Gerth v. Alley, 15 N.Y.2d 781 (1965)
In closely held corporations, courts may consider equitable remedies, including dissolution, when majority shareholders breach fiduciary duties to minority shareholders, especially when the corporation primarily serves to benefit the majority at the expense of the minority.
Summary
This case concerns a dispute between shareholders in a close corporation. The plaintiffs, representing a 46% minority stake, sought dissolution, alleging that the majority shareholder was using excessive compensation to deprive them of dividends. The Court of Appeals reversed the Appellate Division’s decision, finding that the corporation was being maintained solely to pay the majority shareholder’s salary, with no prospect of benefit to the minority. The dissenting opinion argued for equitable intervention to protect minority shareholder interests in such circumstances, treating the corporation more like a partnership.
Facts
The corporation in question was a two-man entity. The plaintiffs represented a 46% share of the common stock, held in trust after the death of one of the original shareholders. The defendant, the majority stockholder, was taking a salary and bonus that significantly reduced the corporation’s net profit, resulting in negligible returns for common stockholders. The corporation’s net profits were consistently low (1-2% annually), and the majority stockholder admitted there was no prospect of future dividends.
Procedural History
The Special Term initially ruled in favor of the plaintiffs, ordering dissolution. The Appellate Division reversed this decision. The New York Court of Appeals then reversed the Appellate Division’s order, remitting the case to the Supreme Court for further proceedings.
Issue(s)
Whether a minority shareholder can seek dissolution of a close corporation when the majority shareholder’s actions effectively prevent the minority from receiving any benefit from their investment, and the corporation primarily serves to benefit the majority shareholder.
Holding
Yes, because when a close corporation is structured such that it only benefits the majority shareholder through salary and bonuses while providing no return to minority shareholders, and there is no prospect of future benefit, dissolution may be an appropriate remedy to protect the minority’s interests.
Court’s Reasoning
The dissenting judge, Chief Judge Desmond, emphasized that the corporation served no purpose beyond paying the majority shareholder’s salary. The low profit margins and lack of dividends rendered the minority stake