Celauro v 4C Foods Corp.

[*1] Celauro v 4C Foods Corp. 2010 NY Slip Op 52264(U) [30 Misc 3d 1204(A)] Decided on December 13, 2010 Supreme Court, Nassau County Driscoll, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on December 13, 2010
Supreme Court, Nassau County

Gaetana Celauro, individually and as Sole Income Beneficiary of the SALVATORE F. CELAURO REVOCABLE TRUST and SALVATORE F. CELAURO IRREVOCABLE LIFE INSURANCE TRUST, et al., Plaintiffs,

against

4C Foods Corp. and CELAURO SALES, INC., et al., Defendants.



600391-10



Plaintiffs' Counsel: Robert & Robert PLLC

Plaintiffs' Counsel: Farrel Fritz, P.C.

Defendants' Counsel: Herrick Feinstein LLP

Timothy S. Driscoll, J.

This matter is before the Court for decision on 1) the Order to Show Cause filed by Plaintiffs on May 25, 2010, 2) the motion filed by Defendants on August 31, 2010, and 3) the cross motion filed by Plaintiffs on August 31, 2010, submitted October 1, 2010, following oral argument before the Court. For the reasons set forth below, the Court 1) denies Plaintiffs' Order to Show Cause; 2) denies Plaintiffs' cross motion; and 3) grants Defendants' motion and dismisses the Verified Complaint.

BACKGROUND

A. Relief Sought

In their Order to Show Cause, Plaintiffs seek an Order temporarily and preliminarily enjoining 4C Foods Corp. ("4C" or "Corporation"), its shareholders, officers, directors, employees, agents, and representatives from taking any action that would interfere with the transferability provisions of, including enjoining them from enacting any further Amendments to, 4C Food's Amended and Restated Shareholders Agreement dated April 4, 2005 ("2005 Agreement") relating to the transferability and/or sale of stock.

In their motion, Defendants move for an Order, pursuant to CPLR § 3212, granting Defendants summary judgment dismissing the Verified Complaint ("Complaint") in its entirety, with prejudice.

In their cross motion, Plaintiffs move for summary judgment declaring that two particular provisions in the amendments ("Amendments") to the 2005 Agreement are void as against public policy, invalid, unenforceable, impose an unlawful restraint on the right to sell personal property and, therefore, are illegal as a matter of law.

B. The Parties' History

In the Complaint, Plaintiffs seek a Declaratory Judgment that two provisions in the Amendments are illegal as a matter of law because they deprive Plaintiffs of the right to sell and/or transfer their stock in 4C, a closely held family corporation. The Original Shareholders Agreement and five separate amendments are referred to collectively as the "Shareholders Agreement."

Specifically, Plaintiffs dispute the validity of 1) the portion of the Third Amendment that rescinds Article VI of the 2005 Agreement entitled "Applicable Sale Process," and 2) the portion of the Fourth Amendment, and similar portions of other Amendments, entitled "Section 4.3 - Transfers to Permitted Transferees." Plaintiffs also seek to enjoin Defendants from taking any action that would interfere with the transferability provisions of the 2005 Agreement, including enjoining Defendants from enacting any amendments that restrict the sale and/or transferability of stock. [*2]

The Complaint alleges that Plaintiffs agreed to and executed the 2005 Agreement which provided that a shareholder ("Shareholder"), regardless of the type of entity that owned the stock, could freely transfer its shares to any "permitted transferee," without intervention by 4C and/or the majority of the Shareholders. Article VI of the 2005 Agreement, titled "Applicable Sales Process," permitted Shareholders to compel 4C and/or the other Shareholders to buy their shares at fair market value ("Put").

Five Amendments to the 2005 Agreement were subsequently signed by all the Shareholders, except Gaetana and Nathan. Plaintiff alleges, inter alia, that 1) the Third and Fourth Amendments set forth new purported transfer restrictions that are unreasonable as a matter of law; 2) Plaintiffs were not given an opportunity to vote on and/or discuss the Amendments prior to their enactment and implementation; 3) with the exception of the First Amendment, Gaetana and Nathan learned of the Amendments after they were passed, via letter to their attention; 4) the Amendments "left Plaintiffs without any ability to sell and/or transfer their stock [emphasis in original]" (Compl. at ¶ 81); and 5) the transfer restrictions have no valid, reasonable business purpose and were passed to destroy the property rights of Plaintiffs and other minority shareholders.

