Expelling a Minority Partner from the Business

Some businesses contain an agreement that allows the majority owners to force the minority shareholders to sell at a predetermined price or a price determined by a mechanism within the agreement. These types of agreements can be written into the shareholder agreement and are enforceable. Similar things can be done with a limited liability company (LLC). While LLCs are not corporations, there are sufficient parallels that many of the same principals apply, as do general contract principals. With LLCs, such an agreement is often called a buy-sell agreement or it can be written into the operating agreement.

However, in the absence of such an agreement, majority owners cannot force the minority owners to sell. They can, however, make life miserable for the minority owners and force them to sell.

For example, if the minority owners are employed by the business, the majority owners can terminate that employment. Since one of the main advantages for minority owners in a small business is employment—buying into a job, in essence—this can deprive the minority owner of the main reason to stay invested. Similarly, if the minority owner has any contracts with the business, as a vendor or a consultant for example, those can be terminated. (Obviously, any terms in an employment or other agreements limiting termination have to be complied with).

The majority owners can use their power to refuse to declare dividends for a corporation or make distributions for a LLC, thereby depriving the minority owner of that benefit. The majority owners can also, subject to any limitations in the operating agreements, pursue strategies or take actions with which the minority owners disagree. In short, the majority owners can make it so the minority owner wants to exit the business. Furthermore, because the stock or other equity of a small business is illiquid, the majority owners can reasonably dictate the buy-out price.

There are some protections under the law for minority owners against gross overreaching or abuses by majority owners. The protections are stronger for corporations than for LLCs. Majority owners looking to get rid of a minority owner should consult with a business or corporate lawyer to see what they can do. Minority owners being forced out should likewise consult with an attorney to see about their legal rights and recourse.

Expelling a Minority Partner: Strategies and Considerations Case Studies

Case Study 1: Termination of Employment and Contracts

In a business where minority owners are also employed by the company, majority owners can use their power to terminate the employment of the minority partners. By doing so, they can strip the minority owners of their main incentive for staying invested in the business.

Additionally, if the minority owner has any contracts with the business, such as vendor or consultant agreements, the majority owners can terminate those contracts as well. These actions can make the business environment hostile for the minority partners, pushing them to consider selling their shares.

Case Study 2: Refusal to Declare Dividends or Distributions

Another tactic used by majority owners to compel minority owners to sell their shares is by refusing to declare dividends for corporations or make distributions for LLCs. By withholding these financial benefits, the majority owners can negatively impact the minority owner’s return on investment, making the ownership less attractive. This can put pressure on the minority owner to seek an exit from the business.

Case Study 3: Dictating Buy-Out Terms

Due to the illiquid nature of stock or equity in a small business, majority owners can often dictate the terms of a buy-out. They may set a buy-out price that is disadvantageous to the minority owner, taking advantage of their limited options. However, legal protections exist to prevent gross overreaching or abuses by majority owners.

It is essential for both majority and minority owners to consult with business or corporate lawyers to understand their rights, obligations, and potential recourse in such situations.