That’s how we sometimes describe this part of our law practice. Instead of explaining shareholder/partner disputes, squeeze outs, minority oppression, buy-sell agreements–it’s easier to say “It’s like a divorce but with a company instead of a marriage.” It can be a useful analogy. A split between partners or shareholders can be just as messy as a marital divorce can be and just like a marriage, it depends heavily on relationship began and how exactly it’s coming to an end.
When you’re starting a business it might feel like a vote of no confidence to hammer out details of how a shareholder can leave the company, but steps taken at this stage can drastically simplify matters down the road. When a company is forced organized, you should consider the possibility of disputes down the line.
One of the chief factors in a closely held corporation that complicates the exit of a shareholder or partner is the difficulty of selling shares. If you own stock in a Fortune 500 company, you aren’t likely to have trouble selling that stake. But when you’re talking about a smaller, closely held company, those shares may not have a lot of value to someone else. This problem is typically addressed through buy-sell agreements, which provide for the company to buy back a shareholders shares. This ensures both that the departing shareholder is actually able to sell their stock but also prevents those shares being sold to a third party the remaining shareholders would not wish to have influence in the company. Pitfalls remain. How exactly to value the shares is a common cause of dispute when it comes time to buy back the shares.
Sometimes, of course, a shareholder may not wish to leave a company or sell their shares, but may find other shareholders are trying to force the matter. There are various strategies by which a majority can try to push a shareholder or partner our and the action is usually called a freeze out or a squeeze out. Broadly, the majority can try to deny the shareholder the benefits of the shares or try to otherwise dilute that shareholder’s control and influence. Whatever the particulars, the action may constitute minority oppression or a breach of fiduciary duty. One test which is often relevant in these situations is legitimate business purpose. Trying to push an obstructionist shareholder out of a company, one who is an active detriment to it, is likely to be seen as valid, while a situation in which the squeeze benefits a particular shareholder’s interest and not the overall company, is more likely to be ruled a fiduciary breach. Every situation is of course unique.
Horowitz Law Offices has represented numerous shareholders and partners of closely held corporations and other business in a variety of disputes, squeeze out situations, and other corporate law concerns. You are welcome to contact us at 312-787-5533 or firstname.lastname@example.org