Business divorce: what happens when your partner asks a judge to dissolve the company.

A dissolution petition reads like a demand to destroy what you built. In practice it is almost always an opening move in a fight about price. Understanding that early is worth more than any single argument you will make.

Judicial dissolution is a court proceeding to wind up and end a company. When a co-owner files one, the paperwork says he wants the business dissolved. What he wants, nearly always, is out — at a number he likes, on a timetable he controls.

Which route he takes depends on what you formed.

If it is a corporation

Two provisions do most of the work.

BCL § 1104 — deadlock. Available where the owners are so evenly divided that the business cannot function: the directors cannot agree, or the shareholders cannot elect directors, or internal dissension means dissolution is beneficial to the shareholders. This is the classic fifty-fifty petition.

BCL § 1104-a — oppression. Available to a holder of twenty percent or more of a close corporation’s shares, on allegations that those in control have engaged in illegal, fraudulent or oppressive conduct, or have looted, wasted or diverted corporate assets. This is the provision most often used against an owner who runs the company, and the word that carries it is oppression — conduct that defeats the reasonable expectations the complaining owner had when he put his money in.

If it is an LLC

The standard is different and materially harder for the petitioner.

Under Limited Liability Company Law § 702 a court may dissolve an LLC only where it is not reasonably practicable to carry on the business in conformity with the operating agreement. The operating agreement is the measuring stick. New York courts have read that narrowly: unhappiness, distrust, even genuine deadlock are not automatically enough if the company can still function as the agreement contemplates.

LLC Law § 702; Matter of 1545 Ocean Ave., LLC.

Practical consequence: an LLC dissolution petition is the more defensible one. If your operating agreement provides a way through the disagreement — a manager with authority, a buy-sell mechanism, a tiebreaker — then the business can be carried on in conformity with it, which is the whole test.

For an LLC, the operating agreement is not background. It is the standard the judge applies.

The provision that ends most of these cases

In a § 1104-a proceeding, the corporation or the other shareholders may elect to purchase the petitioner’s shares at fair value. The election is what converts a dissolution fight into a valuation fight, and it is frequently the single most important decision in the case.

BCL § 1118.

Make the election and the question is no longer whether the company survives. It is what his shares are worth. That is a fight about numbers and experts, and it is one you can prepare for and control. Two points matter enormously and clients almost never know them:

• Fair value is not fair market value. It is a statutory concept, and the discounts a real buyer would demand do not simply carry over.
• The valuation date is generally the day before the petition was filed. Which means the date he chose to sue is the date the company gets measured on.

The election also has consequences that are hard to reverse, and its timing is governed by the statute. It is a decision to make deliberately with counsel, not reflexively.

What arrives alongside the petition

Dissolution petitions rarely travel alone. Expect some combination of:

• A books and records demand. Shareholders have inspection rights under BCL § 624 and LLC members under LLC Law § 1102. These rights are real but not unlimited — they attach to specified records for a proper purpose. A controlled, good-faith production usually removes this as a pressure point rather than feeding it.
• Breach of fiduciary duty claims against whoever runs the company. Worth remembering that fiduciary duty runs in both directions: the petitioner owed one too.
• An application for a receiver or an injunction to freeze operations pending the proceeding. Treat this as the emergency it is — see the entry on temporary restraining orders.
• An accounting.

The defense that usually matters most

Most of what gets called oppression is ordinary business judgment the petitioner did not like. Reducing distributions when the company could not sustain them, declining to hire his relative, reinvesting instead of paying out, cutting a salary that was tied to work he stopped doing — these are decisions, and good-faith business decisions made for the company’s benefit are protected. They are not oppression because the outcome disappointed a minority owner.

The record is what carries that argument: minutes, financials, the numbers the decision rested on, the contemporaneous reason it was made. Which is why building the record starts on day one, not at the deposition.

Where these actually end

Very few of these result in a company being wound up and liquidated. The overwhelming majority end in one owner buying the other out, and the litigation functions as an argument about price and terms conducted in front of a judge. Knowing that from the first week changes what you spend money on: you fight the claims that move the valuation and the leverage, and you stop paying to fight the ones that do not.

He filed a petition to end the company. He is negotiating a price. Defend it as what it is.