Gordon v. Elliman

New York Court of Appeals · Corporations

CorporationsDerivative suitsDividendsSecurity for expensesderivative actiondividend declarationsection 61-bsecurity for expenses

Facts

A stockholder brought suit on behalf of herself and all other stockholders to compel the corporation and its directors to declare a dividend on all outstanding stock. The plaintiff held less than five percent of the outstanding shares, so the defendants sought security for litigation expenses under General Corporation Law section 61-b. The dispute turned on whether this kind of dividend-compulsion suit is one maintained in the right of the corporation. No declared dividend was alleged that would have given stockholders a direct creditor-like claim.

Issue

Is a stockholder's action to compel the declaration of a dividend upon outstanding stock an action brought in the right of the corporation within the meaning of General Corporation Law section 61-b, so that the court may require the plaintiff to furnish security for expenses? Relatedly, was the stay pending such security properly granted?

Rule

The test is whether the suit seeks to recover on a chose in action belonging directly to stockholders, or instead seeks to compel performance of corporate acts that good faith requires directors to take in discharge of duties owed to the corporation and, through it, to stockholders. If no dividend has been declared, a stockholder has no individual cause of action to recover corporate funds; a suit to compel declaration of dividends invokes the court's equitable power to direct management of corporate affairs and is therefore brought in the right of the corporation under section 61-b. By contrast, when a dividend has been declared, or where a contract guarantees specified dividends so that the shareholder has a matured individual right, the shareholder may sue in an individual capacity.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Lena Ortiz owns 2% of Lakefront Textile Group, a New York corporation headquartered in Buffalo. She sues the corporation and its directors in Manhattan, alleging they have refused for years to declare any dividend in bad faith so they can keep paying themselves inflated compensation, and she asks the court to order a reasonable dividend on all outstanding shares.

Under the majority rule, how should this action be characterized for purposes of a statute requiring security in actions brought in the right of the corporation by small shareholders?

Explanation. When no dividend has been declared, no corporate assets have been set aside for shareholders, so they have no direct creditor-like claim to payment. A suit to compel directors to declare a dividend instead asks the court to direct corporate action that good faith required the directors to take, making the action one brought in the right of the corporation and subject to security requirements. (Derived from Gordon v. Elliman (n.d.).)