The Complaint contains two (2) causes of action. In the first, Plaintiffs seek a declaration that the provision in the Third Amendment that eliminates the rights under Article VI of the Original Shareholders Agreement, titled "Applicable Sale Process," is void. In the second, Plaintiffs seek a declaration that Section 4.3 of the Fourth Amendment, titled "Transfers to Permitted Transferees," unreasonably and illegally restricts a shareholder's ability to transfer shares of 4C.

Plaintiffs also seek an Order 1) enjoining the Defendants from enacting further amendments that restrict the sale and/or transferability of stock; 2) declaring invalid all other provisions of the Shareholders Agreement that interferes with the transferability of stock under the Original Shareholders Agreement; 3) enjoining Defendants from taking any action that would interfere with the transferability provisions of the Original Shareholders Agreement; and4) awarding attorney's fees and costs.

4C is a closely held, family-owned corporation that manufactures and distributes food products throughout the New York metropolitan area. The business was established in 1935 by the father ("Father") of Salvatore F. Celauro, Sr. ("Sal, Sr."). Sal, Sr. is the late husband of Plaintiff Gaetana Celauro ("Gaetana"). Upon the Father's death in 1961, Frank Celauro ("Frank"), the brother of Sal, Sr., became President of 4C and the owner of approximately 51% of the stock in that corporation. Upon Frank's death in 1978, his son, Defendant John Celauro ("John") became the owner of approximately 56% of the stock. Sal, Sr., who owned approximately 26% of the stock, became the company's President and Chief Executive Officer. When Sal, Sr. semi-retired in 1990, John became President and Chief Executive Officer, and still holds those positions today.

In 2001, friction began to develop among certain key Celauro family members who were then operating the business. More specifically, plaintiffs allege that in 2001, Sal, Sr suspected that John was engaging in self-dealing activities, including waste and misappropriation of corporate assets and funds. Although Sal, Sr. attempted to resolve this problem within the family, his efforts were unsuccessful and he commenced a lawsuit in which he alleged [*3]misappropriation of corporate funds and other improper conduct. Following the death of Sal, Sr. in 2004, that lawsuit was pursued by his wife Gaetana. This lawsuit marked the onset of conflict and internal division for 4C as Gaetana, and later Nathan, commenced a series of contentiously litigated lawsuits ("Lawsuits") in which they were pitted against an opposing shareholder faction headed by John.

Upon the death of Sal, Sr. in 2004, Plaintiff SFC Exemption Trust became the owner of 12.02% of the shares of 4C, and Sal Sr.'s Estate became the owner of 6.78% of the shares of 4C, which were subsequently transferred to Plaintiff SFC Insurance Trust in 2005. These two trusts give Gaetana an absolute power of appointment to determine who would receive the Trusts' 4C stock upon her death. In her will, she has set forth her planned exercise of that power of appointment by stating that, upon her death, Nathan J. Celauro ("Nathan") will receive the corpus of the SFC Exemption Trust and the SFC Insurance Trust, totaling 18.80% of the shares of 4C stock.

The 2005 Agreement (Ex. 1 to OSC) was adopted on or about April 4, 2005 by the 4C family shareholders, including Gaetana. John affirms that the principal purpose of the 2005 Agreement was "to preserve the character and vitality of the Company as a closely- held family business" and that the Shareholders entered into the 2005 Agreement "to maintain this exclusive family-owned status and safeguard the Company's prospects for themselves and their children" (J. Celaruo July 2010 Aff. at ¶ 3).

The 2005 Agreement contained two relevant provisions with respect to the transfer and/or sale of 4C stock. Article II, § 2.7, titled "Sale of Stock," contains an all-inclusive list enumerating the "five (5) * * * permitted methods for the Transfer of Shares." To the extent pertinent here, Section 2.7 authorized shareholder transfers to "Permitted Transferees," which, in keeping with the goal of retaining family ownership, contains a detailed definition of the family members and/or Trust and Estate beneficiaries to whom stock transfers could be made (2005 Agreement at pp. 7-8). John affirms that no new shareholders from outside the family have been allowed to acquire stock in 4C, and the only transfers of stock have been by inheritance, or on limited occasions many years ago, through a limited purchase by 4C at book value.

