Leibert v. Clapp
196 N.E.2d 540, 247 N.Y.S.2d 102, 13 N.Y.2d 313 (1963)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A minority shareholder may bring an action to compel the judicial dissolution of a corporation when the directors and majority shareholders have so palpably breached their fiduciary duty that they are continuing the corporation's existence solely for their own benefit, at the expense of the minority. This equitable remedy is available even if the corporation is profitable and is distinct from a shareholder's derivative action for waste.
Facts:
- Automatic Fire Alarm Company (AFANY), a profitable corporation, was controlled by its parent company, Grinnell Corporation.
- A minority shareholder alleged that for many years, the directors and majority shareholders of AFANY were looting the company's assets.
- This alleged looting served to enrich the parent company, Grinnell, and other affiliated corporations at the direct expense of AFANY's minority shareholders.
- The complaint asserted that AFANY's corporate existence was being continued for the sole purpose of benefiting those in control.
- This conduct was allegedly part of a scheme to force and coerce the minority stockholders to sell their holdings to the controlling parties at a sacrifice.
Procedural Posture:
- A minority stockholder filed suit against the directors of Automatic Fire Alarm Company (AFANY) in a New York trial court (Special Term) seeking to compel dissolution of the corporation.
- The defendants moved to dismiss the amended complaint for failure to state a cause of action.
- The trial court denied the defendants' motion to dismiss.
- The defendants appealed to the Appellate Division, New York's intermediate appellate court.
- The Appellate Division reversed the trial court's order, granted the defendants' motion, and dismissed the complaint.
- The plaintiff then appealed the dismissal to the New York Court of Appeals, the state's highest court.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does a minority shareholder's complaint state a cause of action for judicial dissolution when it alleges that the directors and majority shareholders are systematically looting corporate assets for their personal enrichment and continuing the corporation's existence solely to benefit themselves at the expense of the minority?
Opinions:
Majority - Fuld, J.
Yes. A complaint states a cause of action for judicial dissolution when it alleges that the directors and majority shareholders are continuing the corporation's existence solely for their own benefit at the expense of the minority shareholders. Such allegations go far beyond mere claims of waste that would be remedied by a derivative suit. Directors and majority shareholders owe a fiduciary duty of scrupulous good faith to all shareholders. When they so palpably breach that duty, they become disqualified from exercising their statutory power to decide on dissolution, creating a 'decisional vacuum' that a court of equity must fill. To restrict the minority shareholders to a derivative suit would be an inadequate remedy, committing them to a multiplicity of actions while leaving the underlying abuse of power unremedied.
Dissenting - Van Voorhis, J.
No. The complaint is legally insufficient because it is merely a shareholder's derivative action for waste disguised as a dissolution action to evade the statutory requirement of posting security for expenses. The allegations of 'looting' are conclusory and insufficient to state a claim for the drastic remedy of dissolution. A claim for dissolution requires factual allegations that corporate capital is impaired or that the corporation's existence is continued for the sole purpose of benefiting the majority. Since the corporation is highly profitable and paying dividends to all shareholders, it is inconceivable that its sole purpose is to benefit those in control at the expense of the minority.
Analysis:
This case establishes a significant equitable remedy for minority shareholder oppression in New York, clarifying that judicial dissolution is available even for a profitable corporation. The decision distinguishes a direct action for dissolution, based on a fundamental breach of fiduciary duty, from a derivative action for waste, thereby providing minority shareholders a powerful tool to combat situations where a controlling majority abuses the corporate form for personal enrichment. This precedent empowers courts to intervene when the misconduct of those in control is so severe that they have forfeited their right to make governance decisions, preventing the majority from using the corporation as a vehicle for 'corporate depredations' against the minority.
