The right of shareholders to elect a corporation’s directors is one of the most valuable rights attendant to share ownership. Election of directors is where shareholders can directly exert their influence on the corporation, and few matters are more central to a corporation’s governance than its ability hold valid elections of directors.
Because the fair election of directors—especially in closely-held corporations—is critical to their orderly functioning, New York’s BCL § 619 authorizes the courts to entertain challenges to board elections, hear proofs, and confirm or deny them. Under BCL § 619, any “shareholder aggrieved by an election” may bring a proceeding in Supreme Court to challenge the election, and the court “shall forthwith hear the proofs and allegations of the parties, and confirm the election, order a new election, or take such other action as justice may require.”
New York courts, I suspect due to both their deference to shareholder voting rights and the existence of an after-the-fact remedy in BCL § 619, historically have been reluctant to enjoin duly-called shareholders meetings for the purpose of electing directors. Why interfere by injunction with a bedrock right of shareholders when the court can hear a fuller challenge to the election under BCL § 619 after the results, or so conventional wisdom goes. Plus, given the existence of BCL § 619, it is the rare case where an election itself will constitute irreparable harm of the type necessary for injunctive relief.
Despite these factors, in a decision of apparent first impression last month, Justice Nancy Bannon of the Manhattan Supreme Court issued an injunction against the holding of a corporate election under BCL § 619. The case is ALP, Inc. et ano. v Moskowitz, et al., Index No. 652326/2019 [Sup Ct NY County, June 14, 2021].
Peter Max and ALP
This dispute arose in the long-running feud among the children of the elderly Peter Max, the German-American artist behind countless colorful, psychedelic, neo-expressionist icons of 20th century art. Max’s property is now managed by his court-appointed property guardian, Lawrence A. Flynn, Esq.
Max’s massive collection of invaluable, original artwork, IP, and licensing rights is owned by ALP, Inc., a corporation formed for the production, maintenance, marketing, licensing, and commercialization of his artwork. ALP is owned 20% by Max (controlled by Flynn), 40% by Max’s son Adam, and 40% by his daughter Libra.
In December of 2018, after years of alleged mismanagement by Adam as CEO of ALP—notably detailed in a New York Times exposé—Libra (represented by Farrell Fritz in that phase of the case) and Flynn duly called a shareholders meeting under BCL § 603 for the purpose of removing Adam from control of ALP. Although Adam petitioned to stop that shareholders meeting, the Court allowed it to proceed, a new board of directors consisting of Libra, Flynn, and a third independent director was appointed, and Adam was ousted as CEO. Adam’s subsequent legal challenge to that election was also rejected. In both of those actions, Flynn—the swing vote between Adam and Libra—sided with Libra, attesting that it would be a breach of his fiduciary duty to Peter to allow Adam’s continued dominion over ALP.
Having failed to overturn the results of the December 2018 board election and ousted from his position as CEO (he was later fired from his position as an officer altogether), Adam sought an alliance with the swing voter, Flynn. Ultimately, Adam and Flynn reached a “settlement” agreement where Flynn agreed with Adam to wrest control of ALP from Libra: in exchange for Flynn’s vote to put Adam back in control of ALP, Adam would cause ALP to surrender a trove of highly valuable original artworks, IP rights, and social media accounts to Peter Max—which would be managed by Flynn. Adam also would not challenge Flynn’s guardianship fees.
With Flynn’s acquired vote seemingly in his pocket, Adam noticed a special meeting of ALP’s shareholders to be held in May 2020 (the “May Vote”). By then, Libra learned of Adam and Flynn’s voting agreement—although she had not then seen a copy of it—and brought suit seeking to enjoin the May Vote.
The Court’s Authority to Enjoin the May Vote
Libra moved for temporary and preliminary injunctions restraining the May Vote. Her counsel at Schlam Stone & Dolan grounded the request in the last clause of BCL § 619, that upon the application of a “shareholder aggrieved by an election,” the Supreme Court “shall forthwith hear the proofs and allegations of the parties, and confirm the election, order a new election, or take such other action as justice may require.” The court’s authority to take “such other action as justice may require,” counsel argued, included the authority to enjoin an election rigged by an illegal voting agreement.
Libra also included in her causes of action requests for permanent injunctions under BCL § 706(d) and BCL § 716(c) barring Adam from again serving as a director or officer of ALP. With the § 716(c) claim in play, Libra argued that a temporary restraining order and preliminary injunction were necessary to enjoin the May Vote in order to preserve the status quo pending litigation of those claims. Absent injunctive relief, the May Vote would proceed and Adam’s bid to regain control of ALP would be a fait accompli before Libra’s § 716(c) claim could be litigated. In other words, by seeking a permanent injunction under BCL § 716(c), Libra bolstered her pitch for injunctive relief, because an after-the-fact challenge to the May Vote under BCL § 619 would only come after Adam resumed control of the board and reinstalled himself as CEO. Libra argued that her § 716(c) claim necessitated an injunction stopping the May Vote.
