [the] corporate principals of the corporate defendants, because one of the primary legitimate purposes of incorporating is to limit or eliminate the personal liability of corporate principals … , and the court did not find that they “abused the privilege of doing business in the corporate form”… . Qadan v Tehseldar, 2016 NY Slip Op 04036, 2nd Dept 5-25-16

CORPORATION LAW (LIABILITY SHOULD NOT HAVE BEEN FOUND ON THE PART OF THE CORPORATE PRINCIPALS WHO COMMITTED OPPRESSIVE ACTS AGAINST PLAINTIFF SHAREHOLDER)

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PURCHASER OF UNSOLD SHARES IN A COOPERATIVE BOUND BY A STIPULATION TO WHICH PURCHASER WAS NOT A PARTY; STIPULATION RESTRICTED THE NUMBER OF BOARD MEMBERS WHO COULD BE ELECTED BY HOLDERS OF UNSOLD SHARES.

The First Department, in a full-fledged opinion by Justice Acosta, determined a purchaser of a cooperative apartment, Johnson, was bound by a pre-existing stipulation to which Johnson was not a party. The stipulation required that the holders of unsold shares in the cooperative (HUS) could elect no more than two of the five directors. Unsold shares are held by investors who do not live in the apartments:

The [relevant] documents, including Johnson’s express agreement to take subject to the provisions of the proprietary lease, which incorporated the stipulation, make clear that he was an HUS and was bound by the stipulation’s provisions, including the election restriction … .

[The holder of the unsold shares] should not be permitted to frustrate its obligations under the offering plan or stipulation by transferring its shares to puppet entities to syphon votes away from resident shareholder candidates in order to control the board well beyond the period contemplated by the Attorney General … . Indeed, there is no question that the sole purpose of [the] assign[ment of] 600 shares to Johnson just four days before the … board election was to avoid the provision that prohibited holders of unsold shares from electing more than two directors. Matter of Tiemann Place Realty, LLC v 55 Tiemann Owners Corp., 2016 NY Slip Op 04007, 1st Dept 5-24-16

CONTRACT LAW (COOPERATIVE APARTMENTS, PURCHASER OF UNSOLD SHARES IN A COOPERATIVE BOUND BY A STIPULATION TO WHICH PURCHASER WAS NOT A PARTY; STIPULATION RESTRICTED THE NUMBER OF BOARD MEMBERS WHO COULD BE ELECTED BY HOLDERS OF UNSOLD SHARES)/CORPORATION LAW (COOPERATIVE APARTMENTS, PURCHASER OF UNSOLD SHARES IN A COOPERATIVE BOUND BY A STIPULATION TO WHICH PURCHASER WAS NOT A PARTY; STIPULATION RESTRICTED THE NUMBER OF BOARD MEMBERS WHO COULD BE ELECTED BY HOLDERS OF UNSOLD SHARES)/COOPERATIVES (COOPERATIVE APARTMENTS, PURCHASER OF UNSOLD SHARES IN A COOPERATIVE BOUND BY A STIPULATION TO WHICH PURCHASER WAS NOT A PARTY; STIPULATION RESTRICTED THE NUMBER OF BOARD MEMBERS WHO COULD BE ELECTED BY HOLDERS OF UNSOLD SHARES)

STANDARD FOR REVIEW OF GOING-PRIVATE MERGERS ANNOUNCED; SHAREHOLDER CLASS ACTION CHALLENGING THE GOING-PRIVATE MERGER DISMISSED.

The Court of Appeals, in a full-fledged opinion by Judge Stein, determined a shareholder class action complaint challenging a going-private merger was properly dismissed for failure to state a cause of action. The court adopted a Delaware standard of review for going-private mergers, i.e., where the controlling shareholder seeks to buy out all the outstanding shares and, in effect, take the publicly-traded company private. Plaintiff argued the “entire fairness” review standard should be applied. Defendants argued the “business judgment” review standard should be applied. The Court of Appeals chose a middle ground (the Delaware standard) which is essentially the business judgment standard with added protections for minority shareholders:

Plaintiff urges that we apply the entire fairness standard, which places the burden on the corporation's directors to demonstrate that they engaged in a fair process and obtained a fair price. Defendants seek application of the business judgment rule, with or without certain conditions. We are persuaded to adopt a middle ground. Specifically, the business judgment rule should be applied as long as the corporation's directors establish that certain shareholder-protective conditions are met; however, if those conditions are not met, the entire fairness standard should be applied.

