Squeeze-Out Technique: Termination of the Minority Shareholder’s Employment

The termination of a minority shareholder’s employment; the reduction of their salary; and/or the termination of their spouses’ and/or children’s employment frequently have devastating consequences. It is common that the terminated minority shareholder’s only source of income was the closely-held business in which they hold an ownership interest. Without their salary, the minority’s interest is, at least temporarily, worthless.

The majority’s decision to terminate their employment, or sharply cut the minority shareholder’s salary, frequently results in an immediate and significant economic crisis. It does not take much to imagine the financial strains associated with the loss of employment. Sometimes to make the squeeze-out more effective the majority shareholder may cancel the minority shareholder’s insurance policies and deprive them of the financial benefits of being an owner/employee of the closely held company. During the course of my representation of oppressed minority shareholders, I have seen majority shareholders try to take away the minority shareholder’s use of a company car and the suspension of their country club membership.

The termination of the minority shareholder’s employment is often coupled with the use of other squeeze-out techniques such as: withholding shareholder distribution; changing the company’s office’s locks; escorting the minority shareholder out of the building; making inappropriate comments to other employees, vendors, customers or clients about the minority shareholder or their termination; changing the computer’s passwords; denying access to the company’s books and other financial records; and sometimes threatening or engaging in physical violence.

Generally, the goal of the majority shareholder who terminates the employment of the minority (and/or their family members) is to acquire their interest at a below market price. Frequently, a terminated minority shareholder is pressed for money. Like most people, they still have the same financial obligations they had the day before their employment was terminated. Often, minority shareholders confronted with this dilemma will accept a below-market price for their interest in the company so that they can meet their current financial obligations. That is unfortunate.

Fortunately, the law may provide redress for minority shareholders who find themselves in the afore-described situation. The oppressed minority shareholder may seek remedy in the Courts. Many times, New Jersey Courts will grant an injunction either reinstating the minority member’s employment, or ordering the majority to pay the minority shareholder as if they were still employed. Unlike regular “at will” employees who are severally limited as to the ways they can challenge an employer’s decision to terminate them; a terminated minority shareholder has the oppressed minority shareholder statute along with enhanced fiduciary duty claims within their arsenal.