We often remark anecdotally that disputes over ownership status—whether one is or is not an owner—seem far more common in the context of LLCs than corporations. The contrast between the often-permissive structure of the membership rules in the LLC Law and the more rigid requirements of the shareholder rules in the Business Corporation Law partially explain that phenomenon.
But even the strict rules of the BCL don’t make a corporation immune from disputes over shareholder status, particularly because courts are sometimes willing to overlook those strict rules in the name of equity—especially in closely-held corporations, where corporate formalities often are an afterthought.
A recent, noteworthy decision from the Appellate Division, Second Department, Loreti v. Lorcress Enterprises, Inc., 2025 NY Slip Op 04789 (2d Dept Aug 27, 2025), confronts the limits of the rigid requirements of the BCL, considering whether equity can rescue shareholders who attempt to issue shares beyond those authorized by the certificate of incorporation.
The Rigid Rules Regarding Unauthorized Shares.
BCL 501(a) empowers a corporation to create and issue shares as “stated in its certificate of incorporation.” It also allows a corporation to create—again, in its certificate of incorporation—different classes of shares for purposes of voting, dividends, or liquidation preferences.
Based on 501(a)’s reference to the certificate of incorporation, New York courts have held that shares issued in excess of the number of shares authorized in, or with classes not stated in, the certificate of incorporation are invalid (see, e.g., Matter of Marino, 172 AD2d 525 [2d Dept 1991]).
Moreover, the traditional rules state that if there is any conflict between the certificate of incorporation and a later agreement between shareholders (such as the bylaws, a shareholders’ agreement, or a resolution), the certificate of incorporation must prevail (Christal v Petry, 275 AD 550, 558 [1st Dept 1949], affd, 301 NY 562 [1950]). So, the logic goes, even where the shareholders might have agreed to the issuance of new shares or new share classes, absent an amendment to the certificate of incorporation, shares or classes issued pursuant to that agreement are void.
Judicial Easing of the Rules.
But strict rules sometimes yield inequitable results. So it didn’t take long for New York courts to begin bending those rigid rules where the circumstances required. Perhaps Garson v Garson, 105 AD2d 726, 728 [2d Dept 1984] affd sub nom. Garson v Rapping, 66 NY2d 928 [1985] stands as the high-water mark on courts’ willingness to look past the BCL’s clear reference to the certificate of incorporation.
In Garson, a husband and wife each owned 50% of a corporation’s outstanding shares. When they incorporated the business, they agreed that the husband would remain in control. Attempting to accomplish that, they included in the corporation’s by-laws an agreement that husband’s shares would have three votes each, while wife’s shares would have one vote each. But the certificate of incorporation made no reference to voting classes. When the wife sought to invalidate the 3-to-1 voting scheme based on the lack of authorization in the certificate of incorporation, the Second Department summarily dismissed that claim: “It would not be equitable to invalidate a clear agreement merely because the agreement was not put in the proper place.”
Garson and similar cases ushered in a new tension for New York Courts to consider: the rigid rules of the BCL versus the practical reality that closely held corporations rarely follow the formality of amending their certificate of incorporation.
A Swing to the Rigid Rules in Loreti.
Loreti called on the Second Department to directly address that tension.
The Ownership Dispute
The corporation and dissolution petition. JJL Realty Corp. of New York is a closely held corporation that owns real property in New York. John Loretti, a holder of 50 shares in JJL, commenced a petition for dissolution under BCL 1104-a based on mismanagement and breaches of fiduciary duty by the corporation’s director, Maria Loreti.
The share ownership according to petitioner. John’s dissolution petition alleged that his 50 shares constituted 25% of the corporation’s outstanding shares. The remaining shareholders, according to John (and his sister Gina) were as follows: Gina owned 50 shares constituting a 25% ownership interest, and MSA Realty Group LLC owned 100 shares constituting a 50% ownership interest.
The share ownership according to respondent. Maria acknowledged that both John and Gina owned 50 shares, but she contended that those shares each only constituted 16.67% of the company’s outstanding shares because there were 300 total shares outstanding. Maria cited two corporate resolutions: one in February 2002 that authorized the corporation to issue 2,000 shares of stock (beyond the 200 authorized by JLL’s certificate of incorporation), and one in February 2010 in which the corporation issued 100 shares of stock to her.
