Minority Shareholder Injunctive Relief: Locked Out & Denied Compensation | Franchise Law Blog

Minority Shareholder Injunctive Relief: Locked Out & Denied Compensation

Minority Shareholder: Locked-Out? Denied Compensation?

In typical closely held corporation lockout situations‚ the greatest threat that a minority shareholder faces is a majority shareholder using his or her voting advantage and control to lock the minority shareholder out.  The typical New York and New Jersey small business lock-out situation involves a gradual progression starting with a loss of access to books and records‚ interference with interactions with employees and‚ eventually‚ a complete loss of control typically characterized by‚ board and shareholder meetings (where you are guaranteed to be out voted) that ‚ typically‚ involve your termination‚ the withholding of distributions and – if you are not fired – a reduction of your salary.

When faced with this issue‚ your primary concern will relate to your loss of compensation (whether in the form of salary or distributions) and the impact this will have in your ability to fund a lawsuit to regain and protect your rights.  As I have discussed in many articles and in my book injunctive relief and the filing of an emergency motion to have you reinstated‚ for many reasons‚ will be your best course of action.  However‚ a common misunderstanding that many lawyers share is that injunctive relief cannot be used to reinstate a minority shareholders salary and distribution status.  This misunderstanding comes from the general rule that "injunctive relief" cannot be used to obtain monetary damages. However‚ there are exceptions to this general rule and for minority shareholders of a closely-held company‚ in certain circumstances‚ you may be entitled to an emergency order reinstating your salary and your management rights.

Questions to Evaluate:

When discussing remedies that may or may not be available to you‚ if you are a minority shareholder locked-out of your business and denied compensation‚ consider the following factors that may entitle you to an emergency injunction reinstating your compensation (If You are a controlling sharehlolder and you have an issue with a minority shareholder‚ you should also consider these factors):

  1. Is There a Shareholder Agreement and What Does it Say? Do you have a shareholder agreement that designates you as a manager‚ officer or director of the company? If so‚ in many situations the courts will act to preserve your management and control over the business and‚ in doing so‚ may be inclined to require the reinstatement of your compensation;
  2. What Has Been Done in The Past? Has the company historically stayed away from paying dividends but‚ rather‚ has funneled profits to the shareholders by paying each shareholder a salary or bonus. If so‚ courts are aware that a majority shareholder may try to fire a minority shareholder and then divert profits by way of excessive compensation and salary.

Rights to injunctive relief are not limited to minority shareholders and will apply to all equity holders.  When faced with a shareholder or partnership dispute‚ if you are the "locked-out" party‚ it is critical that you rebalance your negotiating position and‚ much more often than not‚ the only way to do this is through a court imposed injunction.  If approached properly‚ injunctive relief may also involve the reinstatement of your financial compensation‚ your access to books and records and your participation in management.

Learn More

If you are a minority shareholder faced with a potential lock-out or a "change of circumstances" where your salary has been reduced or distributions stopped‚ then learn more about your legal options and proven courses of action that may be used to rebalance the playing field. (a) Order a Complimentary Copy of Charles N. Internicola's book "The New York and New Jersey Partnership Dispute Guide"‚ or (b) Contact us by email or phone (800. 976. 4904) to learn more about proven course of action available to you. 

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