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Minority Shareholders Frozen-Out

Majority shareholders often will not be so bold as to fire a fellow shareholder from his job during a business partner dispute, and they cannot simply take away a minority shareholder’s stock interest.  Instead, the Freeze-Out, or Squeeze-Out, can become the weapon of choice.

A Freeze-Out can occur in many different forms.  A minority shareholder who used to be involved in crucial decisions suddenly finds that his opinion is no longer sought after.  Financial information that used to be routinely provided is withheld.  The accountant no longer returns your call, obviously instructed not to speak with you.

Everyone knows that closely-held businesses are almost always run informally, and written agreements are often sorely lacking.  Many companies have long-standing informal, unwritten agreements, like the mid-sized company in which the shareholders historically agreed that they would all take the same pay raise.  When the majority shareholders started to ignore this informal agreement, and decided that they alone deserved huge raises and bonuses, the minority shareholder felt frozen-out and could see the handwriting on the wall.

One of the most prevalent methods of freezing someone out of a company is changing an employee-shareholder’s job responsibilities.  Rather than outright fire a shareholder from his job as head of sales, for example, the employee-shareholder now finds himself the office or plant manager, no longer eligible for the sales commissions on which he and his family depend.  The common denominator among all these situations is a shareholder who can’t shake the feeling that he is now on the outside of his own company, looking in.

While all of these examples may constitute a Freeze-Out, and may be shareholder oppression under New Jersey law, any one of these alone may not be actionable.  Majority shareholders are allowed to change an employee’s role or decide to change a company’s direction.  Not all prior informal agreements have to be honored, regardless of changed circumstances.  The totality of the circumstances must be taken into account at all times.  The key is to seek the advice of an attorney who handles business partner disputes, and is familiar with the law in this area and who has the experience to differentiate between wrongful action and legitimate, protected business decisions.