New York Law Review

Tag: Shareholder Agreement

  • Wilson v. Dantas, No. 62 (N.Y. 2017): Enforceability of Agreements and Fiduciary Duty in Shareholder Disputes

    Wilson v. Dantas, No. 62 (N.Y. June 6, 2017)

    A court will not enforce an agreement or modify an existing contract, in the absence of a signed writing that unambiguously reflects an intent to vary the terms.

    Summary

    In Wilson v. Dantas, the New York Court of Appeals addressed the enforceability of various agreements and claims in a shareholder dispute involving a Cayman Islands investment fund. The court considered whether a letter of employment could form a binding contract, whether a promise to share in settlement proceeds modified a shareholders’ agreement, and the extent of fiduciary duties owed between shareholders. The Court of Appeals dismissed most of the plaintiff’s claims, finding that agreements had been superseded or were unenforceable. The Court also clarified the standards for establishing a fiduciary duty, particularly under Cayman Islands law where the fund was formed.

    Facts

    Robert Wilson, III, formerly employed by Citibank, devised an investment strategy for Brazil. In 1997, Wilson, Daniel Dantas, and Citibank agreed to form a Cayman Islands entity, Opportunity Equity Partners, Ltd. (OEP). Wilson, who was to move to Brazil to assist with management, sent Dantas a letter specifying his terms of employment, including 5% of the carried interest generated by the funds. Neither Dantas nor OEP signed the letter. Later, the seven shareholders of OEP, including Wilson, entered into a Shareholders’ Agreement. Wilson alleged that Dantas promised to use settlement proceeds from a 2008 settlement of litigation between Citibank, Dantas, and OEP to pay Wilson his carried interest. After the Appellate Division granted leave to appeal, Wilson amended his complaint to eliminate the personal jurisdiction defects raised. Wilson then brought claims against Dantas and related entities, alleging breach of contract, breach of fiduciary duty, unjust enrichment, and fraudulent concealment.

    Procedural History

    Wilson initially sued in federal court, but the case was dismissed for lack of diversity jurisdiction. He then filed in state court. The state Supreme Court dismissed the claims for lack of personal jurisdiction. The Appellate Division reversed, conferred personal jurisdiction, and, at the same time, granted defendants’ motion to dismiss for failure to state a claim as to three of the nine causes of action, denying it as to the other six. The Court of Appeals reviewed the Appellate Division’s decision based on questions of law arising from the motions to dismiss.

    Issue(s)

    1. Whether the alleged 1997 letter agreement, unsigned by Dantas, constituted a binding contract.
    2. Whether the oral promise by Dantas to use proceeds from the 2008 settlement to pay Wilson’s carried interest modified the Shareholders’ Agreement.
    3. Whether Wilson’s seventh cause of action stated a claim for breach of contract under the Partnership Agreement.
    4. Whether Wilson had stated a claim for breach of fiduciary duty.

    Holding

    1. No, because the letter was not signed by the party to be charged, and it was superseded by the subsequent Shareholders’ Agreement.
    2. No, because the Shareholders’ Agreement contained a provision requiring written modifications, and because it contained a merger clause.
    3. No, because Wilson was not a party to the Partnership Agreement.
    4. Yes, to the extent that Wilson’s first cause of action seeks to recover payments owed to Wilson arising from his status as an OEP shareholder, predicated on a theory that defendants, as directors and officers of OEP treated him unfavorably when compared to other shareholders

    Court’s Reasoning

    The court applied New York law, and, in some instances, Cayman Islands law, in analyzing the contract claims. The court stated that “before one may secure redress in our courts because another has failed to honor a promise, it must appear that the promisee assented to the obligation in question.” Because Dantas and OEP did not sign the letter, there was no binding contract. The court further held that the Shareholders’ Agreement, by its terms, superseded any prior agreements. The court emphasized the importance of written agreements and held that oral modifications to the Shareholder Agreement were unenforceable due to its written modification requirements. For the breach of fiduciary duty, the court found that, under the Shareholder Agreement, Cayman Islands law applied. The Court held that, under Cayman law, there was no fiduciary duty owed between shareholders. However, to the extent that it could be alleged that the officers and directors of the company, in settling claims, treated Wilson, a minority shareholder, unfairly compared to other shareholders, Wilson stated a claim. In the dissent, the court found that there should be a dismissal of the appeal for lack of appellate jurisdiction, as the issues on appeal were rendered academic by plaintiff’s subsequent amendment of his complaint.

