In re Matter of Pace Photographers, Ltd.

Appellate Division of the Supreme Court of New York, Second Department · Corporations

Corporationsclose corporationsjudicial dissolutionstock valuationirrevocable election to purchaseBusiness Corporation Law § 1118Business Corporation Law § 1104-aclose corporation

Facts

Pace Photographers, Ltd. was a close corporation whose five shareholders had entered a shareholders' agreement restricting transfers and setting a discounted price for intra-shareholder sales within five years. Rosen, a cofounder and shareholder, filed a petition for judicial dissolution under Business Corporation Law § 1104-a alleging majority oppression and wrongdoing. Pace elected under Business Corporation Law § 1118 to purchase Rosen's shares at the discounted contractual price of $53,340, and earlier courts initially accepted that price. After the Court of Appeals held that the shareholders' agreement did not control fair value in this dissolution context and remitted for valuation, Pace attempted within a month to revoke its election to purchase.

Issue

May a close corporation revoke its election under Business Corporation Law § 1118 to purchase a petitioning shareholder's shares after the Court of Appeals has ruled that the corporation's proposed price does not constitute fair value? More specifically, do any just and equitable considerations permit revocation here?

Rule

Business Corporation Law § 1118(a) provides that an election to purchase shares in lieu of dissolution is irrevocable unless the court, in its discretion, determines for just and equitable considerations that the election should be revocable. Where the corporation has sought a judicial determination of fair value, it may not revoke the election merely because an appellate decision rejects its proposed price as not constituting fair value.

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Lakeside Drafting Studio, a close corporation in Buffalo, received a judicial-dissolution petition from shareholder Nina Patel alleging majority oppression. The corporation elected under the governing statute to purchase Nina's shares and asked the court to determine fair value after arguing that a restrictive shareholder formula should control. The appellate court later ruled that the formula did not establish fair value and remanded for valuation.

If Lakeside now seeks to revoke its election solely because the court rejected its preferred pricing method and the shares may cost more than expected, how should the court rule?

Explanation. The majority rule is that an election to purchase in lieu of dissolution is presumptively irrevocable. Revocation is allowed only if the court, in its discretion, finds just and equitable considerations. A corporation that sought judicial determination of fair value cannot revoke merely because the court later rejects its proposed valuation approach and the purchase becomes more expensive. (Derived from In re Matter of Pace Photographers, Ltd. (n.d.).)