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A minority petition to dissolve the seltzer business loses its fizz. Pharrell Fritz, PC

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In 1950, Sam Hoffman and his two sons, Hyman and Melvin, founded the Brooklyn-based Cornell Beverage Company to manufacture and sell seltzer. It was a time when the “seltzer man” was delivering cases of siphon seltzer bottles every week.

Seventy years later, the seltzermen and siphon bottles have long since disappeared, and the main occupation of the third-generation heir to the family business seems to be delivering cases of legal documents to each other.

Cornell still makes and sells seltzer beverages, but it’s a fraction of what it was in its heyday, and it’s not profitable. But not just the industrial site where Cornell makes seltzer, but another one in the immediate vicinity. He has had the foresight to acquire eight commercial sites, thanks to their ancestors, three generations of owners. Don’t miss too much or shed too many tears. The current valuation is over $40 million.

As the head of the family, Sam could not have foreseen the legal woes of his four grandchildren. Each is his 25% shareholder in Cornell, a real estate holding company, largely driven by his three factors: Amazing valuation of real estate. Only two of his four grandchildren entered the business as salaried workers. A shareholder agreement that stipulates that the shares of a shareholder who wishes to exit shall be purchased at book value.

For one of the “outside” shareholders who didn’t pay their salaries and tried to monetize their 25% share of the property’s trapped value, these factors contributed to the decision to sue for judicial dissolution of the three companies. claiming to have most likely contributed. She was a freezeout victim. After seven years of litigation, she has nothing to prove it, except legal bills, as she suffered a post-trial dismissal of her dissolution petition, which was confirmed on appeal last week. I did.

family business

Sam and his two sons operated and co-owned the seltzer business and a second company named STHM Realty Corp as one-third shareholders. In 1978, the two sons founded his third company, Hymel-Porter Realty Corp., as his 50/50 owner.

Hyman died in 1978, leaving a 50% stake equally to his son Alan and daughter Elaine. Melvin died about ten years later, leaving 50% of his profits to his wife. was retained as a 25% shareholder in Alan, Elaine, Donna and Judy.

Alan and Donna started working for the company in 1973 and 1986, respectively, and took management positions after the death of their father. His other two, Elaine and Judy, had never worked in or participated in running the business. Over the years, which is not uncommon in family-owned businesses, little or no attention was paid to the company’s procedures.

Shareholder agreement

a 1967 Shareholder Agreement As amended, it applied to all three companies. Under its provisions:

  • Any change in salary or “anything that may affect, jeopardize or interfere with the rights of minority shareholders” requires the approval of two-thirds of the shareholders.
  • Retained earnings can be declared as dividends and distributed to shareholders.When
  • If a shareholder decides to sell its shares, the remaining shareholders have the right of first offer to purchase the shares at their book value.

petition for dissolution

In late 2015, Elaine Hoffman, Alan’s sister and Donna and Judy’s cousin, filed three separate, essentially stylized petitions seeking judicial dissolution of the three companies.You can read Cornell’s petition here.

Elaine’s petition Section 1104a(a)(1) and (a)(2) of the Business Companies Act Contrary to the original shareholders’ intentions that the company would operate as a “family business”, after their death four next-generation owners would each be involved in the management and management of the company. officers and directors usurped full control, received excessive compensation, did not provide access to the company’s books and records, “looted, wasted, and/or diverted” corporate assets, and “destroyed” Elaine. denying her a “fair share” of the corporate value because she was engaged in an act designed to “freeze” her.

Elaine loses the trial

The three cases were consolidated before Brooklyn Commercial Division Judge Lawrence Knipel. Judge Kniper, October 2016 issued an order It denied Alan and Donna’s motion to dismiss the petition and found that the parties’ conflicting affidavits raised questions of fact as to the petition’s merits and appropriate remedies.

After the discovery, Judge Knipel held a bench trial in early 2019. In September 2019, Judge Knipel said made a post-trial decision Denied all three petitions. The decision marks a decline in Cornell’s seltzer business over the years, while “real estate values ​​have skyrocketed.” Continuing, you will find:

  • Elaine “was largely indifferent to corporate affairs during the years of declining real estate values.”
  • In recent years, Elaine has “seeked to make financial gains, both for her personal needs and for the perception that the value of her property has risen dramatically.”
  • Elaine’s efforts were frustrated by “the adamant refusal of three other shareholders to sell, to take a mortgage, or to take any action that would result in a substantial distribution to the shareholders. Did”.When
  • Elaine “refuses to force a buyout under a shareholder agreement because that way she can only receive the book value of her shares.”