Alternatively, shareholder transfers and sales could be made pursuant to an "Applicable Sale" process, a separately standing transfer methodology described more fully in Article VI of the Agreement. The "Applicable Sales Process" method of transferring stock permitted certain shareholders, defined as "Applicable Shareholders," to compel a purchase of their shares, a redemption procedure more commonly known as shareholder "put." Specifically, Section 6.1 provides in part that "Applicable Shareholders" would have the right, but not the obligation, to sell all of their stock to the Corporations or to the Remaining Shareholders (2005 Agreement, Article VI, §§ 6.1-6.3, at pp. 20-24; see also Article II, § 2.7(a)). The definition section of the 2005 Agreement provides that "Corporations" refers to 4C and Celauro Sales, Inc. ("CSI") (2005 Agreement at p. 3).

The 2005 Agreement does not, however, confer upon all shareholders the right to compel the purchase of their stock pursuant to Article VI. Rather, the Agreement contains specific exceptions which exclude certain shareholders, or shareholder groups, from exercising a "put" right. Among those shareholders expressly precluded from exercising a "put" were Gaetana and John, as well as shareholding trusts in which they are named beneficiaries (2005 Agreement at[*4]p. 2).

More particularly, Article I defines the term "Applicable Shareholders" as "all shareholders other than, among others, * * * (ii) Gae[tana] Celauro * * * (iv) JAC [John Celauro] or (v) any trust in which any of the Person named in the preceding clauses of this definition is a beneficiary" (2005 Agreement at p. 2) (emphases added).

Where an authorized "put" request has been made by an "Applicable Shareholder," the Agreement prescribes a multi-tiered purchase procedure under which the valuation and payment methods differ based upon the quantity and type of shares being offered for sale (Article VI, § 6.3, at pp. 21-24). In transactions involving larger share blocks, i.e., blocks ranging from over 9% to more than 27%, payments would be pursuant to the terms of an "Applicable Sale Note" which would mature from three to seven years after closing, depending upon the quantity and type of shares being transferred (e.g., Article VI, § 6.3, at pp. 21-23).

Gaetana contends, inter alia, that at the time the 2005 Agreement was approved, all parties were aware of her power of appointment. She submits that she relied on a particular benefit of the shareholder "put" option, which was that the recipient of her stock would be able to sell the shares without majority intervention and then use the proceeds to pay for her federal estate taxes.

John affirms that the rationale underlying the existing "put" limitations was to preclude large blocks of stock from exercising "puts," alleging that such a forced purchase by the Company of the large block of stock held could seriously interfere with the Company's finances. Defendants note that, in early 2005, neither the "put" nor "permitted transferee" sale options was made contingent upon, or subject to, the prior consent of 4C and/or a majority vote of 4C's shareholders. John explains that majority consent was not required for a qualifying shareholder to exercise a stock "put" because, at that time, "it did not appear that relations between the shareholders were in such a state that future transfers would be used in a manner that would endanger [4C's] financial well-being" (J. Celauro July 2010 Aff. at ¶ 7).

John affirms that this assumption changed in June of 2005, after Gaetana commenced the various Lawsuits. That litigation generated concern among the opposing shareholders that Gaetana and Nathan might attempt to wield their sale or transfer rights as a litigation tactic, and/or to gain leverage over 4C. This would have been possible, in light of the fact that Gaetana, who has numerous children and grandchildren, intended to leave her entire block of shares to Nathan upon her death. Specifically, upon acquiring Gaetana's stock, Nathan would be able to exercise a shareholder "put," thereby requiring 4C to acquire the large block of shares that he would offer for sale as part of the transaction. John contends that such an unchecked transfer right in the hands of a shareholder would expose the Company to disruption, and seriously interfere with its operations.

Sparked by these concerns, 4C adopted a series of amendments between September 2005 and January of 2007 that were approved by 80% of 4C's shareholders. Where the 2005 Agreement had permitted conveyances to permitted transferees with no corporate veto right, the newly-adopted amendments collectively: 1) eliminated the shareholder "put" or redemption transfer provisions altogether; and 2) altered the shareholder transfer rights previously contained in Article II, by now requiring majority consent to any proposed sale. Gaetana contends that the new amendments were enacted without notice to her, and without her approval, although she [*5]concedes that they were adopted by an affirmative vote of at least 75% of the outstanding 4C shares, as required by the 2005 Agreement.

