Buyout Rights of Oppressed Minority Shareholders or LLC Members

When starting a business, co-owners envision the best—working together productively and profitably. But it is all too common for business partners to encounter a serious impasse over how to operate the business. When partners are unable to work through a dispute, it may be time for one partner to exit the company via a buyout of their interest. It is not uncommon for this scenario to arise in conjunction with claims that the majority shareholder or shareholders are oppressing the minority shareholder or shareholders.

For Illinois corporations, the Illinois Business Corporation Act of 1983 (BCA) permits shareholders to pursue legal action against each other based on allegations of fraud, illegal activity, corporate waste or other disruptive conduct. The BCA provides for 12 categories of relief that a court may order as an alternative to dissolving the business. Minority shareholders frequently opt to pursue the remedy of a buyout, in which the exiting shareholder’s interest is purchased by the remaining shareholders for “fair value.” Similarly for Illinois LLCs, the Illinois Limited Liability Company Act provides that a court may order the entity or the remaining members to purchase the interest of the outgoing member.

The BCA defines “fair value” as the value of the shares “taking into account any impact on the value of the shares resulting from the actions giving rise to a petition under this Section.” The statute goes on the explain that “‘fair value,’ with respect to a petitioning shareholder’s shares, means the proportionate interest of the shareholder in the corporation, without any discount for minority status or, absent extraordinary circumstances, lack of marketability.” For many companies, this provides a much more favorable valuation to a minority shareholder than selling shares for fair market value or any other metric of value normally employed when selling an interest in a small business. This is particularly true for closed (or closely held) corporations where a market for the minority’s shares might not otherwise exist since the statutory valuation does not generally speaking allow for a discount for the lack of marketability of the minority’s shares.

A buyout may be appropriate in circumstances where the minority shareholder alleges shareholder oppression by the controlling or majority shareholder or shareholders. Although shareholder oppression can take many forms, often the claims involve allegations that the minority owner is being hurt by the actions of the other owners, such as refusing to pay dividends or to allow the minority owner to access company records. As mentioned, in many companies, minority owners are at a disadvantage because no market for their shares exists and therefore they stand to lose their entire investment if the majority takes actions that devalue their shares or freezes the minority owner out of the business altogether.

While the principle of a fair value buyout is simple enough to grasp in concept, the reality of actually arriving at the fair value of the departing owner or member’s interest can be contentious and complicated. The departing owner or member wants a high value so they receive more for their shares or interest and the remaining owners or members want to pay as little as possible for the shares or interest to avoid depleting necessary capital. This is where an experienced commercial litigation and shareholder rights attorney can be invaluable. Often, each party will retain a valuation expert to prepare a report valuing the shares or interest being bought out and explaining the rationale behind the valuation. The experienced shareholder rights attorneys at Lubin Austermuehle have decades of experience selecting and working with top valuation experts to prepare well-reasoned, data-backed valuation reports. Additionally, our attorneys know this ever-evolving area of law and stay atop of recent developments in the law that may affect our client’s interests and rights.

If you are a business owner or a minority shareholder facing shareholder oppression or breach of fiduciary claims or are facing the possibility of messy business divorce litigation, and you’d like to discuss how the experienced Chicago shareholder rights lawyers at Lubin Austermuehle can help, we would like to hear from you. To set up a consultation with one of our Chicago commercial litigation attorneys and Chicago business trial lawyers, please call us toll-free at (833) 306-4933 or contact us online.

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