Key Takeaways

• Your rights start with the documents: the partnership agreement, operating agreement, shareholder agreement and bylaws. Where there is no agreement, state law fills the gaps.
• Owners who control a company owe duties to the owners who do not. Freezing out a minority owner, diverting business and paying yourself at the others’ expense can all be challenged.
• Most owner disputes end in a buyout. The fight is usually over the price and the terms.
• Act early. Money moved out of a company and records that disappear are hard to recover later.

Common Owner Disputes

• Freeze-out and oppression. A minority owner is removed from management, cut off from salary and distributions, or denied information.
• Breach of fiduciary duty. An owner or manager uses company money for personal expenses, pays excessive compensation or does business with his or her own side company.
• Diverted opportunities. An owner takes a customer, a contract or a deal that belonged to the company.
• Deadlock. Equal owners cannot agree and the business cannot act.
• Withheld distributions. Profits are retained or paid out as salary to some owners while others receive nothing, sometimes leaving them with tax on income they never received.
• Access to books and records. An owner is refused the financial statements, tax returns and bank records he or she is entitled to see.
• Buy-sell and valuation disputes. An owner leaves, dies, divorces or is forced out, and the others dispute what the interest is worth.
• Competing after departure. A departing owner takes employees, customers or confidential information.

What the Law Allows

The remedy depends on the type of entity and the state whose law governs it. Courts can order a company to open its books, award damages for breach of fiduciary duty, undo self-dealing transactions, order one side to buy out the other at fair value, appoint a custodian or receiver to run the company, and in a serious case dissolve it. An injunction can stop an owner from draining accounts or transferring assets while the case is pending.

Some claims belong to the owner personally. Others belong to the company and must be brought as derivative claims, with their own requirements. Bringing the claim in the wrong form can get it dismissed, so this is decided at the start.

The Buyout

Most cases resolve with one owner buying the other out. The agreement may set a formula or an appraisal process. If it does not, value is negotiated or decided by the court, and each side will usually hire a business valuation expert. The issues that move the number include the valuation date, whether discounts for a minority interest or lack of marketability apply, how owner compensation and personal expenses are treated, and how the price is paid and secured over time.

The tax treatment of a buyout differs depending on whether the company or the remaining owners buy the interest and on how the payments are characterized. Attorney Michael A. Siddons holds an LL.M. in Taxation and structures the buyout with the after-tax result in view.

First Steps if You Are in a Dispute

• Collect the governing documents and any amendments.
• Preserve emails, texts, financial statements and bank records you lawfully have access to.
• Do not move company funds, change account access or lock anyone out without legal advice. Self-help often becomes the other side’s best claim.
• Put requests for information in writing.
• Do not sign a buyout, a release or an amended agreement until it has been reviewed.

Preventing the Next Dispute

Most of these cases arise because the owners never signed an agreement, or signed one that did not address what happens when an owner wants out, stops working, dies or divorces. A buy-sell agreement with a clear valuation method and a way to break a deadlock costs far less than litigation. See our business law page.

What Our Firm Does

• Review the governing documents and advise you on your rights and exposure.
• Demand and enforce access to the company’s books and records.
• Seek or oppose injunctions to protect company assets.
• Bring and defend claims for breach of fiduciary duty, oppression and breach of contract.
• Negotiate buyouts and separation agreements, and work with valuation experts.
• Represent owners in mediation, arbitration and trial.

Who We Help

• Minority shareholders and LLC members.
• Majority owners accused of wrongdoing.
• Fifty-fifty partners in deadlock.
• Family business owners and their heirs.
• Professionals leaving a medical, dental, accounting or other practice.

Frequently Asked Questions

We never signed a partnership or operating agreement. Do I have any rights?

Yes. When there is no written agreement, the state’s partnership, LLC or corporation statute supplies default rules on voting, profits, access to records and what happens when an owner leaves.

Can a majority owner fire me from my own company?

A majority can often end your employment, but it cannot use its control to strip a minority owner of the value of the ownership interest. Removal combined with cutting off distributions and information is the classic freeze-out, and courts can order relief.

Can I force my partner to buy me out?

It depends on your agreement and the governing statute. Some agreements give that right. Where they do not, a court may order a buyout as a remedy for oppression or deadlock, and a credible claim often leads to a negotiated one.

How is my share valued?

By the method in your agreement if there is one. Otherwise, by negotiation or by the court with the help of valuation experts. The valuation date and the use of discounts are frequently the largest points in dispute.

How long do these cases take?

An emergency request for an injunction can be heard in days. A contested case through trial can take a year or more. Many resolve earlier once each side has seen the financial records.

Get Advice Before You Act

Email msiddons@siddonslaw.com with the type of company, your ownership share and what has happened. We will reply with what we need to see.