## Facts

- Kemp & Beatley, Inc. was a closely held New York corporation with 1,500 outstanding shares held by eight shareholders.
- Two minority shareholders, long-time employee-managers, owned about 20.33% of the shares (one held 200 shares; the other 105).
- For many years, the corporation distributed a substantial portion of earnings to shareholders in proportion to stock ownership, using either formal dividends or payments labeled “extra compensation” or “bonuses.”
- After one petitioner resigned and the other was terminated, the corporation changed its distribution practice and stopped making any earnings distributions to them while continuing to distribute earnings to the remaining shareholders.
- The corporation justified the change by characterizing past payments as employee bonuses properly limited to current employees, rather than shareholder returns.
- With no salary, no share of earnings, and no ready market for their shares, the petitioners claimed they were effectively frozen out.
- Petitioners sought judicial dissolution under N.Y. Business Corporation Law § 1104-a based on “oppressive actions”; the trial court ordered dissolution with an option for the corporation to purchase petitioners’ shares at a fair price, and the Appellate Division affirmed.

## Issues

1. Whether discontinuing long-standing, stock-proportionate profit distributions to minority shareholders after their employment ended, while continuing comparable distributions to others, constitutes “oppressive actions” under BCL § 1104-a.
2. Whether ordering dissolution (subject to a fair-value buyout option) was within the trial court’s discretion on these facts.

## Decision

- The Court of Appeals affirmed the dissolution order and the buyout option.
- It held that “oppressive actions” under BCL § 1104-a includes conduct that substantially defeats minority shareholders’ reasonable expectations when they invested.
- The evidence supported findings that petitioners’ reasonable expectations of sharing in corporate earnings were defeated by a targeted change in distribution practice.
- The lower courts did not abuse discretion in concluding dissolution (tempered by a fair-value purchase option) was an appropriate remedy to provide a fair return.

## Legal Principles

- In a closely held corporation, “oppressive actions” under BCL § 1104-a means conduct that substantially defeats the reasonable expectations held by minority shareholders when committing capital to the enterprise.
- Reasonable expectations are those central to the decision to invest and may include participation in management, employment, and receipt of earnings where share liquidity is limited.
- A long-standing pattern of distributing earnings in proportion to share ownership can create a reasonable expectation of continued sharing in profits while the corporation remains profitable and others continue to receive comparable distributions.
- Labeling payments as “bonuses” does not control if, in substance, they function as shareholder profit distributions tied to ownership.
- Dissolution is an available remedy for shareholder oppression when lesser measures will not provide the minority a fair return; courts may mitigate disruption by allowing the controlling group to avoid dissolution through a fair-value buyout.

## Conclusion

The court sustained dissolution relief for minority shareholders who were denied any economic return after the majority altered an established, ownership-based distribution practice, holding that oppression under BCL § 1104-a is measured by whether the majority’s conduct defeats the minority’s reasonable investment expectations in a closely held corporation.


Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63 (N.Y. 1984)