Where Business And Law Come Together

Is it legal to freeze out minority shareholders?

On Behalf of | Feb 1, 2023 | Dispute Resolution

Perhaps you and your siblings represent the majority interest in a business that now has numerous shareholders. You may have a desire to buy out other investors so that you don’t have to pay dividends on the company’s success or be subject to outside opinions about business operations. Maybe you are a minority shareholder who made a sizable investment in a company because you can see it was primed for success.

Parties on both sides of a shareholder relationship may have an interest in learning about freeze-outs and their legality. Is it legal for owners or majority shareholders to freeze out minority shareholders?

The method used largely determines the legality

Unfortunately for those currently embroiled in a shareholder dispute, there is no straightforward answer about the legality of an investor freeze-out. Sometimes, such actions are legally dubious, especially if they involve depriving someone of their contractual rights according to their shareholder agreement.

When someone doesn’t get to vote or doesn’t receive dividends as they should, the actions of the majority shareholders might constitute an actionable breach of the shareholder’s rights. Other times, when an attempted freeze-out perhaps involves majority shareholders voting in mass to prevent minority shareholders from changing company operations, the actions may not violate any agreements or laws whatsoever.

To determine if a freeze-out is potentially actionable or problematic, you have to evaluate the terms of the shareholder agreement and the actions taken or proposed very carefully. Provided that no one violates the law or their contracts, the freeze-out could be a valid means of reassuming control over business operations.

It is easy for investors and executives to make mistakes

Business is often very personal, and people can let their drive to succeed or win overshadow their rational judgment. Even someone who has a long history of running successful businesses could make illegal or unethical choices when faced with a conflict.

Those trying to protect their interest in a company could likewise make mistakes by wrongfully assuming they are in a position to take legal action when they are not. Unnecessary litigation could further sour a shareholder’s relationship with others who have an interest in the company and may even waste business resources.

Understanding how to handle shareholder disputes and similar corporate challenges can help investors and executives alike.