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My Partner Froze Me Out!: What to Do in A Shareholder Dispute

When you run a business with someone else, conflicts can arise. Most business partners should be able to work out there differences together, but unfortunately, it’s a fact of life that this isn’t always the case.

Occasionally, when things get really bad, one partner or shareholder or director will make a poor decision and “freeze out” the other owner of the company. This may happen in a physical way where the part owner changes the locks on the building, or in a less obvious way, such as where one owner tells all of the employees to stop taking direction from the other owner.

If you are the frozen-out shareholder or director, you have some important decisions to make. Here are four things that will impact how your case will develop if you’ve been frozen out of your company:

shareholder dispute

1. What type of business entity do you own?

You may not have paid much attention in the past on whether your company is a corporation, an LLC, or an unorganized partnership, but now is the time to figure that out and to pay close attention to it. The type of entity that you are a part owner of will have a dramatic impact on the type of claims that you’re going to bring and on the best strategy to pursue in litigation.

These and many other questions will influence your options. In the case of a corporation, Pennsylvania statutes provide for the proper process to follow in objecting to many corporate actions. Some actions may be governed by other rules of law, as well.

In regards to an LLC or a partnership, the rules are based more heavily on private documents between the parties, but are also governed by certain fundamental legal principals. In short, knowing what type of entity you own is an important piece to the overall puzzle.

2. What type of ownership interest do you have in the company?

More importantly, what is your ownership interest in the company? If the company is a corporation, are you a voting or non-voting shareholder? Do you have a contractual right to be on the board of directors under your corporation’s bylaws, or under some other agreement? If the company is an LLC, do you have an Operating Agreement? And is your Membership of the same class as the Member who froze you out?

What percentage owner are you? Do you own half? Less than half? If so, you are a “minority shareholder,” meaning that you own less than a controlling percentage of the company. This means the Court will have to apply certain doctrines to protect your rights if a “controlling shareholder” or controlling ownership group are acting oppressively. Of course, if you own a controlling percentage, your remedies may be even stronger if you were frozen out.

3. Do you want to return to your company? Or, do you want a payout?

An important decision that a frozen-out owner will often have to make is whether they want to return to the company as an owner, or whether they essentially want to be bought out of their interest in the company. This is a tough decision to make and may be very difficult in the bitter circumstances of an acrimonious dispute between shareholders or partners.

However, deciding whether you want to reclaim your rightful place in the company or simply accept money for the damages you’ve suffered will help to determine the course of action that you should take starting on day one.  

4. What type of freeze-out occurred?

We referenced at the beginning of this article that there are many ways to be frozen out. Not all freeze-outs are made equal. If you are frozen out by a changing of the locks, you may need to approach the litigation with an injunction from the Court requiring that you be allowed to re-enter the premises, or you may need to take other legal and aggressive action immediately. If you’re the victim of a “soft” freeze-out, where other owners are undermining you and depriving you of the control you are legally entitled to, the approach may be different.

The actions of your co-owner or partners will dictate your strategy in some respects, but if you haven’t been completely frozen-out, that may also give you the opportunity to make important and strategic decisions to protect your rights.

Conclusion: Call the Cornerstone Law Firm to discuss your case

At Cornerstone Law Firm, we handle freeze-out disputes. We have experience in negotiating, litigating and avoiding disputes between partners and owners. We have represented minority owners frozen out of LLCs, partnerships and corporations, and have handled multi-million-dollar business disputes.

Call us today for a free, confidential consultation, and we can discuss how we can help you solve your problem.