Disputes and conflicts often arise in small businesses with multiple owners. From time to time, we see majority owners use their inherent leverage to oppress the powers, rights and/or benefits of a minority owner (one with a non-controlling ownership interest in the business). In the worst case, the majority owners may try to “squeeze out” the minority owner.
A squeeze out may take a variety of forms. The majority may try to force a minority owner to sell or relinquish his or her ownership interest. When a minority owner works at the company, the majority may force a termination of employment. The majority may also prevent minority owners from participating in business decisions and might withhold information about the company.
The majority owners, by virtue of their larger ownership interests in the organization, usually get their way over the objections of the minority. The majority might even authorize the sale or liquidation of the business. However, this does not mean that a minority owner has no recourse when faced with being squeezed out.
The majority owners must comply with the controlling company documents, such as shareholder or membership agreements. In addition, the law imposes other requirements on them. Controlling owners of a small businesses typically owe a fiduciary duty to other owners. That is, the controlling owners must act in the best interests of the company and of the other owners. The law also requires controlling owners to act in good faith and deal fairly with the other owners.
Courts give the majority owners fairly wide discretion as to what constitutes reasonable conduct in the management and operation of a business, but a minority owner has legal standing to challenge conduct as a violation of fiduciary duty or of the duties of good faith and fair dealing. A minority owner who works as an employee of the company might also claim unlawful termination. Success on these claims may entitle the squeeze-out victim to reinstatement of his or ownership shares and job position. In egregious cases, a court might award punitive damages.
Even if majority owners think they can prevail in a lawsuit by a squeezed-out owner, they may have an incentive to avoid or to settle such litigation. An allegation of misconduct by owners or an indication of instability in management might lead to reputational damage that could significantly harm or even destroy a small firm. The majority owners thus have an incentive to treat the minority owners fairly in constructing a buyout and to conduct good faith settlement negotiations if the dispute ends up in court.
Schwartz & Kanyock, LLC of Chicago represents businesses and business owners throughout Northern Illinois. If you or your company are involved in an internal dispute, please feel free to contact us online or call 312-436-1442 for an initial consultation.