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Shareholder Oppression: Freeze-Outs

On Behalf of | Apr 10, 2014 | Shareholder Oppression

Last week we wrote about one specific kind of shareholder oppression known as a squeeze-out. With a squeeze-out, the majority effectively removes the minority’s right to benefit as a shareholder, and more or less forces that shareholder to sell its interest at a reduced price back to the majority. Although similar, today we want to discuss a different form of oppression more common to the partnership context known as a “freeze-out.”

To understand a freeze-out, it is important to first understand that closely held companies do not always have to last forever. If there is disagreement among shareholders or partners, those partners are generally entitled to dissolve the company and go their separate ways. However, when dissolution of the company is the result of a breach of certain duties to a partner, that dissolution may be considered a freeze-out oppression situation.

A freeze-out occurs when a partner attempts to dissolve another partner’s interest in the company for an unfair price, all the while intending to continue the business after that partner is gone. Continuing with our pizza parlor example from last week, imagine two partners buy an existing pizza business. One of the partners owns the building where the business is located, and rents the space to the partnership.

Now imagine that the partner who owns the building seeks to dissolve the partnership, refusing to rent that land out to the business any longer. If, after dissolution, that partner attempts to buy the pizza parlor assets at a reduced price, and then continue the business without the other partner, these actions may be considered an oppressive freeze-out. Because of the oppressive partner’s ownership of the land, the balance of power was shifted in that partner’s favor, allowing for the oppressive conduct to occur.

Of course, as with squeeze-out oppression, the law provides some protection for victims of freeze-out oppression. If the dissolution was the result of a breach of a partner’s fiduciary duties, the oppressive party may be enjoined from bidding on the company’s assets, or from selling the interest to the other partner at a meager price.

Determining what kind of oppression has occurred is not always important. Rather, the primary concern should always be identifying whatever oppressive conduct and stopping it before any harm caused becomes insurmountable. An experienced shareholder oppression law attorney can help.