Matter of Kemp & Beatley, Inc.
484 N.Y.S.2d 799, 473 N.E.2d 1173 (N.Y. 1984)

  • Dissin and Gardstein were shareholders in Kemp & Beatley. They were also employees.
    • Kemp & Beatley was a close corporation with only eight shareholders total. Dissin and Gardstein together held about 20% of all of the corporation’s shares.
  • Due to some turmoil in the corporation, Dissin resigned and Gardstein was fired. The corporation stopped paying them dividends (aka frozen out). Dissin and Gardstein sued.
    • Dissin and Gardstein argued that the decision to stop paying dividends constituted an oppressive action, and under New York Law (Business Corporation Law §1104-a), served as a basis for a court to order dissolution of the corporation.
      • Since Dissin and Gardstein weren’t getting paychecks as employees, and weren’t getting dividends as shareholders, their stock was virtually worthless.
        • There was no market for them to sell their shares either, so they were stuck with them.
    • The corporation argued that they never paid out dividends. They only paid out bonuses to employees. Since Dissin and Gardstein were no longer employees, they get no bonus.
      • Technically, these ‘bonuses’ were paid out as a percentage of stock the person owned in the corporation. After Dissin and Gardstein left, the directors changed it so that it was based on employee performance, which meant that, as non-employees, Dissin and Gardstein got nothing.
  • The Trial Court found for Dissin and Gardstein and ordered the corporation dissolved. The other shareholders appealed.
    • The Trial Court found that the corporation had rendered Dissin and Gardstein’s stock worthless, and the only way they could expect any return was by dissolution.
    • The Court did give the corporation the option of offering to buy out Dissin and Gardstein’s shares for a reasonable price.
  • The Appellate Court affirmed. The other shareholders appealed.
  • The New York Supreme Court affirmed.
    • The New York Supreme Court noted that §1104-a proscribed “illegal” “fraudulent” and “oppressive” conduct against minority shareholders, but did not define the terms.
    • The Court defined oppressive conduct as that “conduct that substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise.”
      • Basically, it was reasonable for Dissin and Gardstein to expect that the corporation would pay them a salary as employees or dividends as shareholders.
    • The Court noted that if a minority shareholder had unreasonable expectations, or if they were fired for misconduct, or if they were acting in bad faith (like getting fired on purpose so they could petition to the court to dissolve the corporation), then there is no oppressive conduct.