Last week, the Appellate Division, First Department, ruled that New York State Courts do not have the authority to dissolve out-of-state corporate entities. This is a departure from a long line of cases holding that when a company has its principal place of business in New York, New York Courts can consider judicial dissolution proceedings. This ruling in Raharney Capital v. Capital Stack will make it difficult for aggrieved shareholders to obtain recourse in New York. Judicial dissolution proceedings are frequently filed by shareholders or limited liability members when they are in a dispute with their business partners. Typical causes of action in these types of proceedings are deadlock and wasting of corporate assets. NY
Business Corporation Law (BCL) Sec. 1104 states that a 50% shareholder can sue for a court order dissolving the corporation based on deadlock among the shareholders or directors. BCL Section 1104-a permits shareholder holding 20% or more of the equity to file for a judicial dissolution when managing shareholders have committed fraud or illegal conduct. It is also used in cases where those shareholders in control are not being transparent with books and records, not agreeing to an accounting or other “oppressive” conduct. The Raharney Capital case involved a limited liability company where both the plaintiff and defendant were based in New York. They are now faced with the prospect of having to litigate this matter before the Delaware Court of Chancery. The New York parties will likely have to spend more on legal fees and costs to litigate in Delaware, retaining new attorneys and traveling to depositions and court appearances. This case will likely have a chilling effect on many entrepreneurs forming their LLCs in Delaware to take advantage of tax benefits and less expensive formation costs. Future rulings will undoubtedly clarify what would be a sufficient New York connection for the Courts to once again take jurisdiction in the dissolution of out of state companies.