Judge Kniper then dismissed Elaine’s allegations of coercion and financial misconduct by Alan and Donna, ruling:

  • All shareholders “initially agreed (or acquiesced) to hiring Alan and Donna,” and at least 75% agreed to subsequent compensation changes.
  • “There was no material evidence that the entity operated in any other than honest and straightforward manner, or that compensation was reasonable and modest”;
  • Alan and Donna managed the company “in a very conservative manner”, but the court ruled “reasonably (perhaps suboptimally) by three solid shareholders out of four. However, we have no discretion to replace it with our own business judgment.”

In conclusion, alluding to the “reasonable expectations” test of repression, Judge Kniper commented on Elaine’s unmet expectations as a corporate shareholder, finding that he:

The only thing she’s frustrated about is that she wants corporate entities that currently own a lot of equity in real estate to liquidate some or all of that wealth and distribute it to shareholders. . Clearly, this is not the frustration required for liquidation under BCL 1104-a. No credible evidence of illegal, fraudulent, or oppressive conduct, looting, waste, or diversion of assets for non-corporate purposes was presented at the trial. A buyout here cannot be enforced for reasons other than those stipulated in the shareholder agreement. Under these circumstances, New York law allows her three shareholders, who own 75% of her shares, to keep the remaining shareholders out of running the company.

Elaine’s unsuccessful appeal

Elaine has appealed the dismissal of her case to the Appellate Division of Division II. In a unanimous decision handed down last week, Hoffman v STHM Realty Corp issue., 2022 NY Slip Op 04725 [2d Dept July 27, 2022]the Court of Appeals emphatically upheld Judge Kniper’s judgment and its underlying rationale, writing:

The trial evidence here showed that after claimant inherited an equity interest in the company, he did not seek employment or responsibility in the day-to-day management of the company, did not express interest in shareholders’ meetings, but rather remained so. rice field. , a longtime passive shareholder, agreed to exercise control over the day-to-day management of the company by Alan Hoffman and Donna Hoffman. This and other evidence supports the Supreme Court’s decision that the petitioner failed to demonstrate a reasonable expectation to actively participate in the management of the corporation, and that the petitioner now believes that the corporation’s assets are The behavior of the major shareholders was not oppressive, although they may disagree with the way it is being managed.

Matters concerning the Code of Conduct

A typical example of minority shareholder suppression, especially in a closed company that does not pay dividends, is either loss of employment (and associated compensation) and loss of voice in management as a result of being dismissed from the board. Or feature both. directed by.

of Hoffmannone of the pillars on which Elaine’s suppression case was underpinned was a clause in the shareholder agreement that stated:[t]Holders of shares in a corporation shall be employed by the corporation, perform duties as unanimously agreed upon, and shall receive a salary. ”

However, evidence at trial regarding the course of action of both parties suggests that Elaine, who became a shareholder upon her father’s death in 1978, sought employment or appointment as an officer or director in the family business, or had exclusive management rights. I could not prove that I complained about Until she begins to push for acquisitions or other liquidity events involving highly valuable real estate by Alan and Donna.

That is not to suggest that the course of conduct alone did in the Elaine dissolution case. Clause. i.e.., 2 of the 3 original shareholders and 3 of the 4 ultimate shareholders — the salaries or drawings of people employed by the corporation or “affecting minority shareholder rights and change “matters that may be exposed or interfered with”. ”

Perhaps for her own reasons, Donna’s sister Judy, who has never worked in the company or participated in its management as Elaine did, opposes Elaine’s desire to sell or mortgage the property to help Alan and Donna’s relationship. took sides, thereby producing the overwhelming majority necessary to overcome it. This is part of Elaine’s allegations of suppression, which she claims denied her “fair share” of the company’s value.

Finally, when Sam Hoffman and his two sons entered into a shareholder agreement in 1967, the value of their vast amounts of real estate had not yet increased significantly and will continue to do so. I find it a little difficult to accept that I thought it wouldn’t. by value. If so, the provision of right of first offer at book value may have been intended as a disincentive for shareholders to voluntarily sell their shares.

In Elaine’s case, the motivating stuff worked like magic, but it was a way to achieve her understandable but ultimately unsuccessful goal of monetizing her profits at fair value. It also had the perhaps unintended consequence of motivating her to construct and prosecute minority shareholder suppression claims.

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