How Should a Minority Shareholder or LLC Member Handle a Squeeze-Out or Freeze-Out of Their Interests

When a shareholder or LLC (Limited Liability Company) member faces a “freeze-out” or “squeeze-out,” they are typically being pushed out of the company’s decision-making process or their economic interests are being diminished. This can be a challenging and complex situation, requiring a careful and strategic approach. Here are some general steps that might be considered:
  1. Understand Your Legal Rights and Documents: Review the company’s governing documents, such as the bylaws, shareholder agreement, or operating agreement. These documents often outline the rights and obligations of shareholders or members and may contain provisions relevant to your situation.
  2. Gather Evidence: Document any actions that contribute to the freeze-out or squeeze-out. This could include meeting minutes, emails, financial statements, or any other relevant communications.
  3. Seek Legal Advice: Consult with an attorney who specializes in corporate law, particularly someone experienced in shareholder/member rights in LLCs or corporations. They can provide advice specific to your situation, including the interpretation of any legal documents and the identification of any breaches of fiduciary duties or violations of state laws.
  4. Explore Negotiation and Mediation: Before taking any legal action, consider whether the situation can be resolved through negotiation or mediation. These alternative dispute resolution methods can often be less costly and time-consuming than litigation.
  5. Consider Your Goals: Identify what you want to achieve. Do you want to regain your position in the company, receive compensation for your lost interests, or simply exit the company in a fair manner? Your goals will guide your strategy moving forward.
  6. Possible Litigation: If negotiations fail and your legal rights are being significantly infringed upon, litigation may be necessary. Your attorney can advise on the likelihood of success and the costs involved.
  7. Financial Implications: Consider the financial impact of your chosen course of action, including legal fees, potential loss of income, and any tax implications.
  8. Communication with Other Shareholders/Members: If other shareholders or members are also being affected, it might be beneficial to communicate with them. There could be strength in numbers, either in negotiations or in legal action.
  9. Understand the Impact on Relationships: Consider the long-term business relationships and how they will be affected by your actions. Sometimes the best legal strategy might not align with your long-term business or personal relationships.
  10. Plan for the Future: Regardless of the outcome, think about your future with or without the company. This might involve considering other business opportunities or roles.

Every situation is unique, and the best course of action will depend on the specific circumstances, the governing laws of the state where the LLC or corporation is registered, and the details of the company’s governing documents. It’s crucial to balance legal considerations with practical business and personal considerations.

In response to a freeze-out or squeeze-out of their interests, shareholders or LLC members have several legal options. They can primarily consider seeking a judicial resolution. They can take their claims to court, as seen in the case of Root Consulting, Inc. v. Insull and affirmed in Rexford Rand Corp. v. Ancel, which encourages parties to seek judicial resolution when unable to amicably resolve matters.

In certain situations, the court may recognize that a freeze-out terminates a shareholder’s fiduciary duty to a close corporation. However, this stance is debated as some courts suggest that even shareholders subjected to a freeze-out have a duty to place the interests of the corporation above their personal interests.

Shareholders or LLC members may also seek remedies such as dissolution of the corporation or a forced buyout. Under the Business Corporation Act, majority shareholders may avoid dissolution through a buyout of the minority at a “fair value”, which the court can determine if parties cannot reach an agreement.

For LLC members specifically, the Illinois Limited Liability Company Act recognizes the right of a member to bring a derivative action on behalf of the company. The Illinois Limited Liability Act also grants a cause of action to members harmed by controlling LLC members who acted in a manner that is illegal, fraudulent, or oppressive.

However, it should be noted that not all courts recognize the termination of a shareholder’s stock position as a result of a freezeout merger as a valid legal injury. In Small v. Sussman, the court held that the minority shareholder could not individually sue for the elimination of their ownership interest in anticipation of a profitable freezeout merger.

Given these complexities and potential variations in legal interpretation, shareholders or LLC members facing a freeze-out or squeeze-out should carefully evaluate their situation based on these precedents.

Choosing Lubin Austermuehle for freeze-out and squeeze-out cases is a consideration for several reasons. Firstly, their attorneys have more than three decades of experience in litigating member and shareholder oppression, business divorce, and breach of fiduciary duty lawsuits, specifically in the context of LLC member or shareholder squeeze-out and freeze-out cases. This extensive experience in a wide variety of business contexts is crucial for understanding the complex nuances of such cases.

Their approach includes a detailed analysis of all business and accounting issues, which helps in developing a comprehensive strategy for both prosecuting and defending claims arising in these cases. This is especially important as these cases often involve intricate financial details and require a deep understanding of corporate law and fiduciary duties.

Lubin Austermuehle also emphasizes working closely with accounting and damages experts to develop winning strategies, a practice that has proven successful in complex disputes, including those involving substantial monetary damages. Their ability to find accounting irregularities with the help of forensic accountants and then effectively present these findings in court is a significant asset. This is important for presenting complex accounting and capital structure issues in a way that is clear and persuasive to the court.

Furthermore, the firm offers free consultations, allowing potential clients to determine if they are the right fit for their particular legal needs. This client-centric approach, coupled with their experience and expertise in business litigation, makes them a strong candidate for representing interests in complex shareholder or LLC freeze-out litigation.

In summary, Lubin Austermuehle’s depth of experience in shareholder and LLC member disputes, their detailed approach to handling complex business and accounting issues, and their commitment to understanding each client’s unique situation make them a compelling choice for those involved in freeze-out and squeeze-out cases.

For a free consultation, call us at 630-710-4990 or contact us online.

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