The trial court voids the shares issued to Maria. John and Gina moved for summary judgment on their claim for a declaratory judgment that the purported issuance of 100 shares to Maria is void, and that they each own 25% of the corporation’s outstanding shares. Westchester County Justice Terry Jane Ruderman granted John and Gina’s motion for summary judgment. The Court found that because the certificate of incorporation only authorized the corporation to issue 200 shares of stock, the additional 100 shares issued to Maria were void.
Maria’s Appeal.
On Appeal, Maria urged the Second Department to adopt a flexible approach in the name of equity. Just like Garson, argued Maria, the parties here agreed to the issuance of new shares (or, at least, there were issues of fact as to whether they agreed/acquiesced), and—according to Garson—“even though all formal steps required by the statute had not been taken, the agreement, as between the original parties to it, is enforceable.”
Maria’s evidence in support of her claim that the shareholders agreed/acquiesced to her issuance of additional shares included the corporate resolutions where she as sole director awarded 100 shares to herself, as well as deposition testimony of Gina where she appeared to acknowledge the possibility that there were more than 200 authorized shares outstanding.
John and Gina in response argued for application of the rigid rules in the BCL. They contended that the evidence Maria relied upon was ambiguous at best, and a far cry from the factual circumstances in Garson. But they also went a step further: John and Gina argued that shares issued in excess of those authorized are void. And void is a powerful word—ratification or other equitable defenses, no matter how compelling factually, cannot save a void transaction (see NYBD’s take on the magic powers of “void” here).
The Appellate Division Sides with John and Gina.
The Appellate Division, Second Department sided with John and Gina, affirming the trial court’s grant of summary judgment on their claim for a declaratory judgment that their 50 shares each constitute 25% of the outstanding shares of the corporation.
The Court didn’t bite on John and Gina’s “void” argument, stating that “[S]hareholder agreements . . . may overcome the presumption that the certificate controls over any contradictory corporate document … when there is clear and unambiguous evidence that a later agreement was meant to override the certificate.”
But Maria’s problem, said the Second Department, was a failure of her proof. John and Gina established prima facie their “entitlement to judgment as a matter of law on the issue of ownership by submitting evidence demonstrating that [the corporation’s] certificate of incorporation authorized the issuance of only 200 shares of stock and that the shares purportedly issued to Maria Loreti in excess of the authorized 200 shares were a nullity.” In opposition, held the Second Department, “Maria Loreti failed to raise a triable issue of fact as to whether the certificate of incorporation had been changed or overridden by a shareholder agreement.”
Have You Checked Your Certificate of Incorporation Lately?
Regardless of your view of the sufficiency of Maria’s evidence, it’s hard not to feel a little Calvinballed by the Courts’ approach to the BCL’s requirements; formal requirements matter, except when they don’t. The pain of that uncertainty is compounded by the often critical consequences that disputes over ownership have, such as standing to pursue dissolution proceedings, controlling votes, and economic rights.
In the end, though, Loreti reminds practitioners that while courts may sometimes rescue informal arrangements, documentary precision is essential—especially where certificates and shareholder agreements collide.
An Aside on Self-Interested Transactions.
An equally interesting part of Loreti was the Second Department’s decision to reverse the trial court and summarily set aside a management agreement between the corporation and Costa Realty—an entity wholly-owned by Maria.
Maria argued that the so-called “Costa Agreement” could not be set aside because, under BCL 713(a), a majority of shareholders approved the deal. She cited a November 20, 2017 shareholders meeting where Maria and Gina discussed—but only generally—Maria’s desire to manage the property, but not the Costa Agreement itself or any material terms thereof.
The Second Department found that general conversation to be insufficient; “the material terms of the Costa Agreement were not presented to the shareholders.” Nor did Maria establish that the Costa Agreement could pass entire fairness review.
While that analysis is hardly groundbreaking, it is a refreshingly crisp application of the rules concerning interested party transactions and helpful guidance on what constitutes (or, in this case, what does not constitute) presentation of material terms to the shareholders sufficient to obtain shareholder approval under BCL 713.
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