[The adopted Delaware standard has been summarized as follows:] … “[I]n controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority” … . Matter of Kenneth Cole Prods., Inc, 2016 NY Slip Op 03545, CtApp 5-5-16

CORPORATION LAW (STANDARD FOR REVIEW OF GOING-PRIVATE MERGERS ANNOUNCED; SHAREHOLDER CLASS ACTION CHALLENGING THE GOING-PRIVATE MERGER DISMISSED)/SHAREHOLDER ACTIONS (STANDARD FOR REVIEW OF GOING-PRIVATE MERGERS ANNOUNCED; SHAREHOLDER CLASS ACTION CHALLENGING THE GOING-PRIVATE MERGER DISMISSED)/GOING PRIVATE MERGER (CORPORATION LAW, STANDARD FOR REVIEW OF GOING-PRIVATE MERGERS ANNOUNCED; SHAREHOLDER CLASS ACTION CHALLENGING THE GOING-PRIVATE MERGER DISMISSED)

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COURT PROPERLY REFUSED TO APPROVE CLASS ACTION SETTLEMENT WHICH DID NOT GIVE OUT OF STATE SHAREHOLDERS THE RIGHT TO OPT OUT.

The Court of Appeals, in a full-fledged opinion by Judge Pigott, determined Supreme Court properly refused to approve a settlement in a class action challenging a corporate merger because there was no opt-out provision for out-of-state shareholders. Because the suit included claims for damages, effectively prohibiting out-of-state shareholders from bringing actions in other jurisdictions would deprive them of a property right:

While the complaint seeks predominately equitable relief, the settlement would also release any damage claims relating to the merger by out-of-state class members. The broad release encompassed in the agreement bars the right of those class members to pursue claims not equitable in nature, which … are constitutionally protected property rights. Jiannaras v Alfant, 2016 NY Slip Op 03548, CtApp 5-5-16

CIVIL PROCEDURE (COURT PROPERLY REFUSED TO APPROVE CLASS ACTION SETTLEMENT WHICH DID NOT GIVE OUT OF STATE SHAREHOLDERS THE RIGHT TO OPT OUT)/CLASS ACTIONS (COURT PROPERLY REFUSED TO APPROVE CLASS ACTION SETTLEMENT WHICH DID NOT GIVE OUT OF STATE SHAREHOLDERS THE RIGHT TO OPT OUT)/CORPORATION LAW (SHAREHOLDER CLASS ACTION, (COURT PROPERLY REFUSED TO APPROVE CLASS ACTION SETTLEMENT WHICH DID NOT GIVE OUT OF STATE SHAREHOLDERS THE RIGHT TO OPT OUT)/SHAREHOLDER ACTIONS (SHAREHOLDER CLASS ACTION, (COURT PROPERLY REFUSED TO APPROVE CLASS ACTION SETTLEMENT WHICH DID NOT GIVE OUT OF STATE SHAREHOLDERS THE RIGHT TO OPT OUT)

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PARENT CORPORATION NOT LIABLE, UNDER A STRICT PRODUCTS LIABILITY THEORY, FOR ASBESTOS-CONTAINING PRODUCTS MANUFACTURED AND DISTRIBUTED BY A WHOLLY OWNED SUBSIDIARY.

The Court of Appeals, in a full-fledged opinion by Judge Pigott, reversing the Appellate Division, determined the products liability complaint against Ford USA, based upon asbestos brake linings manufactured and distributed by Ford UK, should have been dismissed. The Court of Appeals concluded Ford USA could only be held liable for a product manufactured and distributed by a wholly owned subsidiary by piercing the corporate veil, a theory unsupported by the facts alleged:

Ford USA was not a party within the distribution chain, nor can it be said that it actually placed the parts into the stream of commerce. Although plaintiff submitted evidence tending to show that Ford USA provided guidance to Ford UK in the design of certain tractor components, absent any evidence that Ford USA was in fact a manufacturer or seller of those components, Ford USA may not be held liable under a strict products liability theory … . * * *

Ford USA, as the parent corporation of Ford UK, may not be held derivatively liable to plaintiff under a theory of strict products liability unless Ford USA disregarded the separate identity of Ford UK and involved itself directly in that entity's affairs such that the corporate veil could be pieced … a conclusion that neither Supreme Court nor the Appellate Division reached in this instance. Finerty v Abex Corp., 2016 NY Slip Op 03411, CtApp 5-3-16

