Summary
In Matter of Cantelmo (Brewer) (275 App. Div. 231), there was a hearing before a Referee, and the evidence warranted the conclusion that the corporation there involved was "functioning actively and with profit" and "growing steadily, with profits to both parties".
Summary of this case from Matter of Numode Realty Co., Inc.Opinion
May 10, 1949.
Appeal from Supreme Court, New York County, PECORA, J.
Robert Daru, Oswald Vischi and Norman S. Fenton for appellant.
Maurice Finkelstein, Herman N. Finkelstein and Rose Lader for respondent.
Petitioner-respondent Cantelmo is a 50% owner of the stock in Brewer-Cantelmo Co., Inc. The respondent-appellant Brewer owns the other 50% of the stock. Both parties were the original organizers of the corporation. Cantelmo has brought this proceeding to dissolve the corporation on the ground that there is a hopeless deadlock between the stockholders, who, because of their differences, are unable to agree upon a third impartial director and consequently are unable to elect a directorate to control the business of the corporation.
The proceeding is brought under section 103 of the General Corporation Law, which provides: "Unless otherwise provided in the certificate of incorporation, if a corporation has an even number of directors who are equally divided respecting the management of its affairs, or if the votes of its stockholders are so divided that they cannot elect a board of directors, the holders of one-half of the stock entitled to vote at an election of directors may present a verified petition for dissolution of the corporation * * *".
Section 117 provides in part that "If upon the application for the final order, it shall appear that the case is one specified in this article and that a dissolution will be beneficial to the stockholders or members and not injurious to the public, the court must make a final order dissolving the corporation."
It is apparent from the provisions of the statute that in order to be entitled to a dissolution, such dissolution must be for the benefit of the stockholders. In a somewhat similar case ( Matter of Myer v. Myer, 272 App. Div. 888, leave to appeal denied 297 N.Y. 1038), this court refused the dissolution where the holders of 50% of the stock demanded it on the ground of a deadlock in the board of directors. In that case, as in this, the business was functioning actively and with profit. In that case, as in this, there was no real difference in opinion between the parties as to matters of management. The corporation was growing steadily, with profits to both parties, and there was nothing to show that a similar investment in another business would produce more satisfactory returns. The referee in the Myer case, whose report was confirmed, rightly stated: "It is sheer folly to destroy it. Whatever other judicial remedy they may have, they have failed to make out a case for dissolution."
Without referring to the details of the growth and development of Brewer-Cantelmo Co., Inc., the corporation here involved, it may be noted that starting with a capital of $3,000 and by paying themselves small salaries the business was built up until they were able to pay themselves $25,000 each in salaries, with bonuses, and the net profits for the years 1942-1947 have been very large.
There is a complete absence of factual proof in this record to indicate that corporate success and efficiency of management have been interfered with by the inability of the parties to agree upon a third director. Indeed, the petitioner has made no bona fide attempt to agree with the respondent on the selection of such a third director. The entire objective of the petitioner has been to force the respondent out of the business and, in effect, to obtain for himself (the petitioner) the benefits to the corporation built up over the years by the joint efforts of both parties. We see no reason why the courts should, under the circumstances here presented, lend themselves to the accomplishment of the purpose sought by the petitioner. The language of the statute that dissolution will be ordered where it "will be beneficial to the stockholders" is not mere empty verbiage. It is intended to mean something, and it applies with peculiar force to the situation here involved.
The object of the dissolution sought is personal to Cantelmo, and is certainly not for the benefit of either himself or of Brewer, as stockholders. As we interpret the statute, the sole desire of the petitioner to get control of the business entirely for himself is not one of the purposes for which the dissolution section was enacted.
The order should be reversed, with costs to the respondent-appellant and the petition denied.
Matter of Myer v. Myer ( 272 App. Div. 888) is not in point. While there was technically an equal division among the stockholders in that case, the petitioners for dissolution were merely the holders of the bare legal title to half of the stock under a trust. The beneficial owner of the stock was the father of the stockholders. He was an elderly man and incompetent. Originally he organized the corporation and had been receiving regular payments from it. The committee for the incompetent opposed the dissolution. It appears too that there was no deadlock over policy among the board of directors consisting of two sons who had held over and who were the persons long in active and successful management of the corporate business. Petitioners there never had been members of the board nor had they any connection with the operation of the business. In the circumstances this court affirmed an order of the Special Term in the cited case, which confirmed the recommendation of the referee against dissolution.
However, in the case at bar, after a full hearing a referee appointed by the court, upon ample evidence has found that there is a hopeless deadlock between the two 50% stockholders of Brewer-Cantelmo Co., Inc., and that such stockholders are unable to elect a new board of directors as they cannot agree upon a third director. As a consequence there has been a paralyzing failure of management of the corporation. The referee also found it beneficial to the interests of the two stockholders that the corporation be dissolved and that such dissolution would not be injurious to the public interests. His report was in all respects confirmed by the Special Term.
Appellant, who now opposes dissolution and who now charges that it is sought in bad faith, through his own attorney, by letter dated January 13, 1948, addressed to the corporation, suggested dissolution in the following language: "In view of the deadlock which exists and of the failure of the stockholders to elect a full Board of Directors, we have advised our client that the affairs of the corporation cannot be properly conducted as required by law and that we are constrained on his behalf to take appropriate legal steps to protect his interest as a 50% stockholder of the corporation and to protect the corporation itself. Of course, you are aware that when stockholders are unable to elect a board of directors, the New York General Corporation Law, Section 103, provides that a petition may be filed for the dissolution of the corporation."
Now that the dissolution which appellant himself threatened to bring about to protect his interest as a 50% stockholder has been ordered, the charge is made that the proceeding was instituted by respondent in bad faith and would unjustly enrich him. There is no merit to that contention. Respondent is not bound to the corporation by contract or otherwise and concededly is free to withdraw his personal services from the corporation at any time he chooses to do so and to set up his own business. The order of dissolution here amply protects both stockholders for it provides for a sale of all corporate assets including good will under judicial supervision on terms to be agreed upon between the parties or to be fixed by the court and appellant will have as much right to purchase the business as will respondent.
It is also to be noted that when the motion for dissolution was made, appellant, joining with respondent, indicated that a temporary receiver to conduct the business of the corporation should be appointed pursuant to section 110 of the General Corporation Law. Under the direction of such temporary receiver, the corporation has been functioning up to the present time.
Where as here there is a complete deadlock between the two equal stockholders and they are unable to elect a new board of directors, dissolution is clearly authorized (General Corporation Law, §§ 103, 117). As was declared in Benintendi v. Kenton Hotel ( 294 N.Y. 112, 118) "Any corporation may arrive at a condition where dissolution is the right and necessary course. The Legislature has decided that a vote of a majority of the shares, or half of them in case of a deadlock, is sufficient to force a dissolution."
The situation of a close corporation with two 50% stockholders, in irreconcilable dissension and engaged in constant legal warfare under circumstances where corporate success and efficiency imperatively demand co-operation, is one calling for the relief provided by statute. No reason appears why the decision of the Special Term, granting such relief, should not be upheld. This case falls directly within the terms of section 103 of the General Corporation Law. Dissolution is likewise obviously "beneficial to the stockholders" within the meaning of section 117.
For the foregoing reasons the order should be affirmed.
DORE, J.P., CALLAHAN and VAN VOORHIS, JJ., concur with SHIENTAG, J.; COHN, J., dissents and votes to affirm, in opinion.
Order reversed, with costs to the respondent-appellant and the petition denied. Settle order on notice.