With respect to the shareholder transfer rights previously contained in Article II, the newly adopted amendments still limit transfers to "Permitted Transferees," but now additionally require a "Transferring Shareholder" to, inter alia, obtain the consent of a majority of 4C's outstanding voting shares before proceeding with the transaction. The proposed, "transferring shareholder" may vote his or her own stock in favor of the proposed sale, which counts towards the requisite, majority vote.Upon considering a proposed sale, the majority can reject any transfer, and/or consent to all, or a lesser portion thereof.

If the required majority shareholder consent is not obtained within a stated time period, then the sale is unauthorized and will not be permitted. In such a case, the transferor/shareholder is afforded two options, either 1) to retain the stock; or 2) to offer it to the Corporation. Where the majority withholds its consent to a proposed transfer made by a Trust or an "Estate Shareholder," those transferors are then "obligated to sell, and the Corporation shall be obligated to purchase" the stock in question (Article IV, § 4.3(a)(ii)).

When a shareholder transfer request is denied, and the Corporation's obligation to acquire the stock, deemed the Non-Transferrable stock, is thereby triggered, the amendments prescribe a "Per Share Appraisal" valuation procedure which must be followed (Article IV, § 4.3(a)(ii)). Specifically, for such Non-Transferrable shares, the amendments state that "[t]he purchase price per share for the Non-Transferrable Shares purchased pursuant to Section 4.3[a] above shall be equal to: [i] * * * the Per Share Appraisal Price * * * determined as of the date that the Proposed Transfer Notice is received by" 4C (Article IV, § 4.3(c)(i)).

Article VIII governs the appraisal method applicable in such a case, pursuant to which two appraisers are to be selected: one by John and the other by the shareholder whose sale request has been denied (Article VIII, §§ 8.1, 8.2, 8.3). Thereafter, the respective appraisers must issue a written report which values the Company, inter alia, "on a fair market value, going concern basis, with the definition of fair market value being the amount at which all of the Shares of the Corporation would change hands between a willing buyer and a willing seller neither being under compulsion to buy or sell and each having reasonable knowledge of the relevant facts" (Article VIII, § 8.2(a)(i), (ii)). In the event that the two appraisers cannot reach an agreement, and their respective valuations differ by a stated percentage, the two appraisers must jointly select a third appraiser, who will prepare his or her own written report, which will then constitute the "Appraised Price" (Article VIII, §§ 8.2(b)(i)-(iv); 8.3). Finally, the "Per Share Appraisal Price" is then determined by dividing the 4C "Appraisal Price," as previously calculated by the appraisers, by the number of issued and outstanding 4C Shares immediately prior to the closing of such transaction * * *" (Article VIII, § 8.2(b),(v)(A)).

On May 25, 2010, the Court issued a temporary restraining order ("TRO") directing that, pending the hearing of this application, 4C, their shareholders, officers, directors, employees, agents, and representatives are temporarily enjoined from taking any action that would interfere with the transferability provisions of, including enacting any further Amendments to, the Original Shareholders Agreement.

C. The Parties' Positions

Plaintiffs submit that they have met their burden to warrant the requested injunctive [*6]relief. First, Plaintiffs contend that they have demonstrated a likelihood of success on the merits by demonstrating that the disputed portions of the Third and Fourth Amendments are invalid because they effectively eliminate Plaintiffs' right to sell and transfer their shares of 4C and to realize their fair market value. Specifically, Plaintiffs argue that these Amendments are unreasonable because 1) the Third Amendment eliminates the "Put" provision that required 4C to buy Plaintiffs' stock at fair market value when no other Permitted Transferee will purchase the stock; and 2) the Fourth Amendment requires a consent of the majority of shareholders, who can effectively "veto" (Ps' Memorandum of Law in Supp. at p. 5) a transfer for any reason.

Plaintiffs also contend that they will suffer irreparable harm if injunctive relief is not granted because if the Court does not enjoin 4C from pursuing additional amendments to the Shareholders Agreement, it may vote to make further unreasonable and illegal restrictions which would, in turn, unfairly alter the status quo. Finally, Plaintiffs argue that a balancing of the equities favors the Plaintiffs because their ability to sell or transfer their stock is being adversely affected by the disputed provisions, and 4C and the other Defendants would not be harmed by injunctive relief.

