Squeeze-outs and Freeze-outs in a Closely Held Business
Forms of Minority Shareholder Oppression in Texas
Because of the nature of the business structure in a closely held corporation, it’s not uncommon for conflict to arise between owners, often leading to oppression of minority shareholders. A closely held company is typically controlled by a small number of shareholders or owners, in which possess the majority of the shares. By virtue, the balance of decision-making authority rests in the hands of the majority owners, or a few acting in concrete. This leaves those with a non-controlling interest subject to the discretion of the controlling majority. Since stock in a closely-held corporation is not readily salable, a minority shareholder at odds with management may be vulnerable to shareholder oppression by form of “squeeze-outs” or “freeze-outs”.
- Squeeze- outs: Minority shareholders are forced to sell their interest in the company at an unfairly low price or receive nothing at all for their interest.
- Freeze-outs: Majority shareholders render the minority shareholder’s share or ownership meaningless, preventing the shareholder from liquidating his or her investment.
Ultimately, squeeze-outs and freeze-outs are tactics used by majority owners to diminish the value of a minority shareholder’s interest in the business. This can include:
- Refuse a minority’s access to information about the corporation and from any participation in management
- Eliminate a minority’s interests altogether
- Terminate the minority shareholder’s employment
- Vote the minority off the governing board
- Divert the minority’s resources (salaries and benefits) to those still under the employ of the business.
Remedies for Minority Shareholder Oppression
In the past, those affected by shareholder oppression could resolve their dispute through way of a shareholder oppression claim. In 2014, this dramatically changed after the Texas Supreme Court ruling in Ritchie V. Rupe. In its ruling, the court declined to recognize a common law cause of action for shareholder oppression. What this means for shareholders is - in most cases you may no longer sue majority shareholders for oppression or a forced buy-out without a written agreement in place. According to the Texas Supreme Court in Ritchie v. Rupe: “Shareholders of closely-held corporations may address and resolve such difficulties by entering into shareholder agreements that contain buy-sell, first refusal, or redemption provisions that reflect their mutual expectations and agreements.”
Nonetheless, despite this ruling, with creative, experienced legal counsel, remedies may still be available for shareholder oppression claims and defenses.
At Hendershot, Cannon & Hisey, our business practice spans two decades and includes experience with legal issues from business formation through complex shareholder dispute litigation. We have the knowledge and experience to assess and advise you on your shareholder oppression options and all paths to dispute resolution including:
- Bringing a claim for breach of fiduciary duty
- Bringing a claim for breach of contract
- Obtaining an injunction to preserve the status quo
- Enforcing your right to inspect the books and records
- Bringing a claim for fraud or fraudulent transfers as applicable
In addition, our business attorneys regularly review, draft and implement shareholder and partnership agreements which can prevent future conflict from arising by establishing and defining rights of both majority and minority shareholders within a corporate structure.
Benefits of a Shareholder agreement includes:
- Address the roles, obligations and commitments of majority and minority shareholders in on-going operations and corporate decision-making
- It can be used to protect the position of minority shareholders, establishing preventative measures to prevent shareholder oppression
- Regulate the procedures to designate, replace, or remove directors and officers
- Create options for removal of inactive or otherwise undesirable or potentially harmful shareholders
- It can place limits or restrictions on changes to the nature of the company business
- Establish stipulations for dealing with buyout offers and events likely to impact corporate ownership and control
- It can provide resolution options such mediation or arbitration in the event of a shareholder dispute or deadlock
- Address competition if a shareholder leaves or is removed and/or include covenants not to compete or no-competition clauses
- Establish a method to determine the value of a share in-advance
- Protect intellectual property and trade secrets