New businesses frequently begin on a wave of exuberance and optimism. Riding this wave, entrepreneurs often have difficulty accepting the fact that the trust and goodwill they currently have with their business partners may not be permanent. As the business develops, interests may change and new stakeholders may alter the dynamics. Even if the composition of the business remains the same, people change and relationships may sour. This can create serious problems for minority shareholders in closely held corporations when other stakeholders join forces to exclude them from the operation of the business.
Such a freeze out or squeeze out can occur when a coalition representing a majority of shareholders in a closely held corporation or limited liability company (LLC) begins taking steps to force a minority shareholder to sell his or her shares, often at a deflated value. Majorities and the boards they elect may attempt to accomplish this in several ways:
- Making changes to the articles or bylaws of the corporation
- Depriving minority shareholders of dividend income
- Excluding minority shareholders from the management of the company
- Engaging in self-dealing
- Manipulating stock to decrease minority shareholders’ voting power
- Refusing to provide information to shareholders
Fortunately, the Minnesota business corporations law does provide some protections to shareholders and members placed in this position. Minority shareholders may seek equitable relief against unfairly prejudicial actions by a controlling majority. Furthermore, legal remedies may be available against corporations that act in an unfairly prejudicial manner against minority stockholders.
While an internal resolution is almost always preferable to this type of litigation, an assertive and seasoned Elk River business litigation attorney may be able to help oppressed minority shareholders protect their investments when all else fails.