What happens after after a judicial dissolution of a corporation on the grounds of deadlock? What usually happens in a dissolution. The corporation winds up its business, pays its creditors, and distributes assets to its shareholders. But if there’s a deadlock, there’s a good chance that the directors (and shareholders) won’t be able to agree on those matters, either. What happens then? In re Ravitz v. Gerard Furst and Marjorie Ravitz, DPM, P.C., 2009 NY Slip Op 06437 (N.Y. App. Div. Sept. 8, 2009), tells us what does not happen, at least under New York law.
The corporation in question was a podiatry practice with two equal shareholders, three offices. The two agreed that one office should be closed. They agreed that they would split the two remaining offices. The problem was that one office was more profitable than the other. The shareholder who would take the less profitable office proposed a valuation of the goodwill of each office, and a cash settlement to equalize the distribution of assets. When the other did not agree, the first asked the court to supervise the liquidation for the purpose of valuing the practices. Both the trial and appellate courts held that such a procedure was not permitted under the pertinent provisions of the New York Business Corporation Law.
Section 1008(a) of the New York General Corporation Law (NY GCL) authorizes a court to
continue the liquidation of the corporation under the supervision of the court and may make all such orders as it may deem proper in all matters in connection with the dissolution or the winding up of the affairs of the corporation
The Court held that Section 1008(a) did not authorize the appointment of a referee. Under Section 1005(a)(2), assets can only be sold at “public or private sale.” In re Ravitz, Slip Op. at 1-2. If the parties cannot agree on a private sale, the only recourse is a public sale. Id.
The appointment of a referee (special master) to mediate a possible sale, and to value the businesses, should be within the power of the court. If one of the parties is intransigent, and refuses to pay full value, should the only recourse seems to be a referee to conduct the public sale?
The Court also held that, in the absence of an agreement, goodwill was not a distributable asset. More on that later.
Hat tip to Peter A. Mahler (New Business Divorce blog), who represented the prevailing party.
Gary Rosin
Tags: judicial dissolution, liquidation