Opinion ID: 2180448
Heading Depth: 1
Heading Rank: 5

Heading: Dividend Distribution

Text: Barry argues that the similarity of the Maryland statute with the New York statute should influence a conclusion that before dissolution is ordered the directors must be so divided on matters material and essential to the existence of the corporation. He cites Wollman v. Littman, 35 A.D.2d 935, 316 N.Y.S.2d 526 (N.Y.App.Div.1970) and In re Admiral Rubber Corporation, 12 Misc.2d 355, 172 N.Y.S.2d 952 (N.Y.Sup.Ct.1958). [21] His argument follows that the distribution of dividends is not a material matter essential to the existence of the corporation, but rather a matter of importance only to the shareholders. Because the distribution of dividends is of no consequence to the daily operation of the corporation, it is an insufficient ground upon which to order involuntary dissolution. In re Smith, 154 A.D.2d 537, 546 N.Y.S.2d 382, 384 (N.Y.App.Div.1989) (holding that the failure to declare dividends by a close corporation without a policy of declaring dividends is insufficient to order involuntary dissolution under a claim for stockholder oppression); Hall v. John S. Isaacs & Sons Farms, Inc., 163 A.2d 288, 295 (Del.1960) (stating that the refusal to declare dividends seems not to be ground for the appointment of liquidating receivers). He argues in the alternative that a refusal to distribute dividends is not a deadlock, but rather the equivalent of a decision by the board not to issue dividends. Forman, supporting Barry's conclusion, but in a different manner, relies on the language of § 3-413 to frame a contention more in tune with our refusal to consider judicial dissolution outside of specific statutory authority. In Forman's view, regardless of the extent of conflict and its impact on the corporation, the conflict must exist in the present, that is at the time of the dispositive evidentiary hearing. He states that nowhere in the record is there any finding by the trial judge of a deadlock over dividends. Furthermore, because Barry capitulated ultimately to the unrestricted dividend distribution (albeit at the proverbial eleventh hour), there was no conflict over dividends. He is correct. Whatever ambiguity may exist as to what may be considered corporate deadlock under § 3-413, the statutory language is at least clear that a conflict of some order must exist. The statute contemplates that the directors are so divided ... so that votes required for action by the board cannot be obtained. § 3-413(a)(1). Past conflict is irrelevant and consideration of future conflict, however prescient, is not contemplated by the statute. The requirement of a current conflict reflects the intent of the statute to avoid judicial intervention regarding personal disputes by allowing the parties the opportunity to resolve their disputes before the entry of judgment. See Commission, supra, at 73. Michael disagrees and would craft a separate standard for dealing with holding corporations like Custom, organized under the General Corporations Title of the Corporations and Associations Article. Michael argues that § 3-413(a)(1) contemplates that a deadlock of sufficient magnitude could exist in a holding corporation over dividend distributions so as to authorize a court to exercise its discretion to order dissolution. He relies (incorrectly) on the Court of Special Appeals's opinion here, (which described erroneously the Circuit Court's 4 November 2003 opinion as based on a deadlock over dividends) which stated [i]t is obvious that the deadlock over the payment of dividends completely negated the primary reason for the corporation's existence. The Circuit Court, however, ordered dissolution based on the stipulated deadlock over the choice of counsel, not over dividends. Michael further argues that the deadlock required pursuant to § 3-413(a)(1) need not last for a defined period of time. He cites the Model Act as authority, which states [d]issolution because of deadlock at the director's level is not dependent on the lapse of time during which the deadlock continues. 3 Model Bus. Corp. Act Annotated, § 14-104 (3rd Ed.2000/01/02 Supp.). He suggested at oral argument that this pertains to both the duration of the division as well as the currency of that division. Any reliance on the current version of the Model Act is misguided because the lapse of time referred to there alludes to the duration of the division and not whether the division presently exists or merely existed in the past. Whatever the nature and magnitude of the corporate conflict required to grant involuntary dissolution under § 3-413, it is a moot point here in regard to the question of distributing dividends. When the Class B Directors capitulated and signed the Proposed Director Consent Form, without any conditions, on or about 18 September 2003 and before the Circuit Court received the additional evidence and entered a new judgment, there was no longer any division among the directors regarding dividends. The Class M Directors had proposed a $4 million dividend and the Class B Directors accepted the proposal. There was no evidence in the record nor any judicial holding that the executed Proposed Director Consent Form was either a sham or made in bad faith. To allow a court to exercise its equity powers to grant involuntary dissolution of a corporation on the basis that the directors were divided as to dividends, where the moving party received exactly what it sought, would have been an abuse of discretion. [22]