PRODUCTS LIABILITY (PARENT CORPORATION NOT LIABLE, UNDER A STRICT PRODUCTS LIABILITY THEORY, FOR ASBESTOS-CONTAINING PRODUCTS MANUFACTURED AND DISTRIBUTED BY A WHOLLY OWNED SUBSIDIARY)/CORPORATION LAW (PRODUCTS LIABILITY, PARENT CORPORATION NOT LIABLE, UNDER A STRICT PRODUCTS LIABILITY THEORY, FOR ASBESTOS-CONTAINING PRODUCTS MANUFACTURED AND DISTRIBUTED BY A WHOLLY OWNED SUBSIDIARY)/PIERCING THE CORPORATE VEIL (PRODUCTS LIABILITY, PARENT CORPORATION NOT LIABLE, UNDER A STRICT PRODUCTS LIABILITY THEORY, FOR ASBESTOS-CONTAINING PRODUCTS MANUFACTURED AND DISTRIBUTED BY A WHOLLY OWNED SUBSIDIARY)

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CORPORATE VEIL PIERCED TO ENFORCE JUDGMENTS.

The Second Department determined petitioners were properly granted summary judgment piercing the corporate (Diontech) veil to enforce judgments:

Equity will intervene to pierce the corporate veil and permit the imposition of individual liability on owners for the obligations of their corporations in order to avoid fraud or injustice … . A party seeking to pierce the corporate veil must establish that (1) the owners exercised complete domination of the corporation with respect to the transaction at issue, and (2) such domination was used to commit a fraud or wrong against the party seeking to pierce the corporate veil which resulted in the injury to that party … . The decision whether to pierce the corporate veil in a given instance will depend on the circumstances of the case … .

Here, the petitioners demonstrated their prima facie entitlement to judgment as a matter of law on so much of the petition as sought to pierce Diontech’s corporate veil by submitting evidence showing, inter alia, that the appellants dominated Diontech, that Diontech did not adhere to any corporate formalities such as holding regular meetings and maintaining corporate records and minutes, that the appellants used corporate funds for personal purposes, and that the appellants stripped Diontech of assets as they wound down the business, leaving it without sufficient funds to pay its creditors, including the petitioners… . Matter of Agai v Diontech Consulting, Inc., 2016 NY Slip Op 02646, 2nd Dept 4-6-16

CORPORATION LAW (CORPORATE VEIL PIERCED TO ENFORCE JUDGMENTS AGAINST PRINCIPALS)/CIVIL PROCEDURE (CORPORATE VEIL PIERCED TO ENFORCE JUDGMENTS AGAINST PRINCIPALS)/DEBTOR-CREDITOR (CORPORATE VEIL PIERCED TO ENFORCE JUDGMENTS AGAINST PRINCIPALS)/PIERCING CORPORATE VEIL (CORPORATE VEIL PIERCED TO ENFORCE JUDGMENTS AGAINST PRINCIPALS)

DERIVATIVE SUIT AGAINST JP MORGAN CHASE STEMMING FROM SUBPRIME MORTGAGE-BACKED SECURITIES DISMISSED.

The First Department determined a derivative suit against the board of directors of JP Morgan Chase stemming from subprime mortgage-backed securities was properly dismissed for failure to demonstrate the futility of a presuit demand upon the board. The decision includes particularly clear explanations of what must be alleged to sufficiently demonstrate futility under Delaware law pursuant to the “Aronson” and “Rales” tests. With regard to one of the two “Aronson” tests, the court wrote:

Plaintiffs contend that the board's action, including the adoption of the January 2007 resolution delegating authority to a management committee, was not a valid exercise of business judgment. However, this factual assertion examines the board's course of action in hindsight and hinges on certain warning signs that plaintiff alleges the board failed to heed, including some losses that reverted back to JPMorgan's balance sheet by September 2008. Delaware law presumes that in making a business decision the board of directors acts in good faith and in the honest belief that the action is taken in the best interests of the company … . In order to satisfy the second prong of the Aronson test, plaintiffs are required to plead particularized facts sufficient to raise a reason to doubt that [1] the action was taken honestly and in good faith or [2] the board was adequately informed in making the decision … . These facts do not rebut the presumption of regularity of the board's decision making process … . Although risky, the conduct plaintiff challenges, the board's authorization of the securitization and sale of investments, involves “legal business decisions that were firmly within management's judgment to pursue” … . The fact that investors later sued or made repurchase demands does not raise a reasonable doubt that the decision to engage in such transactions was not a valid exercise of business judgment … . Asbestos Workers Phila. Pension Fund v Bell, 2016 NY Slip Op 02510, 1st Dept 3-31-16

