Stay Away Settlement Between Closely-Held Corporation and Dissident Shareholder Goes Away Upon Shareholder’s Death
September 27, 2021
Business divorce has a way of drawing quick and often lopsided battle lines. Many disputes in closely-held companies feature one outspoken owner feuding with a united group of the remaining owners over management or participation in the company. Depending on the ownership percentages held by each faction, corporate shareholders on either side of those battle lines have at their disposal a broad range of potential remedies under both the BCL and the common law—freeze outs, dissolution proceedings, claims for money damages, and bids for injunctive relief, to name a few.
Disputes of this variety are often resolved with a buyout of the outspoken owner. Other times, the parties agree that the dissident owner remains an owner, but forfeits any right to an active role in the company and agrees to stay away from company operations. For instance, a corporation agrees to some schedule of regular payments (whether salary, distributions, or some mix of the two) to the dissident shareholder, and in return, the complaining shareholder butts out of company business; he agrees to have no role in the company’s management and foregoes his right to sue the company or other shareholders for anything other than non-payment of his regular due. When his vote as a shareholder is required, he agrees to simply vote his shares in accordance with the recommendation of the board of directors.
“Stay away” settlement agreements like this one have some obvious appeal: they satisfy (and silence) the outspoken shareholder without requiring the company to immediately come up with the cash that a buyout would require. But there are downsides: disputes may arise over the payments, flaws in the settlement documents may be leveraged by either side, and, ultimately, the fighting factions remain joint owners.
This week’s post considers one potential pitfall to stay away settlement agreements: what happens when the outspoken shareholder dies? In Stile v C-Air Customhouse Brokers-Forwards, Inc., Index No. 656575/2020 [Sup Ct, New York County 2021], the New York County Supreme Court declined to dismiss a suit by the estate of a shareholder subject to a stay away settlement agreement on the grounds that the stay away obligations did not expressly apply to the shareholder’s successors.
C-Air and the Stay Away Settlement Agreement
With offices in New York, Miami, and Los Angeles, C-Air Customhouse Brokers-Forwards, Inc. and C-Air International (collectively, “C-Air” or the “Companies”) provide customs brokerage, freight forwarding, and export services to international shippers. Prior to 2008, C-Air was equally owned by three shareholders: Salvatore Stile, Milton Heid, and Augustus Antico, all of whom were active participants in C-Air’s business.
The shareholders’ relationship soured by 2008, when Heid and Antico commenced a lawsuit against Stile alleging that he breached his fiduciary duties to C-Air by abandoning his active role in C-Air and devoting his time to “filing harassing lawsuits against [them]—which resulted in zero recovery to Mr. Stile—starting businesses which directly competed with the Companies, and attempting to draw the Companies’ customers to those competing businesses,” all while collecting millions from C-Air.
The 2008 action settled, and the shareholders entered into a settlement agreement providing that Stile would stay away from the Companies in exchange for his receiving income and distribution payments until his death. Specifically, Stile promised to “forever forebear from commencing, prosecuting, and/or participating in, directly or indirectly, any action or proceeding against Heid, Antico, [or C-Air] concerning . . . matter[s] related to the operation and/or business of [C-Air].” Notably, Stile’s “stay away” obligations in the settlement do not purport to bind Stile’s heirs, successors, and assigns.
The settlement agreement did not provide that Stile’s shares in the Companies would be cancelled, redeemed, assigned or otherwise extinguished, but it did state that other than the payments set forth in the settlement agreement, Stile would “not be entitled to any other payments [or] profits and ha[ve] no interest in the operations of C-Air NY and C-Air LA.”
Paragraph 10(d) of the settlement agreement stated that no transfer, sale, pledge, or encumbrance of Stile’s shares would be valid until the transferee agreed in writing to be bound by Stile’s stay away obligations.
In a separate release, Stile—this time (unlike in the settlement agreement) on behalf of himself and his heirs, successors, and assigns—agreed to release the defendants from all claims arising “from the beginning of the world to the day of the date of th[e] [release].”
Stile’s Estate Asserts Shareholder’s Rights, Commences Suit
Stile collected the payments to which he was entitled under the settlement agreement until his death in April 2020. Some months later, in September 2020, his estate representative (the “Estate”) demanded, as a shareholder of C-Air, to inspect the Companies’ books and records pursuant to BCL § 624. In response, C-Air advised the Estate that, in its view, the Estate is not a shareholder of C-Air; the settlement agreement, said C-Air, “quite clearly provides for the termination of all rights upon the death of Mr. Stile.” Even if he was a shareholder, C-Air maintained, Stile specifically waived the right to inspect C-Air’s books and records.
