You may have gone into a joint enterprise with the best intentions. However, if the business relationship begins to deteriorate and your business partner has started to make decisions without your input, refuses to communicate, or cuts off your access to information, you may be facing a “freeze-out.”
In New York, freeze-outs often arise in closely held corporations, LLCs, and partnerships where owners are actively involved in day-to-day operations. Being frozen out can not only threaten your role in the company, but also your financial stake in it. Understanding how to recognize a freeze-out and what steps you should take is crucial to protecting your interests.
What is a Freeze-Out?
While freeze-outs are most commonly associated with minority shareholders in closely held corporations, they can also occur in partnerships and LLCs. Specifically, a freeze-out is a tactic used by majority owners or equal co-owners to manipulate control or exclude a co-owner from decision-making, profits, or access to company information. While freeze-outs are not always illegal if they serve a legitimate business purpose and statutory and contractual duties are adhered to, they can be challenged by a minority owner if the conduct breaches a fiduciary duty or is “oppressive.” In a true 50-50 partnership, a freeze-out may also create a deadlock, potentially complicating resolution and necessitating legal intervention.
Some common tactics used in a freeze-out can include the following:
- Cutting off distributions
- Denying access to management meetings
- Withholding financial records
- Making unilateral decisions
- Transferring company funds without authorization
- Changing passwords and access credentials to accounts
- Diverting business opportunities
In corporations, another common tactic is a freeze-out “merger,” where the majority merges the company into a new entity they control while forcing the minority to accept cash for their shares. While this mechanism is specific to corporate structures, those in partnerships and LLCs can experience similar risks whenever a co-owner uses their control to block the other’s ability to participate in management or exercise their ownership rights. Regardless of the entity type, the underlying issue in a freeze-out remains the same: exclusion from decision-making and ownership rights.
Immediate Actions to Take After a Freeze-Out
If a business partner has frozen you out, it’s important to act swiftly to protect your legal and financial interests. Taking prompt action can help preserve your rights and position you for the best possible outcome in your case, whether the results are achieved through negotiation, litigation, or alternative dispute resolution.
Steps to take after a freeze-out include:
- Review the governing documents: If you have been frozen out, you should first review your business’s governing documents. Look carefully at the partnership agreement, operating agreement, or shareholder agreement to determine whether the specific scenario you are facing is addressed. These documents may also specify the procedures for dispute resolution.
- Formally demand access to books and records: Partners, LLC members, and shareholders generally have statutory rights to inspect financial and company records. Make a written demand to access these records so you can assess potential misconduct and investigate any breaches of fiduciary duty. Making a demand also creates a paper trail that can strengthen any legal claim you file.
- Document everything: Preserve all evidence to support a claim that you’ve been wrongfully excluded from the company. This can include emails, text messages, financial statements, and meeting notes. If you have been denied access to accounts or systems, document the date of the denial.
- Avoid engaging in self-help measures: If you’ve been frozen out of a business, taking matters into your own hands can be detrimental to your claim. It’s best to avoid “self-help” and instead document the situation, preserve evidence, and pursue legal remedies through proper channels.
- Consult a business litigation attorney: A knowledgeable New York business litigation attorney can best advise you regarding your legal rights, protect your interests, and develop a strategy to challenge the freeze-out or seek appropriate remedies.
Depending on the circumstances and type of entity, there may be a number of legal remedies available to you in the event of a freeze-out. These can include an injunction to stop the harmful conduct, breach of fiduciary duty litigation, a buyout, or in some cases, judicial dissolution.
Contact an Experienced Long Island Business Litigation Attorney
If you have been frozen out of your business, it’s crucial to have an experienced business litigation attorney by your side to protect your legal rights and safeguard your financial interests. At Barnes & Barnes, P.C., our attorneys provide knowledgeable counsel and high-quality legal services to business owners across a wide range of commercial matters on Long Island. Contact us at (516) 673-0674 to schedule a consultation.
