Remedies for Dissenting Shareholders and the Deadlocked Corporation

Dissenting shareholders in a publicly-traded corporation may sell or otherwise dispose of their shares and seek as damages any lessening of value of the shares prior to the sale resulting from the matter causing the dissension. However, shareholders in a closely held corporation may not have a reasonable way to dispose of their shares and avoid dissension. Deadlocks among shareholders or directors of closely held corporations thus may result more often in litigation than such conflicts within publicly held corporations.

Judicial tests for resolving issues of shareholder dissension vary among the states. For example, a court in Massachusetts devised an equal opportunity doctrine to require that in a buy-out of a corporation, a minority group must be given the same relative price for its shares as the price being given a control group. A Delaware court ruled that if treatment of minority shareholders is fair under all the circumstances, it need not necessarily be equal to the treatment obtained by majority shareholders. A New York court held that before ordering the ultimate remedy of dissolution of a corporation, it would first consider whether less drastic remedies were available that would maintain a balance between preserving reasonable expectations of minority shareholders while not requiring that majority shareholders guarantee results for the minority.

State corporation statutes often have provisions designed to resolve potential conflicts among minority and majority shareholders of closely-held corporations. Such statutes may also provide for dissolution proceedings in various circumstances. For example, many states have adopted provisions allowing the board of directors to recommend dissolution of the corporation and providing for a shareholder vote on the dissolution proposal.

Additional statutory provisions may allow a shareholder to seek judicial dissolution of a corporation with a deadlocked board of directors or deadlocked shareholders. Such dissolution proceedings may also be authorized to deal with claims that the assets of the corporation are being wasted or that controlling shareholders or directors are acting illegally or fraudulently. Another remedy for the dissenting shareholder may be the appointment of a custodian either to oversee the dissolution of the corporation or to oversee the operation of the corporation’s business while dissension is resolved.

Forward-looking shareholders may agree upon the formation of a closely-held corporation on how dissension or deadlock will be treated should it occur. Such agreements may cover not only what would be considered a deadlock but also what remedies, ranging from buyouts to dissolution, will be available to resolve a full range of potential disputes, including deadlock.

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.