Just like the bracing chill of a Massachusetts winter, experiencing a corporate freeze-out can feel cold and harsh. Whether you’re part of a Limited Liability Company (LLC), partnership or a close corporation in Massachusetts, a thorough understanding of freeze-out claims is a must-have survival tool. This article serves as your guiding light through this often treacherous landscape.
What is a Freeze-Out?
A corporate freeze-out, or squeeze-out, occurs when majority shareholders wield their influence to rob minority shareholders of their rights and benefits within the corporation or LLC. Such tactics can include denying profit shares, excluding them from decision-making processes, or attempting to push a buyout at a significantly reduced value. However, the chilling tactics can take other forms too. For instance, majority owners might deplete corporate assets by paying themselves exorbitant salaries or awarding lavish benefits such as expensive automobiles. They may employ their family members, who do very little actual work. The bitter sting of a freeze-out can leave minority shareholders feeling as though they’ve been left out in the cold.
Massachusetts Law on Freeze-Outs
Minority shareholders in close corporations and members of LLCs in Massachusetts are fortified against such icy tactics. Massachusetts courts have held that majority shareholders owe a fiduciary duty of utmost good faith and loyalty to the minority shareholders. This duty is more stringent than in most states, which often only require a fairness standard.
This strict standard signifies that majority shareholders in Massachusetts cannot engage in actions that are harmful to the minority or deprive them of their rights without a valid business purpose. Any breach of this fiduciary duty can be challenged with a freeze-out claim.
Turning Up the Heat: The Freeze-Out Claim
Should you find yourself in the midst of a freeze-out scenario, Massachusetts law allows you to lodge a freeze-out claim against the majority shareholders. This involves filing a lawsuit alleging a breach of fiduciary duty. If successful, the court may offer remedies such as:
Damages: If the freeze-out has led to financial loss, the court may order the majority shareholders to compensate the minority shareholders.
Injunction: The court might implement an injunction to halt the majority shareholders from continuing their detrimental actions.
Dissolution: In severe cases, the court may order the dissolution of the corporation or LLC.
However, it’s important to note that Massachusetts courts usually do not have the power to mandate a buy-out of the minority’s shares by the majority shareholders. Much depends on the Operating Agreement or Shareholder Agreement. The state of incorporation may also make a difference.
The Right to Employment for Minority Owners
Minority owners might also have a reasonable expectation of continued employment within the corporation or LLC. If majority shareholders infringe upon this right unfairly, it can be considered another form of freeze-out. Minority owners who believe their employment rights have been violated should consult with a knowledgeable Massachusetts attorney to discuss potential legal options. There could be a variety of claims. This is not your normal employment-at-will situation.
Key Takeaways: Stand Firm Against the Freeze-Out
Despite the chilling effect of a corporate freeze-out, remember you’re not alone in this snowstorm. If you’re a minority shareholder in a Massachusetts LLC or close corporation and suspect you’re being frozen out, promptly seeking legal counsel is imperative. Armed with a deep understanding of your rights and the guidance of an experienced Massachusetts business litigation attorney, you can navigate the icy terrain of freeze-out claims, safeguard your interests, and reclaim the warmth of your corporate involvement.
Are you weathering a freeze-out scenario? You need an attorney to fight through the thick ice. Contact me today to schedule a consultation.
By Adam P. Whitney, Esq.; [email protected]; 617.338.7000