You can buy the petitioner out under BCL 1118.

A shareholder who sues your corporation for judicial dissolution under BCL 1104-a can be bought out instead of fought. BCL 1118 lets the corporation or any other shareholder elect to purchase that petitioner’s shares at fair value, within ninety days of filing or later if the court allows, on court-approved terms. The fight becomes price.

What is a BCL 1118 election to purchase?

A BCL 1118 election to purchase is a filed election by the corporation, or by any other shareholder, to buy the dissolution petitioner’s shares at fair value in a proceeding brought under BCL 1104-a. The purchase happens on terms and conditions the court approves. The company stays alive. The petitioner leaves with money.

The election is a right while it is timely, not a request. BCL 1104-a lets holders of twenty percent or more of the votes of all outstanding shares of a corporation that is neither listed nor regularly quoted petition for dissolution for illegal, fraudulent, or oppressive actions by those in control, or for looting, waste, or diversion of corporate assets. The petitioner asks the court to end the company. You answer that the shares will be bought instead.

Once the election is on file and the parties cannot agree on price, the court may, on the application of the purchaser or the petitioner, stay the 1104-a proceeding and fix fair value itself. The Court of Appeals put it directly: once the corporations elected, the misconduct charges became irrelevant and the issue became one of valuation. One qualification survives. BCL 1118(b) directs the court to give effect to any adjustment or surcharge found appropriate in the 1104-a proceeding.

Law: N.Y. Bus. Corp. Law 1104-a(a); 1118(a); 1118(b). Case: Matter of Seagroatt Floral Co. (Riccardi), 78 N.Y.2d 439 (1991).

Should you elect, or should you fight the dissolution petition?

Electing under BCL 1118 and defending the 1104-a petition on the merits are two different cases with two different risks. Defending keeps the argument on conduct and on whether liquidation is the only feasible way for the petitioner to get a fair return. Electing removes liquidation from the table and substitutes a price.

Grounds alone do not produce a dissolution order. BCL 1104-a(b) requires the court to weigh whether liquidation is the only feasible means for the petitioner to obtain a fair return, and whether it is reasonably necessary to protect the petitioner or a substantial number of shareholders.

There is also a threshold check. BCL 1104-a(a) requires petitioners to hold twenty percent or more of the votes of all outstanding shares entitled to vote for directors, and holdings can be aggregated to reach that line. A petitioner below it has no standing under the section, which makes the 1104-a claim vulnerable to dismissal and leaves nothing to elect against. That does not end the case. The same pleading may still press deadlock under BCL 1104.

Law: N.Y. Bus. Corp. Law 1104-a(a), (b).

How long do you have to elect, and what happens after ninety days?

Ninety days after the filing of the petition is the period set by BCL 1118(a) for an election to purchase. The clock runs from filing, not from service. The court may allow an election at a later time in its discretion. A late election exposes you to consequences the statute leaves to the court.

BCL 1118(c) sets out those consequences, and both are discretionary. Where the election comes beyond ninety days and the court allows the petition, the court may award the petitioner the reasonable expenses incurred before the election, including reasonable attorneys’ fees. Separately, whatever the timing, the court may require a bond or other acceptable security, at any time before the actual purchase, sufficient to secure the fair value of the shares.

Inside ninety days, you elect without asking permission, though the purchase terms are still approved by the court. Outside ninety days, you are asking the court to allow the election at all, and you are exposed to the petitioner’s pre-election costs. That difference is money.

I read the shareholders agreement and the certificate of incorporation before I read the petition.

Ninety days is not a suggestion, and the election is not a draft.

Law: N.Y. Bus. Corp. Law 1118(a); 1118(c)(1); 1118(c)(2).

Is a BCL 1118 election irrevocable?

An election under BCL 1118(a) is irrevocable unless the court, in its discretion and for just and equitable considerations, determines that the election be revocable. That is the statutory text. Treat the filing as a one-way door and assume you will not get back through it. Decide before you file, not after.

The Court of Appeals has enforced that language on hard facts. Once a party elects, that party must purchase and the petitioner must sell at fair value. Absent an agreement to the contrary, divestiture events under a mandatory buy-out agreement, such as death, will not frustrate a preexisting 1118 election. The electing shareholder there wanted the contract price triggered by the petitioner’s death. He was held to the election.

The escape hatch is narrow. It has been opened for catastrophe, not regret: the Second Department treated an unforeseeable fire that impaired the value of the corporate stock after an election as a just and equitable consideration. A valuation you dislike is not that.

The sequencing rule follows. Valuation analysis comes before the election, not after it. The statute does not hand you an exit if the number disappoints.

Law: N.Y. Bus. Corp. Law 1118(a). Cases: Matter of Penepent Corp., 96 N.Y.2d 186 (2001); Matter of Rey v. Pan Am. Cash & Carry Corp., 152 A.D.2d 246 (2d Dep’t 1989).

What date is used to value the shares, and does interest run?

BCL 1118(b) fixes fair value as of the day prior to the date the dissolution petition was filed, exclusive of any element of value arising from the filing itself. The court may award interest, in its discretion, from the filing date to the date of payment at an equitable rate on the judicially determined fair value.

The relevant picture is the company as it stood the day before the petition hit, so the records you need are the records that existed then. And value that bleeds out because of the filing itself is stripped from the calculation rather than charged to the petitioner.