Defendants submit that they have established their right to summary judgment because the disputed restrictions are not unreasonable. Defendants argue that 1) the disputed restrictions are not an effective prohibition against transferability because, if the majority shareholders refuse to consent to a transfer of shares, 4C must repurchase those shares according to an appraisal process paid for by 4C and based on fair market value; 2) the disputed restrictions are more reasonable than those at issue in case law cited by Plaintiffs; 3) in Allen v. Biltmore Tissue Corp., 2 NY2d 534 (1957), a case cited by Plaintiffs, the court upheld the disputed transfer restriction; and 4) assuming, arguendo, that the reasonableness of the purpose behind the transfer restrictions is relevant, the Amendments at issue were necessary "to protect the Company from [rogue] shareholders who had gone to war' against it [references omitted] [and] is entitled to at least the same presumption of reasonableness" (Ds' Memorandum of Law in Supp. at p. 17).

Plaintiffs submit that they have demonstrated their right to summary judgment by establishing that the disputed restrictions are an unreasonable restraint on the transferability of Plaintiffs' shares in 4C. Plaintiffs note that they were not given the opportunity to vote on the Amendments prior to their enactment and implementation by Defendants. With respect to the claimed illegality of the restrictions, Plaintiffs contend, inter alia, that 1) the disputed restrictions "leave Plaintiffs without any ability to sell, and unreasonably restrict their ability to transfer their stock" (Ps' Aff. in Supp. at p. 7) (emphasis in original); 2) it is not relevant that the Amendments were adopted by the requisite number of votes; 3) the Third Amendment deprives shareholders of their right to compel 4C to buy their stock at fair market value; and 3) the Fourth Amendment, by requiring a shareholder to obtain the consent of the majority, effectively grants John the right to "single-handedly control[] who will get the stock" (Id. at p. 8).

RULING OF THE COURT

A. Summary Judgment Standard

To grant summary judgment, the court must find that there are no material, triable issues of fact, that the movant has established his cause of action or defense sufficiently to warrant the court, as a matter of law, directing judgment in his favor, and that the proof tendered is in admissible form. Menekou v. Crean, 222 AD2d 418, 419-420 (2d Dept 1995). If the movant [*7]tenders sufficient admissible evidence to show that there are no material issues of fact, the burden then shifts to the opponent to produce admissible proof establishing a material issue of fact. Id. at 420. Summary judgment is a drastic remedy that should not be granted where there is any doubt regarding the existence of a triable issue of fact. Id.

B. Standards for Preliminary Injunction

A preliminary injunction is a drastic remedy and will only be granted if the movant establishes a clear right to it under the law and upon the relevant facts set forth in the moving papers. William M. Blake Agency, Inc. v. Leon, 283 AD2d 423, 424 (2d Dept. 2001); Peterson v. Corbin, 275 AD2d 35, 36 (2d Dept. 2000). Injunctive relief will lie where a movant demonstrates a likelihood of success on the merits, a danger of irreparable harm unless the injunction is granted and a balance of the equities in his or her favor. Aetna Ins. Co. v. Capasso, 75 NY2d 860 (1990); W.T. Grant Co. v. Srogi, 52 NY2d 496, 517 (1981); Merscorp, Inc. v. Romaine, 295 AD2d 431 (2d Dept. 2002); Neos v. Lacey, 291 AD2d 434 (2d Dept. 2002). The decision whether to grant a preliminary injunction rests in the sound discretion of the Supreme Court. Doe v. Axelrod, 73 NY2d 748, 750 (1988); Automated Waste Disposal, Inc. v. Mid-Hudson Waste, Inc., 50 AD3d 1073 (2d Dept. 2008); City of Long Beach v. Sterling American Capital, LLC, 40 AD3d 902, 903 (2d Dept. 2007); Ruiz v. Meloney, 26 AD3d 485 (2d Dept. 2006).

A plaintiff has not suffered irreparable harm warranting injunctive relief where its alleged injuries are compensable by money damages. See White Bay Enterprises v. Newsday, 258 AD2d 520 (2d Dept. 1999) (lower court's order granting preliminary injunction reversed where record demonstrated that alleged injuries compensable by money damages); Schrager v. Klein, 267 AD2d 296 (2d Dept. 1999) (lower court's order granting preliminary injunction reversed where record failed to demonstrate likelihood of success on merits or that injuries were not compensable by money damages).

