In New York, majority owners of closely held corporations owe a fiduciary duty to minority shareholders. You may face situations where those in control use their power to push you out or strip your investment of its value. This practice, often called a “squeeze-out” or “freeze-out,” involves actions designed to force you to sell your shares at a steep discount.
Identifying oppressive actions
New York law provides protections for minority owners. If you own a 20% or greater interest in a non-public corporation, you have the right to petition for judicial dissolution under Business Corporation Law (BCL) § 1104-a if the majority engages in illegal, fraudulent, or oppressive conduct. Shareholders with smaller stakes maintain protections through common law breach of fiduciary duty claims.
Legal precedent defines “oppression” as actions that fundamentally frustrate the objectively reasonable expectations that were essential to a minority shareholder’s choice to participate in the business. (Matter of Kemp & Beatley, Inc., 64 N.Y.2d 63). Common tactics used by majority shareholders include:
- Withholding dividends: The company remains profitable, but the board refuses to issue distributions while paying themselves high salaries.
- Termination of employment: You lose your job and your primary source of income, despite an expectation of continued employment.
- Denial of information: Those in control stop sharing financial reports or block your access to corporate books and records.
- Exclusion from governance: The majority removes you from the board of directors or ignores your input on business decisions.
When you identify these behaviors, you can take steps to protect your equity and legal standing.
Strategic remedies and fair value
Filing for judicial dissolution under § 1104-a triggers a statutory buyout mechanism that allows the corporation or other shareholders to elect to purchase your shares as an alternative to dissolution. Within 90 days, they may elect to purchase your shares at their “fair value” under BCL § 1118.
This often changes a battle over the company’s existence into a valuation dispute. In these cases, New York courts determine the value of the business as a going concern. The court will exclude any “minority discount” (a discount based on lack of control), which means you are not penalized for your minority status. However, the court may still apply a discount for lack of marketability (DLOM) to reflect the difficulty of selling shares in a private company.
Recent appellate decisions emphasize that you should receive a fair return on your investment when your reasonable expectations are thwarted.