In Feldman v. YIDL Trust, No. 2017-0253-AGB, 2018 WL 1151797 (Del. Ch. Mar. 5, 2018), the Delaware Court of Chancery ordered the dissolution of Royston, Inc. over the objections of one 50% shareholder which argued that it was defrauded by the other 50% shareholder.
Royston’s only asset was a boat named the M/V Nervous Wreck. When Andrew Feldman died, the YIDL Trust became the 100% owner of Royston. Howard and Roberta Feldman, Andrew’s parents, were the trustees of the Trust. The Trust transferred 50% of its outstanding stock to Benjamin Feldman, Andrew’s son, in consideration of expenses he incurred in connection with the boat. Thereafter, Benjamin’s relationship with his grandparents soured and he filed a petition under Section 273 of the Delaware General Corporation Law (8 Del. C. § 273) to dissolve Royston and appoint a receiver to wind up its affairs.
Section 273 provides for judicial dissolution of a corporation when three requirements are met: (1) the corporation has two 50% stockholders; (2) who are engaged in a joint venture; and (3) they cannot agree about whether to discontinue the business or how to dispose of its assets. Feldman, 2018 WL 1151797, at *3. Where the criteria are met, the Chancery Court can deny a dissolution petition, but that power should be “sparingly exercised” and “is limited to a determination of whether or not a bona fide inability to agree exists.” Id. Put another way in a key footnote, dissolution “should not be judicially interfered with in the absence of a showing of bad faith . . . in the seeking of a dissolution . . . and not [bad faith relating] to other claims or actions between those concerned.” Id. at *3 n.30.
The court granted Benjamin’s motion for summary judgment of dissolution because it was undisputed that the three criteria for dissolution had been met. It did so over the Trust’s allegation that Benjamin deceived his grandparents into transferring 50% of the shares of Royston to him. This allegation of bad faith, however, was irrelevant. Even if Benjamin did deceive his grandparents into giving him 50% of Royston, that did not relate to Benjamin’s petition for dissolution, but instead to his obtaining ownership in the first place. And, the Trust did not dispute that Benjamin owned 50% of Royston despite the alleged deception. Accordingly, because Section 273’s requirements were met and there was no evidence Benjamin filed the dissolution petition in bad faith, the motion was granted and the court appointed a receiver to oversee the dissolution of Royston, the sale of the boat, and the wind up of Royston’s affairs.
Feldman highlights the risk inherent under Delaware law in a corporation with only two equal shareholders. Once the shareholders have a falling out and cannot agree about continuing the business, dissolution is all but assured if a petition is presented seeking it.
At Novack and Macey, we have extensive experience advising shareholders involved in closely held company disputes, as well as advising companies on how to avoid disputes in the first place. For more information about our services, please contact John Haarlow at 312.419.6900 or firstname.lastname@example.org.