C. Enforceability of Shareholder Agreements

As a general rule, courts must enforce shareholder agreements according to their terms. In re Penepent Corp., 96 NY2d 186, 192 (2001). Such agreements avoid costly, lengthy litigation and promote reliance, predictability and definitiveness in relationships among shareholders in close corporations. Id., citing and quoting, inter alia, Gallagher v. Lambert, 74 NY2d 562, 567 (1989).

Given, however, that New York regards certificates of stock as personal property, restrictions upon their transfer are subject to the rule that there be no unreasonable restraint on alienation. Rafe v. Hinden, 29 AD2d 481 (2d Dept. 1968), aff'd, 23 NY2d 759 (1968); Penthouse Properties v. 1158 Fifth Ave., 256 A. D. 685, 690-691 (1st Dept. 1939). See also Allen v. Biltmore Tissue Corp., 2 NY2d 534 (1957).

The general rule that ownership of property cannot exist in one person and the right of alienation in another has frequently been applied to shares of corporate stock. Penthouse Properties, 256 A.D. at 690, citing, inter alia, Kinnan v. Sullivan Country Club, 26 App. Div. 213 (1898). The right of transfer is a right of property, and if another has the arbitrary power to forbid a transfer of property by the owner, that amounts to annihilation of property. Penthouse Properties, 256 A.D. at 690-91. [*8]

Although absolute prohibitions against transferability of shares are unlawful in New York, restrictions on the transfer of the shares of a closely-held corporation are considered reasonable where they do not represent an effective prohibition against transferability, but merely limit the group to whom the shares may be transferred. Allen, 2 NY2d at 542; In re Gusman,178 AD2d 597, 598 (2d Dept. 1991), app. den., 80 NY2d 753 (1992). See also Carroll v. Eno, 237 AD2d 102 (1st Dept. 1997). A restraint on the transferability of stock will be upheld if it is reasonable, in accordance with public policy, and effectuates a lawful purpose. Ferolito v. Vultaggio, 2010 NY App. Div. LEXIS 8522, p. 2 (1st Dept. 2010), citing Levey v. Saphier, 54 AD2d 959, 960 (2d Dept. 1976), app. den., 41 NY2d 805 (1977). Thus, what the law condemns is not a restriction on transfer or a provision merely postponing sale during the option period, but rather an effective prohibition against transferability itself. Wildenstein & Co., Inc. v. Wallis, 79 NY2d 641, 651-652 (1992); Allen, 2 NY2d at 542; Rafe v. Hinden, 29 AD2d at 484. The relevant question is whether restrictions on transferring shares in a closely held corporation are reasonable in light of the circumstances and purposes sought to be accomplished. Ferolito, supra, at p.3, quoting Benson v. RMJ Sec. Corp., 683 F. Supp. 359, 373 (S.D.NY 1988).

D. Application of these Principles to the Instant Action

With the above principles in mind, the Court concludes that the contested provisions in the Amendments are lawful. These provisions do not violate the common-law rule against unreasonable restraints because they do not create an effective prohibition against transferability itself by authorizing another to arbitrarily forbid a transfer of property, thereby amounting to annihilation of property. See Allen, 2 NY2d at 543.

The first cause of action alleges that the majority's elimination of the shareholder "put" option amounts to an illegal restraint as a matter of law because, without that provision, it would allegedly be "impossible for minority shareholders to sell their stock and realize its value" (Compl. at ¶ 85). The Court disagrees.

Plaintiffs have not cited any governing authority establishing that they possess a vested right or continuing, future entitlement to the retention of shareholder "put" benefits, as formerly conferred by Article IV — a right which, according to the Defendants, existed as a shareholder option for less than one year prior to being removed for all shareholders in March 2006 (Ds' Reply Memorandum of Law at p. 2). Nor have Plaintiffs cited applicable New York authority that establishes that dissenting or minority shareholders can "veto," and/or must affirmatively consent to, an otherwise properly adopted amendment deleting a shareholder agreement provision conferring "put" rights.

