When a business relationship breaks down, you may decide that the easiest way to reduce conflict is to limit a minority owner’s role. You may think that excluding that owner from some decisions will help management focus on the company again.
However, a minority owner does not need to lose an ownership interest to claim unfair treatment. In closely held corporations and limited liability companies (LLCs), limiting an owner’s role or cutting off financial benefits can trigger shareholder or member litigation.
What it means to freeze out a minority owner
A freeze-out occurs when majority owners use their control to reduce a minority owner’s role in the business. Actions that may become part of a freeze-out dispute include:
- Excluding the owner from management decisions
- Limiting the owner’s access to financial records
- Removing the owner from an operating role
- Changing compensation to benefit majority owners
- Restricting the owner’s role in major company decisions
Courts usually look at the parties’ conduct as a whole. One decision may not create liability. A series of decisions, however, may support a legal claim.
Why freeze-out claims lead to litigation
If you limit a minority owner’s role, that owner may believe the ownership interest no longer has value. This concern may grow if the owner no longer receives company information, takes part in key decisions or shares in the company’s financial benefits.
The claims in these cases depend on state law and the type of business entity. Litigation may include allegations of breach of fiduciary duty, minority oppression or other wrongful conduct. Courts usually look at the history between the owners and the events that gave rise to the dispute.
How owner disputes can affect the business
Disputes between owners rarely stay between the owners. Litigation may require employees to gather records, answer discovery requests and appear in court. It may also pull management’s attention away from running the business and draw the attention of employees, customers or vendors.
For companies with substantial revenue and long-standing business relationships, owner disputes can affect customers, lenders and other stakeholders. What begins as an effort to limit one owner’s role may grow into a dispute that affects daily operations and future business plans.