Rebuffed by C-Air in its bid for access to books and records, the Estate commenced suit in November 2020 seeking, among other relief in a fifteen-count complaint, money damages, a declaratory judgment stating that the Estate is a shareholder of C-Air, and dissolution of C-Air under the common law and BCL § 1104-a based on minority shareholder oppression.
C-Air moved to dismiss the Estate’s action, arguing that (i) Stile forfeited all of his rights as a shareholder when he agreed to have “no interest in the operations of C-Air NY and C-Air LA” and (ii) pursuant to the release, neither Stile nor his successors have any right to commence or maintain an action against C-Air.
Citing paragraph 10(d) of the settlement agreement, C-Air also argued that no transfer of shares to the Estate had occurred because the Estate had not agreed in writing to be bound by Stile’s stay away obligations.
In opposition to C-Air’s motion, the Estate argued that Stile never forfeited his rights as a shareholder. He simply agreed that he would have “no interest in the operations” of the Companies. Relinquishing an interest in “operations” is a far cry from relinquishing all rights as an owner. Stile may have agreed to butt out in exchange for regular payments, said the Estate, but that does not mean that his shares are cancelled when he dies. And the release, the Estate argued, does not preclude suit for conduct occurring after the date of the release.
Is Stile’s Estate Entitled to the Ordinary Rights of a Shareholder, Notwithstanding Stile’s Obligation to Stay Away?
New York County Supreme Court Justice Verna Saunders refused to dismiss the Estate’s claims, finding that the settlement agreement and release did not extinguish the Estate’s rights as a shareholder upon Stile’s death. The Court held:
Although the settlement agreement explicitly provides that Stile forfeited, in exchange for lifetime payments, certain rights, i.e., participating in the operation of the companies; commencing any action against defendants concerning the issues of petty cash, credit card charges, loans and/or other matters regarding the operation and/or business of the companies; and making requests or demands for inspection of the records of the companies, it fails to conclusively establish that all of Stile’s rights in the companies were extinguished at the time of his death.
And although Stile was obligated to stay away from the Companies; his Estate . . . perhaps not. The Court noted the absence of an express provision in the settlement agreement binding Stile’s successors to his stay away obligations, observing:
While it does appear that the settlement agreement, sought to enjoin Stile from conduct believed to be potentially detrimental to defendants, it is unclear from said instruments whether it would apply after his death and, thus, to his estate.
The Court made short work of C-Air’s argument that the release precluded suit, since the language of release did not preclude claims arising after the release date:
The release is also not documentary proof barring the allegations asserted in this action insofar as it applies to claims “from the beginning of the world to the day of the date of th[e] [release].” Therefore, it fails to preclude potential claims arising after its execution.
Finally, the Court rejected C-Air’s argument that no transfer of shares to the Estate had occurred because the Estate had not, pursuant to paragraph 10(d) of the settlement agreement, agreed in writing to be bound by Stile’s stay away obligations. That provision, said the Court, “concerns conduct contemplated during Stile’s lifetime and the extent to which it was meant to apply to the estate is not expressly denoted.” So the Estate is a valid transferee of Stile’s shares.
While the lawsuit remains in its early stages, the Estate’s win means that C-Air will have an uphill battle in convincing the Court that the Estate is not entitled all of the rights and remedies available to an ordinary shareholder: including the rights to share in distributions, review books and records, and even seek dissolution of the corporation. While the stay away settlement kept Stile quiet for his lifetime, Stile’s death redraws the 2008 battle lines with a new dissident shareholder, his Estate.
Stile highlights not only a potential flaw in stay away settlement agreements, but also the perils of conflicting language—even language often dismissed as boilerplate—between a settlement agreement and a release. In the release, Stile agreed to expressly bind his “successors, heirs, and assigns,” to the terms of the release. In the settlement agreement, Stile did not expressly bind his “successors, heirs, and assigns” to his stay away obligations. Whether that discrepancy was intentional or not, it would be difficult in these circumstances for a court to overlook it. The parties knew how to bind Stile’s successors—they did so in the release—but they chose not to do so in the settlement, or so the argument goes. Counsel negotiating any settlement and release would be wise to keep a sharp eye for potential discrepancies between the companion documents, even in the boilerplate.