I started a corporation with two friends. We all own one-third of the shares. Recently, I’ve come into conflict with my co-owners, and they have prevented me from a voice in running the business and have fired me as an employee. I’d like to be bought out, but they aren’t making a fair offer. Is there anything I can do?
Few things are more frustrating than being frozen out of a company you helped build. Although it might seem like you have no recourse in this situation since the other two owners will always outvote you, North Carolina has long been at the forefront of protecting shareholders in a close corporation.
North Carolina Statute §55-14-30 allows for a shareholder to petition the courts to dissolve a corporation in certain circumstances. In your case, dissolution could be ordered as being reasonably necessary for the protection of your rights or interests. In looking to determine whether the corporation may be dissolved, the courts will use the “reasonable expectations” test.
Under the reasonable expectations test, a court will order a judicial dissolution if four criteria are met. First, you must show that you had some reasonable expectation of your ownership that was known or assumed by the other shareholders. This is usually an easy threshold to meet. Your expectations of having a say in running the corporation and being an employee of the corporation are expectations that courts have held qualify as a reasonable expectations. The second thing you must prove is that your expectations have been frustrated. Since you don’t currently have a say in the running of the corporation and are no longer employed there, you have also met this criteria.
Third, you must demonstrate that your exclusion has not been through any fault of your own and was largely due to circumstances beyond your control. Generally, if you have not done anything that would specifically harm the corporation, you can claim that your exclusion has not been through any fault of your own. North Carolina courts have held that shareholders who do not bother to learn the corporation’s business or attend company meetings can be excluded, as can shareholders who used their position to embezzle funds. However, the North Carolina Court of Appeals specifically held that a shareholder in a close corporation could not be prevented from receiving a share of the corporate profits because he had sexually harassed an employee. As long as you are not harming the corporation, and are at least making an effort to conduct its business, you probably satisfy the third part of the reasonable expectation test.
Finally, you must be able to show that the specific circumstances of your case entitle you to some relief. If you have been permanently frozen out, the courts will generally find that you are entitled to relief.
Once you have demonstrated that you are entitled to relief under the reasonable expectations test, the court will generally grant your petition for judicial dissolution of the corporation. However, this is not always in your best interest. The usual process calls for the corporate assets to be liquidated to pay off the creditors of the corporation. As with any judicially-ordered sale, you will be lucky to get half of what the assets are really worth. Fortunately, the corporation can avoid dissolution by buying your shares for their fair market value, an outcome that is most likely better for everyone. At Miller & Monroe, we have experience in dealing with corporate disputes and break-ups. We have helped individual investors and corporate entities across many industries. Give us a call today to speak with an attorney.