    Practical Implications

    This case underscores several important points for attorneys and parties involved in business disputes:

    • Importance of Written Agreements: The court’s emphasis on written agreements highlights the need for parties to ensure that all significant terms are clearly documented in a signed writing. Relying on unsigned letters or oral agreements is risky. The court quoted that “a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable.”
    • Merger Clauses: The presence of merger clauses in agreements, such as the Shareholder Agreement, can extinguish prior representations and agreements, so parties must consider all prior discussions and agreements when negotiating contracts.
    • Modification Clauses: Written agreements should include clauses that mandate that any modifications be made in writing, which is essential to avoid arguments about oral modifications.
    • Fiduciary Duties: The case highlights the differences in fiduciary duties that apply, depending on the legal jurisdiction. Parties need to consider the relevant law (here, Cayman Islands law) to determine the scope of duties owed.
    • Shareholder Disputes: The case demonstrates that minority shareholders can, in certain circumstances, bring claims against directors and officers for unfair treatment, even if fiduciary duties are not owed between shareholders.

  • Stern v. Stern, 66 N.Y.2d 360 (1985): Enforceability of Interim Valuation Agreements

    Stern v. Stern, 66 N.Y.2d 360 (1985)

    Interim agreements regarding valuation methods in corporate dissolution proceedings are enforceable, even if a final agreement is not reached, provided the chosen method reasonably complies with usual valuation practices.

    Summary

    This case concerns the enforceability of a preliminary agreement outlining a valuation method for shares in a professional corporation during a dissolution. The plaintiff argued the accountant’s cash-basis valuation was incorrect based on precedent for valuing law firms. The Court of Appeals held that the interim agreement, which specified valuation by the accountant, was binding pending a final shareholder agreement. Since no final agreement was reached, the interim agreement controlled. The dissenting judge argued that the plaintiff should have the opportunity to challenge the reasonableness of the accountant’s method, rather than its inherent correctness.

    Facts

    Two shareholders in a professional corporation, anticipating a potential separation, entered into a preliminary agreement. Paragraph 4(b) stipulated an accountant would evaluate shares, which would be binding pending a final agreement. Paragraph 5 stated the agreement lasted only until a final shareholder agreement was formulated and executed. A final agreement was never executed. The accountant valued shares using a cash-basis method. Plaintiff argued this was incorrect under established law for valuing law firms.

    Procedural History

    The plaintiff sought summary judgment, arguing that the accountant’s valuation was incorrect as a matter of law. Special Term agreed. The Appellate Division affirmed. The Court of Appeals reversed, holding the interim agreement was binding.

    Issue(s)

    Whether an interim agreement specifying a valuation method for shares in a professional corporation is enforceable when a final shareholder agreement is never executed?

    Holding

    Yes, because the parties agreed to the accountant’s evaluation as binding until a final agreement was reached, and no final agreement was ever executed.

    Court’s Reasoning

    The Court of Appeals reasoned that the parties explicitly agreed to be bound by the accountant’s valuation pending a final agreement. Paragraph 5 clearly stated the interim agreement’s duration. Since a final agreement was never reached, the interim agreement remains in effect. The dissenting judge, Meyer, argued that while the interim agreement was binding, the plaintiff should be able to challenge whether the accountant’s method reasonably complied with usual evaluation methods. He stated, “The only issue open to plaintiff, therefore, should be whether the method used by the accountant reasonably complied with the usual evaluation methods…” The dissent emphasized the need to avoid absurd outcomes and ensure fairness in the valuation process. The majority did not address the reasonableness of the method, only its binding nature due to the interim agreement. The implication is that while the agreement is binding, it is still subject to a test of reasonableness or good faith.

  • Abel-Bey v. Melrod, 42 N.Y.2d 863 (1977): Enforceability of Arbitration Agreements by Shareholders

    Abel-Bey v. Melrod, 42 N.Y.2d 863 (1977)

    A party waives the right to challenge the validity of an arbitration agreement if it fails to make a timely application for a stay of arbitration.

    Summary

    In this case, the New York Court of Appeals addressed whether a corporation could challenge the enforceability of an arbitration agreement after failing to timely apply for a stay of arbitration. The court held that because the corporation did not timely challenge the arbitration demand, it waived its right to argue that it was not bound by the agreement or that the claims fell outside the scope of the arbitration clause. The ruling emphasizes the importance of timely challenging arbitration demands and the broad scope of arbitration agreements when all shareholders agree.

    Facts

    Dr. Abel-Bey and three other individuals, who were all the shareholders of a corporation, entered into a stockholders’ agreement. The agreement restricted the disposition of their shares, addressed the election of directors and management of the corporation, and determined the compensation for each shareholder as corporate employees. Although the agreement stated that the corporation was a party, it was never executed on the corporation’s behalf. The agreement included a broad arbitration clause: “All disputes arising in connection with this agreement shall be finally settled by arbitration”. Differences arose between Dr. Abel-Bey and the other shareholders concerning the corporation’s failure to enter into an employment contract with him and regarding compensation and other payments made to the other shareholders. Dr. Abel-Bey served a demand for arbitration on the other three shareholders and the corporation.

