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Katzowitz v. Sidler | 249 N.E.2d 359 (1969)

Corporate shareholders typically have the right to purchase a share of newly issued stock that’s proportionate to their existing ownership share. But what remedy is available to a close-corporation shareholder who doesn’t want to buy the new stock because it’s undervalued? This was the issue presented by Katzowitz versus Sidler.

Isador Katzowitz, Jacob Sidler, and Max Lasker were equal partners and owners of Sulburn Holding, a close corporation. They also constituted Sulburn’s board of directors.

There was a falling out between Katzowitz and the other two members, who sought to oust Katzowitz. The parties reached an agreement whereby Katzowitz would withdraw from active participation in business operations but would remain on the board of directors, receive the same compensation as the other members, and remain an equal shareholder.

Both Sidler and Lasker knew that Katzowitz didn’t want to participate in any new stock issuance. Nonetheless, they called a special board meeting that only they attended. There, they issued seventy-five shares of Sulburn common stock at $100 per share, which was one-eighteenth the book value of the stock.

All three shareholders received notice of their right to buy twenty-five shares of the newly issued stock at $100 per share. Sidler and Lasker each purchased twenty-five shares, while Katzowitz declined.
Sulburn then dissolved. Upon dissolution, Sidler and Lasker received nearly $19,000 each, while Katzowitz received slightly over $3,000.

Katzowitz sued Lasker and Sidler, seeking a proportional interest in Sulburn’s assets, minus the $2,500 that Sidler and Lasker had each paid for their extra stock shares.

The trial court found for Sidler and Lasker, holding that Katzowitz wasn’t entitled to relief because he had waived his preemptive right to purchase the newly issued stock. The Appellate Division affirmed, and Katzowitz appealed to the New York Court of Appeals.

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