Stakeholder Rights During a Freeze Out
Unfortunately, the exuberance and camaraderie that usually comes with the formation of a new business venture does not always last. Relationships between the owners may sour over time or the ownership composition of the company may change entirely. Either situation can ultimately pit owner against owner and even lead to one faction of shareholder attempting to force other owners out. This is an all-too-frequent occurrence for minority shareholders and can place owners in a difficult position unless they know their rights.
Freeze out or squeeze out are terms that encompass the variety of tactics — some legal and some not — that a majority shareholder might use to force a minority shareholder to sell. Because a shareholder typically cannot be directly forced to sell his or her shares, the freeze out usually involves making his or her position so intolerable that selling appears to be the only option. A majority may go about this by:
- Removing minority shareholders from positions as officers or directors
- Cutting salaries of minority officers or directors
- Withholding dividends from minority shareholders
- Refusing to hold shareholder meetings
- Managing corporate affairs in a way that benefits the majority or is detrimental to the minority
Many of these tactics violate state business corporation laws or are a breach of fiduciary duty by the responsible parties. However, even when a freeze out can be accomplished legally, the departing shareholders still have the right to receive fair value for their shares in most jurisdictions.
Owners who feel they are being pushed out should remember that there are legal actions they can take to prevent a freeze out or otherwise protect their rights. Likewise, businesses that want to separate from an existing minority shareholder should understand that there may be ways to do so without conflicting with the law. An experienced Washington, DC area corporate governance attorney can provide competent advice in either situation.
