Disputes among partners and stockholders in closely held corporations can invariably be traced to a variety of causes. A disparity of workload; a change in the status quo (someone dies, someone gets divorced, someone gets married, someone suffers illness, etc.), lack of business to support all of the stockholders, blatant power ego rages, are just some of the underlying causes for stockholder or partner disputes. Very often these disputes lead to a deadlock among the partners, a deadlock among stockholders and a deadlock among the board of directors. Regardless of the cause of the dispute and irrespective of whether it causes a deadlock or not, a dispute more often than not somewhere before its final resolution will involve some form of a stockholder or partner squeeze out or freeze out.
These stockholder and partner freeze outs and squeeze outs are a series of actions taken by one or more of the partners or stockholders against the target partner or stockholder intended to coerce them into giving up their stake in the business. Some of these tactics are terminating the employment of the target partner or stockholder including locking the individual out of the business premises. Other tactics include removing the target as an Officer and or Director on the Board of Directors. Still other tactics either by itself or in conjunction with other tactics will include a forced buy out of the partner’s partnership interest or the stockholders shares at a “take it or leave it” price.
Often there exists a fiduciary duty between stockholders of a closely held corporation or between partners in a closely held partnership. This raises the question whether stockholder freeze out or partnership squeeze out practices violate the fiduciary duty between shareholders or between partners.
Various jurisdictions have answered this differently and several jurisdictions have held the fiduciary duty does not extend to squeeze out and freeze out tactics. Do you know what the law is in your jurisdiction?
For more information on squeeze outs and freeze outs, shareholder or partner disputes, minority oppression, or other corporate law concerns, contact Horowitz & Weinstein.