Buyout Provisions; Cause Call Options; Breach of Contract; Fiduciary Duties
By: Kayla Kuzniewski | Staff Writer
Plaintiff purchased a majority interest in Defendant’s dental business. Plaintiff bought Defendant out after learning Defendant manipulated Plaintiff and its employees to ensure that he maintained full control of the company. Plaintiff’s actions culminated in Defendant’s early resignation from the company, which was one month before he was to resign per the terms of the contract. The contract entitled Plaintiff to purchase Defendant’s shares in the event of Defendant resigning prior to the end of his employment contract without “good reason.” The “Cause Call Option” (“CCO”) entitled Plaintiff to the same should a Court decide that Defendant committed “cause.” Following Defendant’s actions, Plaintiff exercised this right. As a result, both parties filed suit; Defendant’s was dismissed.
Plaintiff originally brought a motion for declaratory judgment with eleven causes of action, which were later reduced to nine. These causes of action included the seeking of a declaration that Defendant’s actions constituted cause, that Defendant resigned without good reason, that Defendant breached his fiduciary duties, and that Defendant’s acts breached the implied covenant of good faith and fair dealing. Defendant’s counterclaims included the allegation that Plaintiff breached the mandatory buy-out clause and that Plaintiff has no right to exercise the ECO or the CCO due to a lack of satisfaction of all conditions. In its Decision, the Court primarily focused on two issues: (1) whether Plaintiff as the majority owner of the joint venture can buy out the Defendant, a minority shareholder, through either exercising its ECO and/or its CCO; and (2) whether Plaintiff failed to compensate Defendant with rightly owed excess cash and whether it failed to acknowledge the veto right of Defendant in a certain transactional situation. Defendant responded to the Plaintiff’s motion by seeking summary judgment. The motion considered in this judgment consolidated and provided answers for these two main issues.
In regards to the first issue, Defendant argued that Plaintiff was not entitled to exercise the ECO because of the Consulting Agreement which the two entered into immediately following Defendant’s resignation. Conversely, Plaintiff argued, that Plaintiff was in fact entitled to exercise the ECO because the Consulting Agreement was based upon fraudulent actions on the part of the Defendant. The Plaintiff also argued that it had the right to exercise the CCO because Defendant’s conduct qualified as the requisite “cause.” Plaintiff based such cause on the severity of the inappropriateness of the Defendant’s actions. This conduct included, but was not limited to, disparaging the company, harassing and abusing fellow employees, and breaching of fiduciary duties.
In response, the Court held that Plaintiff could exercise its Employment Call Option to buy out Defendant and that the Cause Call Option was an optional buyout provision. The Court reasoned that the actions taken by Plaintiff were appropriate due in large part to the fraudulence on the part of Defendant on which they were based.
In regards to the second issue, Defendant argued that his shareholder rights were infringed due to the alleged withholding of excess cash and the failure of the Plaintiff to acknowledge his veto right in a “transaction.” Plaintiff argued that the allegation of withholding of excess cash by the Defendant on the part of the Plaintiff was false in its factual entirety. Additionally, Plaintiff argued that Defendant’s claim regarding his veto right was without merit due to the fact that the “transaction” in question involved a trivial amount of money and was ultimately unsuccessful.
As to this second issue, the Court held that the Plaintiff was correct in its assertions that Defendant’s allegations of withholding cash were without fact and that Plaintiff’s failure to acknowledge Defendant’s veto right in the alleged transaction did not infringe upon his shareholder rights.
Sybron Can. Holdings, Inc. v. Niznick, Index No. 650908/14, 03/03/2017 (Ostrager, J.).