    Procedural History

    The petitioner (presumably one of the other shareholders), individually, sought a stay of arbitration, arguing that the corporation was not a party to the agreement and that the claims were outside the scope of the arbitration agreement. The Supreme Court denied the stay for one claim but granted it for the other two. The Appellate Division modified this decision by denying the stay for all three claims. The New York Court of Appeals affirmed the Appellate Division’s order.

    Issue(s)

    1. Whether the corporation, by failing to timely apply for a stay of arbitration, waived its right to challenge the validity of the arbitration agreement.
    2. Whether the three claims raised by Dr. Abel-Bey fall within the scope of the arbitration agreement.
    3. Whether any public policy considerations preclude the submission of these claims to arbitration.

    Holding

    1. Yes, because the corporation failed to raise the question of whether it was bound by the arbitration agreement in a timely application for a stay as required by CPLR 7503(c).
    2. Yes, because the court agreed with the Appellate Division that all three claims fell within the scope of the arbitration agreement.
    3. No, because no considerations of public policy preclude their submission to arbitration.

    Court’s Reasoning

    The Court of Appeals reasoned that the threshold question of whether the corporation was bound by the arbitration agreement was waived because the corporation did not raise it in a timely application for a stay of arbitration, citing CPLR 7503(c). The statute requires a party objecting to arbitration to move for a stay within twenty days of service of the notice of intention to arbitrate. Failure to do so constitutes a waiver of the right to object. The court emphasized the importance of adhering to procedural rules governing arbitration, particularly the requirement to timely challenge the validity or scope of an arbitration agreement. Regarding the scope of the agreement, the court deferred to the Appellate Division’s finding that all three claims fell within the scope and found no public policy reason to prevent arbitration. The court did not provide an in-depth analysis of the specific claims but instead focused on the procedural aspect of timely challenging arbitration demands.

  • 3 Mitchell Place, Inc. v. D’Angelo, 34 N.Y.2d 310 (1974): Waiver of Arbitration Rights by Litigating Separate Claims

    3 Mitchell Place, Inc. v. D’Angelo, 34 N.Y.2d 310 (1974)

    Resort to the courts on some claims arising from an agreement does not waive the right to arbitrate separate and distinct claims arising under the same agreement if the agreement remains in full force.

    Summary

    This case addresses whether a party waives their right to arbitrate disputes under a shareholder’s agreement by initiating court actions regarding different, though related, disputes under the same agreement. The New York Court of Appeals held that initiating court actions on specific claims does not automatically waive the right to arbitrate other, distinct claims arising from the same agreement, especially when the opposing party acquiesced to the dual-forum approach. However, the court strongly cautioned against the inefficient and abusive practice of splitting disputes between forums, advocating for comprehensive resolution by a single arbitrator.

    Facts

    Shareholders of 3 Mitchell PL, Inc., which operated the Beekman Tower Hotel, entered into a shareholder’s agreement with a broad arbitration clause. A dispute arose over a proposed management agreement. D’Angelo demanded arbitration in May 1970. While arbitration was pending, D’Angelo commenced actions in court relating to a mortgage loan and alleged diversion of corporate funds, all arguably connected to the shareholder agreement. The other shareholders then sought to prevent D’Angelo from pursuing the initial arbitration and subsequent arbitrations.

    Procedural History

    D’Angelo initiated arbitration, followed by several court actions. 3 Mitchell Place, Inc. then commenced a proceeding to stay arbitration. The lower court stayed arbitration, denying a motion to dismiss the petition. The Appellate Division affirmed. The New York Court of Appeals then reviewed the case.

    Issue(s)

    Whether commencing several court actions against other parties to a shareholders’ agreement on causes of action arising from that agreement constitutes a waiver of the party’s right to arbitrate different issues arising under the same agreement.

    Holding

    No, because as to claims separate and distinct, no waiver of arbitration may be implied from the fact that resort has been made to the courts on other claims arising under a common agreement which remains in full force and effect.

    Court’s Reasoning

    The court acknowledged that D’Angelo pursued an “unorthodox course” by proceeding in both judicial and arbitral forums. However, because the claims in the court actions were distinct from those submitted to arbitration, and the other shareholders did not initially object to the court actions, D’Angelo did not waive his right to arbitrate. The court emphasized that 3 Mitchell Place, Inc. had the opportunity to stay the court actions and compel arbitration initially, but they did not. The court stated, “When the actions were brought, the petitioners had the right under the shareholders’ agreement to stay the actions and compel arbitration, but they did not do so. At this late date, the petitioners, having acquiesced in that course, should not be heard to claim that respondent has waived his right to proceed in arbitration on claims not previously presented to the courts.” The court also strongly discouraged the practice of “flitting between forums,” viewing it as an abuse of both the arbitration process and the courts. The court advocated for a comprehensive resolution of all disputes before a single arbitrator.