Plaintiffs' claims, inter alia, that 1) the "put" provisions were a key benefit to Gaetana because Nathan could have exercised a "put" upon ultimately acquiring the stock; and/or 2) the other shareholders were aware of Gaetana's unfettered power of appointment, do not serve as a basis to preclude the majority shareholders from deleting the "put" provision. The record does not substantiate the claim that removal of the put right approved by some 80% of the outstanding shares was unlawful or that minority shareholder consent was required as a prerequisite to its enforceability. Nor is the Court inclined to create or discern such a previously unrecognized shareholder right in New York. Accordingly, the Court dismisses that branch of the first cause of action which seeks a declaration that the removal of the shareholder "put" provision is unlawful. [*9]

With respect to the second cause of action, Plaintiffs contend that as amended, the "Permitted Transferee" provisions are tantamount to a complete sale restriction because another person, specifically John who allegedly controls a voting coalition exceeding 75% of 4C's stock, is in reality the majority. Thus, Plaintiffs claim that John retains the arbitrary power to forbid a transfer, thereby amounting to the annihilation of property. The Court concludes, however, that while the challenged amendments to former Article II place restrictions on the transfer of 4C shares, they do not amount to an effective prohibition against transferability within the meaning of applicable case law.

More specifically, Article II, as amended, does not preclude Plaintiffs from entertaining offers to sell stock to other shareholders or Permitted Transferees. Rather, it potentially restricts the persons to whom the shares may be transferred, but does not preclude the proposed transferor-shareholder from ultimately selling his or her stock . Specifically, and upon the withholding of majority consent, the current agreement requires the Corporation to purchase the proposed transferor's shares, if he or she so elects, pursuant to a contractually mandated valuation mechanism under which third-party appraisers must issue written reports valuing 4C on a fair market value, going concern-type basis.

Provisions restricting shareholder transfer options and/or "first refusal" provisions have been upheld by the Courts, and are commonly encountered in agreements adopted by closely held corporations. This is particularly so because such transfer restrictions can be critical to protecting the day-to-day operations of the close corporation. See Vardanyan v. Close-Up Intern., Inc., 2007 U.S. Dist. LEXIS 88292 (E.D.NY 2007), reconsid. den., 2007 U.S. Dist. LEXIS 94942 (E.D.NY 2007), aff'd, 2009 U.S. App. LEXIS 4988 (2d Cir. 2009); Allen, 2 NY2d at 542-43.

Moreover, the stock price to be paid upon such a restricted transfer is not a dispositive factor in determining the lawfulness of the restrictions. The validity of the restriction on transfer does not rest on any abstract notion of intrinsic fairness of price. Allen, 2 NY2d at 543. In Allen, the Court of Appeals upheld a transfer provision under which a shareholder would receive only the "price at which the shares had originally been purchased from the corporation." The Court of Appeals concluded that, because (1) the parties had effectively agreed on the price formula, and (2) the stock could be sold to a third party if the corporation did not purchase it, or provide for its purchase, the restriction was reasonable and valid. Id.

Plaintiffs additionally suggest that before a proposed, Article II stock transfer proposal even reaches the point where the majority would vote on it, a shareholder would be required to wait for a formal, third-party offer to materialize, and then submit that offer to the Corporation in order to trigger the consent and appraisal provisions. Plaintiffs claim such an event would most likely never occur, because the universe of permitted transferees is limited, and because there is shareholder animosity and division. A review of Section 4.3(a), however, belies the Plaintiffs' claims in this respect. The relevant language of the Agreement does not mandate the production of a separately standing, or formal written purchase offer as a condition to the majority's consideration of the proposed transfer; rather, it states that if there is a specific offer, then the terms shall be included in the notice provided by the seller to the Corporation, i.e. the "Proposed Transfer Notice" (Article IV, § 4.3(a), at pp. 9-10). [*10]

Nor, as Plaintiffs suggest, does the amendment require that the Plaintiffs remain passive until they receive an unsolicited, formally constituted, written offer from a third-party shareholder/transferee. Rather, before formally notifying the Corporation of any contemplated sale, the Plaintiffs would presumably contact, negotiate with, and/or otherwise solicit or receive interest from, other permitted transferees. These contacts would proceed essentially the same way as they would have prior to the adoption of the amendments, when divisive shareholder coalitions also existed and when the pool of Permitted Transferees was similarly limited under the Agreement. It follows that, if the Plaintiffs succeed in generating serious interest in a sale, then any purported written offer requirement will not constitute an obstacle to consummation of the transaction. Conversely, if they cannot attract a buyer, then the existence of any alleged requirement in this respect will be immaterial.

