Rosiny v. Schmidt

Appellate Division of the Supreme Court of New York, First Department · 1992 · Corporations

CorporationsShareholders' agreementsTransfer restrictionsSpecific performanceUnconscionabilityclose corporationbook valuepost-mortem buyout

Facts

The parties were shareholders in Ched, and a 1981 shareholders’ agreement provided that no shareholder could transfer stock during life without first offering it to the others at book value as of the prior month or $200 per share, whichever was greater. The agreement also required surviving shareholders to buy a deceased shareholder’s shares at the same price. Defendants’ decedents, McGuire and Priddy, had signed earlier shareholders’ agreements containing the same or similar book-value buyout provisions, including a 1971 agreement with an identical post-mortem clause after a prior fair-market-value approach had been rejected. After the decedents died, defendants contended the 1981 post-mortem buyout provision was unenforceable and that the shares could pass under the decedents’ wills.

Issue

Was the 1981 shareholders’ agreement’s post-mortem buyout provision enforceable against the decedents’ estates, or was it invalid because it was unconscionable, lacked a meeting of the minds, was tainted by a fiduciary breach, or had been abandoned by the parties’ conduct?

Rule

A shareholders’ agreement that is clear and complete should be enforced according to its terms. Unconscionability generally requires both procedural and substantive unconscionability, meaning an absence of meaningful choice together with terms unreasonably favorable to the other party. Mere disparity between option price and current stock value does not invalidate a transfer restriction; abandonment requires mutual, positive, unequivocal conduct inconsistent with an intent to remain bound; and a mandatory buyout provision in a shareholders’ agreement does not itself create a fiduciary duty requiring one shareholder to explain the agreement to another.

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

In Buffalo, four shareholders of Harbor Loft Realty, Inc. signed a written agreement requiring the surviving shareholders to purchase a deceased shareholder's stock at book value or $150 per share, whichever was greater. Ten years later, after Naomi Velez died, her estate refused to sell, arguing the shares were then worth six times the contract price because the corporation's warehouse had greatly appreciated.

If the agreement is otherwise clear and there is no evidence of pressure, deception, or lack of choice when it was signed, how should a court most likely rule?

Explanation. A clear shareholders' agreement should be enforced according to its terms. Under the majority's reasoning, more than a difference between option price and present value is needed to invalidate a stock-transfer restriction. Unconscionability generally requires both procedural unconscionability—an absence of meaningful choice—and substantive unconscionability—terms unreasonably favorable to the other side. Here, price disparity alone is not enough.