50 N.Y.2d 265 (1980)

A shareholder derivative action may be maintained even after the corporation has dissolved and distributed its assets, provided the shareholder meets the contemporaneous ownership requirement.

Summary

This case addresses whether shareholders can bring a derivative suit on behalf of a corporation after it has dissolved and distributed its assets. Plaintiffs, former shareholders of Sterling Communications, Inc., sued Time, Inc., alleging mismanagement that depressed Sterling’s stock value before Time acquired it. The New York Court of Appeals held that the dissolution of Sterling did not automatically eliminate the shareholders’ standing to bring a derivative action, provided they were shareholders at the time of the alleged wrongdoing. The court reasoned that shareholders retain an interest in corporate assets even after dissolution, and the Business Corporation Law protects their remedies.

Facts

Time, Inc. invested in Sterling Communications, Inc. starting in 1965, eventually gaining substantial control, owning 80% of the stock by 1973. A majority of Sterling’s directors were also Time officers. In September 1973, Sterling shareholders approved the sale of all assets to Time and authorized Sterling’s dissolution and asset distribution. Plaintiffs, former Sterling shareholders, filed a derivative suit six months later, alleging that Sterling’s officers and directors, at Time’s direction, deliberately mismanaged Sterling between 1970 and 1973, depressing its stock value and enabling Time to acquire Sterling at a deflated price.

Procedural History

The Special Term granted Time’s motion for summary judgment, finding that plaintiffs lacked standing because they were not Sterling shareholders when the suit was filed, as Sterling had been dissolved. The Appellate Division unanimously affirmed this decision, stating that because the corporate entity no longer existed, the plaintiffs lacked standing. The New York Court of Appeals reversed the Appellate Division’s order.

Issue(s)

Whether shareholders of a dissolved corporation have standing to maintain a derivative action on behalf of the corporation for actions that occurred prior to the dissolution.

Holding

Yes, because the dissolution of a corporation does not automatically deprive its shareholders of the right to pursue derivative claims for pre-dissolution misconduct, provided they meet the contemporaneous ownership requirement.

Court’s Reasoning

The court rejected the argument that corporate dissolution automatically extinguishes a shareholder’s right to bring a derivative action. It emphasized that under New York’s Business Corporation Law, a dissolved corporation can still sue and be sued. The court acknowledged the dual requirements for derivative standing under Business Corporation Law § 626(b): contemporaneous ownership (owning stock at the time of the alleged wrong) and continuous ownership until the action is commenced. The contemporaneous ownership rule prevents speculation in litigation. While typically, voluntarily disposing of stock terminates shareholder rights, dissolution is not a voluntary act. The court reasoned that dissolution does not abruptly end the shareholder’s interest, especially concerning the distribution of corporate assets. Citing Business Corporation Law § 1006(b), the court stated, “The dissolution of a corporation shall not affect any remedy available to * * * [its] shareholders for any right or claim existing * * * before such dissolution.” The court concluded that the dissolution, by itself, does not preclude a qualified plaintiff from being deemed a shareholder at the time of bringing the derivative action. The court modified the Appellate Division’s order, denying Time’s motion to dismiss, except concerning shareholders who exercised appraisal rights under Business Corporation Law § 623(e).