Landmark Decision Settles Business Corporation Law 909 Controversy

The Price Law Firm LLC prevailed in an appeal before the Appellate Division, First Department that has settled a controversy over the interpretation of New York Business Corporation Law 909(a) on December 12, 2018. This section of the BCL exists to protect minority shareholders from a situation where a corporation divests itself of its only asset without holding a shareholder meeting to permit the input and vote of the minority shareholders. In plain English the corporation cannot divest itself of its sole asset without calling for a vote and taking one.

This rule always begged the question about what is to be done when a closely held corporation does not engage in corporate formalities, does not hold shareholder meetings and does not hold votes but then decides to divest itself of its only asset. Can the corporation nix the contract after it has been signed replying upon the BCL and claiming that it is no longer valid because the corporation did not engage in the formalities required by the BCL? The Appellate Division, First Department just ruled in the case of St. Marks v. Sohayegh, 2018 NY Slip Op 08432 (1st Dept. 2018) that a closely held corporation cannot reply upon technical formalities to avoid its obligations.

In Sohayegh, the Seller provided evidence that all of the shareholders were aware of the transaction regardless of the absence of the corporate formalities. This was enough for the Appellate Division to hold as a matter of law that a closely held corporation could be required to see through its contractual obligations in the absence of corporate formalities.

This was a landmark decision that made law in the field of the Business Corporation Law. The Price Law Firm LLC represented the Seller.