CORPORATION LAW (DERIVATIVE SUIT AGAINST JP MORGAN CHASE STEMMING FROM SUBPRIME MORTGAGE-BACKED SECURITIES DISMISSED)/MORTGAGE-BACKED SECURITIES (DERIVATIVE SUIT AGAINST JP MORGAN CHASE STEMMING FROM SUBPRIME MORTGAGE-BACKED SECURITIES DISMISSED)/SHAREHOLDERS' DERIVATIVE ACTION (DERIVATIVE SUIT AGAINST JP MORGAN CHASE STEMMING FROM SUBPRIME MORTGAGE-BACKED SECURITIES DISMISSED)

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PLAINTIFF MINORITY SHAREHOLDER ALLOWED TO REPLEAD DIRECT CLAIMS UNDER CAYMAN ISLANDS LAW AGAINST THE CORPORATION STEMMING FROM DISPROPORTIONATE PAYMENT OF DIVIDENDS AND BREACH OF FIDUCIARY DUTY BETWEEN DIRECTORS AND PLAINTIFF.

The First Department, in a full-fledged opinion by Justice Andrias, over a two-justice dissenting opinion, determined two causes of action which improperly alleged both direct and derivative claims by a shareholder against the corporation were properly dismissed but could be repled to make direct claims under Cayman Islands law. The dissent argued leave to replead was not warranted by the facts alleged:

Plaintiff should be given an opportunity to replead to remedy the pleading deficiencies … . Although a challenge to a decision to pay dividends would generally be derivative, plaintiff asserts, inter alia, that his claim is direct because the disproportionate payment of dividends is discriminatory and directly harmed him as a minority shareholder. Thus, rather than corporate mismanagement, plaintiff asserts unequal treatment in the form of an intentional, premeditated plan to pay the Investors huge windfall dividends while freezing out minority shareholders in order to induce them to sell their shares to the Investors at a steep discount. * * *

… [P]laintiff should [also] be given leave to replead to separate his direct claim of being induced by the Directors to part with his common shares … for less than their true value from his derivative claim alleging harm to the company … , and to set forth facts to establish the special circumstances necessary under Cayman Islands law to create a fiduciary duty between the Directors and plaintiff as a minority shareholder. Davis v Scottish Re Group Ltd., 2016 NY Slip Op 01756, 1st Dept 3-10-16

CORPORATION LAW (SHAREHOLDER’S DIRECT CLAIMS STEMMING FROM DISPROPORTIONATE PAYMENT OF DIVIDENDS AND BREACH OF FIDUCIARY DUTY BETWEEN SHAREHOLDER AND DIRECTORS)/DIVIDENDS (DIRECT CLAIM AGAINST CORPORATION STEMMING FROM DISPROPORTIONATE PAYMENT OF DIVIDENDS)/FIDUCIARY DUTY (CORPORATION LAW, DUTY OWED SHAREHOLDER BY DIRECTORS AS BASIS FOR DIRECT CLAIM)

NEW YORK COURTS DO NOT HAVE THE POWER TO DISSOLVE A FOREIGN CORPORATION.

The First Department, in a full-fledged opinion by Justice Richter, overruling its own precedent, determined New York courts do not have jurisdiction over the dissolution of a foreign corporation:

 

We agree with the near-universal view that the courts of one state do not have the power to dissolve a business entity formed under another state’s laws. Because a business entity is a creature of state law, the state under whose law the entity was created should be the place that determines whether its existence should be terminated … . Matter of Raharney Capital, LLC v Capital Stack LLC, 2016 NY Slip Op 01425, 2nd Dept 2-25-16

CORPORATION LAW (NEW YORK COURTS CANNOT DISSOLVE A FOREIGN CORPORATIOIN)/JURISDICTION (NEW YORK COURT’S CANNOT DISSOLVE A FOREIGN CORPORATION)/ FOREIGN CORPORATIONS (NEW YORK COURTS CANNOT DISSOLVE)

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