The Plaintiffs' related assertions that an offer may never materialize because of the current family dissension, or because the Plaintiffs are minority shareholders at odds with the majority, do not render their claims more compelling. The fact that shareholder alliances or internal discord may limit, or expand, the pool of potentially, receptive transferees at any given point does not establish that the sale and appraisal provisions as written are substantively illegal or self-defeating. The Court also rejects the Plaintiffs' claims that the sale and appraisal provisions are illusory and/or that the majority, specifically John, possesses unfettered discretion to act arbitrarily with respect to any proposed sale. Although John, assuming he is synonymous with the majority, can disapprove a transfer request, or parts thereof, he cannot act arbitrarily with respect to the two key components of the ensuing transaction, specifically 1) the Corporation's mandatory acquisition of the stock if the shareholder elects to proceed in this fashion), and 2) the price which the transferor will receive for that stock.

In this respect, the amendments provide, in relatively elaborate and detailed fashion, for a corporate acquisition of the so-called "Non Transferable" shares and the use of a written appraisal process governed by very plainly articulated, "fair market value" assessment methodologies. There is no discretion permissible under the terms of the Agreement with respect to these contractually mandated occurrences.

The authorities relied upon by the Plaintiffs are distinguishable or do not compel the result sought by Plaintiffs. In Allen, discussed above, the Court of Appeals upheld a provision that granted the subject corporation a 90-day right of first refusal, pursuant to which a selling shareholder would receive not a fair market value price, but rather the presumably lower price at which the shares had originally been purchased from the corporation. Allen does not support Plaintiffs' position, both because the Court of Appeals upheld the disputed provision and because its reasoning supports the enforceability of the Agreement sub judice. The Court finds unavailing Plaintiffs' citation to the Allen Court's statement that it would have struck down the agreement if the provision precluded transfer to "anyone except to the corporation at whatever price it wished to pay." Allen, 2 NY2d at 542. The Agreement in the matter at bar does not grant the Corporation the right to pay a shareholder "whatever price it wishes to pay," but rather contains a detailed purchase procedure for the valuation of stock being offered for sale.

The Second Department's holding in Rafe v. Hindin, which did strike down a transfer restriction, is similarly inapposite. In Rafe, two 50% shareholders each acquired one stock [*11]certificate bearing a written legend, stating in substance, that: 1) the certificate would not be transferable except to the other shareholder; and 2) any proposed transfer to a third party by one of the shareholders could occur only upon the express approval of the other. Rafe, 29 AD2d at 482.

One of the shareholders was intent upon transferring his certificate, but the other would neither purchase it nor consent to a prospective, third-party sale. As there was no mechanism by which a sale could ever be accomplished in this situation, and no provision precluding one shareholder from arbitrarily withholding his consent to a third-party sale, the court struck down the restriction as impermissibly restrictive. Id. at 482. The court concluded that the legend "may be construed as rendering the sale of the plaintiff's stock impossible to anyone except to the individual defendant at whatever price he wishes to pay," and, therefore, was illegal. Id. at 485. In the matter sub judice, however, the purchase and appraisal provisions are plainly dissimilar from the restrictive legend at issue in the Rafe case because they do not limit Plaintiffs' rights in the impermissible manner discussed in Rafe. While the challenged amendment does not contain language prohibiting the majority from "arbitrarily withholding its consent," the distinction is that a withholding of consent effectively generates a sale, not a situation that allows the Corporation to pay whatever price it wishes. Here, the denial of consent would, to the extent relevant, trigger a contractual offer and appraisal process governed by specific temporal requirements and definitive written valuation criteria intended to culminate in a sale, not a stalemate.

In light of the foregoing, the Court also dismisses Plaintiffs' second cause of action which seeks a declaration that, inter alia, Section 4.3 of the shareholders' agreement is illegal and unreasonable as a matter of law. Based on the Court's conclusion that the causes of action in the Complaint are not viable, the Court 1) grants Defendants' motion for summary judgment dismissing the Complaint; and 2) denies Plaintiffs' Order to Show Cause and cross motion for summary judgment. The Court hereby vacates the TRO.

All matters not decided herein are hereby denied.

This constitutes the decision and order of the Court.

ENTER

DATED: Mineola, NY

December 13, 2010

__________________________

HON. TIMOTHY S. DRISCOLL

J.S.C.