Uncategorized

Company Have a Put/Call Provision?  Statutory Dissolution Unlikely

Where the corporation’s Shareholder Agreement contained a Put/Call provision, the shareholders necessarily gave up their right to seek a judicial dissolution of the company. Mauck v. Cherry Oil, 2022 NCBC 21 (J. Davis).  As a result, the shareholders’ request for a dissolution of the company would be dismissed even though the company had not yet paid the shareholders the value of their stock.

Plaintiffs are minority shareholders of Cherry Oil, Inc., (“Company”), a family-owned business whose majority shareholders are the Cherry Defendants.  In 1998, the parties entered into a Shareholder Agreement which contained a “Put/Call” provision. Pursuant to the Put/Call provision, the Company was permitted to repurchase all shares of any minority shareholder at any time (i.e., a “call”) and, alternatively, the minority shareholder was entitled to require the Company to buy back his shares (i.e., a “put”).  After a falling out between Plaintiffs and the Cherry Defendants, Plaintiffs filed suit seeking, among other claims, a judicial dissolution of Company. Defendants objected, contending that the Put/Call Provision abrogated Plaintiffs’ ability to request judicial dissolution.

 The Business Court agreed and dismissed Plaintiffs’ claim for judicial dissolution.  Noting that the North Carolina Business Corporations Act (“BCA”) permits shareholders of a closely-held company to enter into agreements whose terms directly conflict with the default provisions of the BCA, the Business Court held that put/call provisions are enforceable even though they arguably are contrary to BCA’s terms.  Such provisions, the Business Court recognized, have been viewed as a favorable way for controlling shareholders to handle dissident shareholders. (Opinion, ¶38, 39).  Because Plaintiffs freely entered into the Shareholders Agreement, the Business Court recognized that Plaintiffs’ “reasonable expectations” about whether the Company could or would be dissolved had been met with the Put/Call Provision.  (Id., ¶40-41).  The fact that Defendants had not yet fully paid Plaintiffs the value of their shares did not preclude the Put/Call Provision from foreclosing Plaintiffs’ request for judicial dissolution. (Id., ¶43).

 Based upon this decision, a corporation should consider whether a Put/Call Provision within its Shareholder Agreement would make sense as a way to foreclose a future request for judicial dissolution by a disgruntled shareholder.

Additional Legal Points:

  • The existence of a Put/Call provision does not preclude a shareholder’s individual breach of fiduciary duty claim (Opinion, ¶79).
  • Mere disagreements with directors’ actions (which actions do not amount fraud, self-dealing, or usurpation of corporate opportunities) are insufficient to overcome the Business Judgment Rule (“BJR”), which protects directors and their decisions in a derivative action. (Id.,¶71-73)
  • A request to have the Court judicially remove directors must be based upon something more than mere internal disputes; fraudulent or dishonest conduct is required. (Id., ¶47-48).
  • A failure to identify how Defendants personally benefitted from bad acts dooms their individual claims for constructive fraud. (Id., ¶89).
  • In order to maintain a claim of equitable estoppel to preclude the application of the statute of limitations, a plaintiff must allege facts which show the defendant attempted to “lull [the plaintiff] into a sense of security” in an effort to preclude them from filing suit. (Id., ¶99-100).

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Categories: Uncategorized

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