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What Are Your Rights When You Are Denied Distributions From Your Closely Held Business?

Charles Internicola

by Charles Internicola
National Business and Franchise Lawyer

Date: 10/20/2012 | Category: Partnership Disputes | No comments

FINANCIAL LOCK-OUTS / FREEZE-OUTS: A common problem experienced by minority shareholders and minority partners relates to a financial lock-out and freeze-out.  That is‚ you retain access to your business and you are included (somewhat) in business communications but for all intents and purposes the controlling shareholder and partner is denying you distributions and‚ in doing so‚ is denying you the true value of your equity and ownership interests.  These actions are typically‚ taken by majority / controlling shareholders to either force out the minority partner or‚ simply‚ to increase the salary‚ commissions and/or bonuses paid to the controlling shareholder as compensation.

One example of a financial lock-out typically arises with New York and New Jersey companies that own commercial and residential rental properties and buildings.  in these situations‚ majority / controlling partners will typically reinvest all profits back into the property in an effort to deprive the minority of cash distributions andeventually‚ force a buyout of the minority partners interests.  

So‚ what do you need to know about financial lock-outs?:

  • They are common. Frequently‚ majority shareholders and partners attempt to lock- up distributions in an a effort to encourage a buyout or to support a majority partners misappropriation of corporate assets;
  • You have legal rights.  New York and New Jersey courts recognize financial lockouts as a form of minority shareholder and partner oppression‚  As such‚ although you may be a minority shareholder or partner yare possess significant rights whereby a court may order a full valuation buy-out of your interests or‚ if you don't want to sell‚ an order requiring that distributions be paid to you.

Understand that you have rights and options – you just need to start off with a clear plan of action!

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