The statute also preserves a role for conduct evidence. Fair value gives effect to any adjustment or surcharge found appropriate in the 1104-a proceeding. An election does not sterilize allegations of self-dealing or diverted assets. It relocates them. They become line items in the valuation.

I ask for the trial balance and the financial statements through the valuation date before I ask anyone what happened between the shareholders.

Law: N.Y. Bus. Corp. Law 1118(b).

Can the price be reduced because the petitioner holds only a minority stake?

No. A minority discount may not be applied to the petitioner’s shares in a fair value determination under BCL 1118. Imposing one would value minority shares below majority shares of the same class, which conflicts with the statutory mandate of equal treatment of shares of the same class. The petitioner is paid a proportionate interest in a going concern.

That is the holding of the Court of Appeals in a dissenting shareholder appraisal arising out of close corporations, and the Court applied the same equitable principles to BCL 623 appraisals and to 1118 buyouts. It has since restated the rule: a minority shareholder’s stock should not be further discounted because of its minority status.

Plan the number accordingly. If your valuation assumes you are buying a non-controlling block at non-controlling prices, the assumption is wrong as a matter of New York law.

Law: N.Y. Bus. Corp. Law 501(c). Cases: Matter of Friedman v. Beway Realty Corp., 87 N.Y.2d 161 (1995); Matter of Penepent Corp., 96 N.Y.2d 186 (2001).

Can the price be reduced for lack of marketability?

Yes, subject to proof and to the court’s discretion. A lack of marketability discount is recognized in New York fair value determinations because shares of a closely held corporation cannot be readily sold on a public market. The discount rests on illiquidity. It cannot rest on, or double count, the minority character of the shares.

The Second Department recognized that discount in the leading decision on the point, and the Court of Appeals has confirmed that any risk associated with illiquidity of close corporation shares should be considered. The objective is what a willing purchaser in an arm’s length transaction would offer for an operating business, not for a business being liquidated.

Rate and base are questions of fact. The Second Department has sustained a fifteen percent discount applied to a corporation’s entire enterprise value, holding that the law does not limit the discount to goodwill in all instances.

The election converts a threat to the company into a number. Everything after that is the number.

Cases: Matter of Blake v. Blake Agency, Inc., 107 A.D.2d 139 (2d Dep’t 1985), lv denied 65 N.Y.2d 609; Matter of Seagroatt Floral Co. (Riccardi), 78 N.Y.2d 439 (1991); Matter of Murphy v. United States Dredging Corp., 74 A.D.3d 815 (2d Dep’t 2010).

Does the election work in a BCL 1104 deadlock proceeding?

No. BCL 1118(a) applies by its own terms only to a proceeding brought pursuant to BCL 1104-a. A petition pleading deadlock or internal dissension under BCL 1104 carries no statutory election to purchase. Read the caption and the section actually pleaded before you build a ninety-day plan.

If the petition pleads only deadlock under BCL 1104, any buyout must come from contract or negotiation. If it pleads 1104-a, alone or alongside 1104, the election exists as to that claim and the clock is running.

Law: N.Y. Bus. Corp. Law 1118(a).

Does a price in the shareholders agreement control the buyout?

A price formula in a shareholders agreement governing a voluntary sale of stock does not, by itself, fix fair value under BCL 1118. The Court of Appeals drew that line in a 1104-a case where the corporation elected to purchase and then pointed to the agreement’s price. The agreement is evidence. It is not automatically the answer.

The qualification matters. Shareholders can contract for this in advance. Where an agreement explicitly provides that a 1104-a proceeding is treated as a voluntary offer to sell, or explicitly fixes value on a 1118 election, the court gives those terms effect. Silence does not.

So do not assume a buy-sell clause in your shareholders agreement sets your exposure. A formula written for a voluntary sale by a departing holder is not a court-supervised purchase after a dissolution petition, and the court decides which it is.

Case: Matter of Pace Photographers, Ltd. (Rosen), 71 N.Y.2d 737 (1988).

What should you do in the first two weeks after the petition is filed?

The first two weeks after a dissolution petition is filed should be spent on three things: confirming which statute the petition invokes, calendaring the ninety-day election period from the filing date, and building a defensible valuation as of the day before filing. Everything else in the case is downstream of those three answers.

• Identify the section pleaded. BCL 1104-a carries the election. BCL 1104 does not.
• Calendar the ninetieth day from the filing date, and an internal decision date well before it.
• Test standing. Confirm the petitioners hold, in the aggregate, twenty percent or more of the votes of all outstanding shares, and that no shares are listed or regularly quoted.
• Collect the governing documents: the certificate of incorporation, the bylaws, the shareholders agreement, and any buy-sell or redemption agreement.
• Close the books to the day before filing and assemble the financial statements, tax returns, appraisals, and compensation history supporting a valuation at that date.
• Get a valuation view before you elect, priced without a minority discount and with a supportable marketability analysis.
• Decide who buys. The corporation and individual shareholders are both permitted to elect, and the choice has tax and funding consequences.
• Plan funding, and plan for a court-ordered bond or other security before the purchase closes.

The decision is binary and it is time-limited. Elect inside ninety days with the valuation math in front of you, or accept that you are litigating whether your company continues to exist.

Law: N.Y. Bus. Corp. Law 1118(a), (b), (c).