Corporate Dissolution. I. Burack, Inc, was a family-operated close corporation that sold plumbing supplies in New York. The founder and president, Israel Burack, transferred his shares in the corporation to other family members; and when Israel died in

Question

1974, the position of president passed to his son, Robert Burack. Robert held a one-third interest in the company, and the remainder was divided among Israel's other children and grandchildren. All shareholders participated in the corporation as employees or officers and thus relied on salaries and bonuses, rather than dividends, for distribution of the corporation's earnings. In 1976, several of the family-member employees requested a salary increase from Robert, who claimed that company earnings were not sufficient to warrant any employee salary increases. Shortly thereafter, a shareholders' meeting was held (the first in the company's fifty-year history), and Robert was removed from his position as president and denied the right to participate in any way in the corporation. Robert sued to have the company dissolved because he had been frozen out. Discuss whether Robert should succeed in his suit or whether the court would choose another alternative.

Answer 1

Corporate dissolution
Robert would not be able to force the corporation into involuntary dissolution, but he could receive some other equitable relief. A minority shareholder is "frozen out" when he or she is not allowed to participate in the corporation because of actions by the majority shareholders. In small, family operated close corporations, shareholders seldom elect to have dividends declared because of the double tax implications involved. Normally, the owners will work for the corporation and expect to receive the corporation's benefits by way of salaries and bonuses. Thus, when employment is the only method of reimbursing the shareholders of a company, a minority owner that is fired is unable to recoup his or her investment or receive any of the benefits of the corporation. Courts recognize this and offer equitable remedies for such "frozen out" minorities, but seldom will a court order dissolution of a viable company like Burack. To do so would allow any minority shareholder to easily frustrate the operation of a profitable concern by the majority. A more equitable solution would be to require the corporation to declare dividends or, as the court did in this case, to require the majority to buy out the shares of the minority. Here, the majority shareholders in Burack have prevented Robert from receiving any benefits from the corporation's earnings, benefits which he reasonably expected to receive as a one third owner of the business. The court ordered the other owners to purchase Robert's shares if they would not allow him to participate in the corporation.