Libra’s motion also prominently featured Flynn’s flip-flop and the alleged illegality of his alliance with Adam, highlighting Flynn’s prior sworn statements attesting to Adam’s misconduct.
Adam opposed the injunction, arguing that the court lacked the authority to enjoin a properly noticed shareholders meeting called for the purpose of electing directors. BCL § 619 contemplates solely an after-the-fact remedy because it requires a “shareholder aggrieved by an election,” he contended. Because the May Vote had not yet occurred, Adam argued, Libra was not yet an aggrieved shareholder, thus her exclusive remedy was to petition the Court after the May Vote took place.
Justice Bannon’s Ruling
In late May, 2020, Justice Bannon granted Libra’s request for a temporary restraining order enjoining the May Vote. A little over a year later, and after the Appellate Division, First Department, summarily denied Adam’s motion to stay enforcement of the temporary restraint, Justice Bannon granted Libra’s motion for a preliminary injunction staying the May Vote for the pendency of Libra’s action.
Justice Bannon pulled no punches in her assessment of Adam and Flynn’s misconduct, finding that Libra had established a strong likelihood of success on the merits on her BCL §§ 706(d) and 716(c) claims against Adam:
The plaintiffs’ submissions have demonstrated a likelihood that Adam breached his fiduciary duties to ALP by, inter alia, 1) causing ALP’s insurance coverage to lapse, 2) violating a resolution by ALP’s board of directors by making $4.8 million in illegal payments to an unlicensed insurance adjuster, Lawrence Moskowitz, a defendant in this action who is also alleged to have conspired with Adam to divert ALP’s assets, and 3) again violating the board resolution by selling ALP’s most valuable assets without approval. The submissions regarding Adam’s alleged breaches of fiduciary duty also establish a likelihood of success on the plaintiffs’ cause of action seeking to remove Adam from the board of directors for cause and to enjoin him from serving as director or officer pursuant to BCL §§ 706(d) and 716(c).
Justice Bannon also expressed her skepticism of the voting agreement between Adam and Flynn, citing Flynn’s volte-face from his prior criticism of Adam’s management:
Where a contemplated action is so far opposed to the true interests of the corporation that it can be inferred that no one acting is motivated by an honest desire to preserve the interests of the corporation, but rather must be acting with an intent to serve an outside purpose, the court shall intervene. . . . it remains wholly unclear how Flynn’s agreement to reinstate the very individual he accused of gross misconduct and breach of fiduciary duty a short time ago, expressly permit that individual to engage in the same suspect activities as before, and transfer ALP’s most valuable assets is in any way beneficial to ALP or its shareholders generally.
Having found Libra’s likelihood of success on the merits of her claims, Justice Bannon found that Adam’s promises under the voting agreement with Flynn to transfer a huge trove of ALP’s property to Flynn as guardian constituted irreparable harm warranting injunctive relief.
Minority shareholders in closely-held corporations, when considering their options concerning an anticipated election called by a rival majority, would be wise to give ALP a close look. Under the right circumstances, as ALP illustrates, courts are empowered to enjoin a shareholder vote that will put the company in the hands of shareholders who demonstrably threaten to breach their fiduciary duties.
In my view, Libra’s inclusion of her BCL § 716(c) claim to bar Adam from again serving as an officer of ALP was the linchpin to the success of her bid for injunctive relief. With her § 716(c) claim, Libra convincingly argued that an after-the-fact challenge to the election was not good enough, because by then Adam would be an officer in frustration of her § 716(c) claim. Libra’s BCL § 716(c) claim made the injunction necessary.
By combining her rights to challenge an election under BCL § 619 with her rights to seek an injunction barring Adam from service as a director or officer under BCL §§ 706(d) and 716(c), Libra charts a roadmap for potential injunctive relief enjoining shareholder elections. Whether others following that roadmap will have similar success remains to be seen.
In a pair of decisions issued yesterday, the First Department affirmed Justice Bannon’s issuance of a preliminary injunction against Flynn, finding that “the motion court providently exercised its discretion in awarding preliminary injunctive relief. Defendants demonstrated a likelihood of success on the merits of at least their breach of fiduciary duty claim against plaintiff, and also demonstrated irreparable harm and that the balance of equities weighed in their favor” (2022 NY Slip Op 03968). The First Department reversed the same injunction as against Adam because he was not properly added as a defendant in the lower court action (2022 NY Slip Op 03962). Since the vote to remove Libra would require both Adam and Flynn, the First Department’s decisions keep Libra in control of ALP.