You went into business as equals. Now your partner controls the bank account, the dividends have stopped, and you are finding out about decisions after they are made. In Part 1 we looked at what the law lets you do once that has happened. This is the part most owners wish they had read first: the agreement that would have mitigated your situation.
The short answer
Almost every freeze-out we litigate could have been mitigated from the start, for a small fraction of what the litigation cost later. The tool that does it is a unanimous shareholders’ agreement (a “USA”), signed while everyone still gets along.
What a good agreement actually does
A well-drafted USA anticipates the specific moves of a freeze-out. A few clauses do most of the work:
- A clean exit. A buy-sell or “shotgun” provision gives the owners an agreed way for one to exit or buy out the other. A falling-out then sets off a process instead of a lawsuit, and neither side can use the threat of one to squeeze the other out cheaply, because the buyout process is specifically outlined.
- Defined pay and profits. A clear compensation policy answers the classic squeeze, where one owner pays themselves through salary, bonuses, or management fees and leaves the other with nothing. Once the rules for taking money out of the business are clearly established in the USA, the profits stop following whoever signs the cheques.
- Guaranteed a say. Board and governance terms can give a minority owner a seat or a vote on the decisions that matter, so no one can be cut out of management of the business.
- Expectations in writing. An oppression claim rises or falls on your reasonable expectations — the deal you actually struck, not the bare rights on your share certificate. Put those expectations on paper, even in a short Memorandum of Understanding (“MOU”) setting out what each partner is responsible for and entitled to, and there is little left for anyone to argue about.
Equal ownership is not equal control. Whoever runs the day-to-day can starve the other of information and money long before it reaches a courtroom.
“We don’t need one” — and why that usually changes
The reasons owners skip a shareholders’ agreement tend to sound like these:
“We’re friends, it won’t come to that.” The freeze-outs we litigate are almost all between people who started as friends or family. Trust is what makes the eventual squeeze possible.
“We each own half, so we’re protected.” Equal ownership is not equal control. Whoever runs the day-to-day can starve the other of information and money long before it reaches a courtroom.
“The lawyer who set up the company covered this.” Incorporating a company is not the same as agreeing how the owners will run it. Standard incorporation documents rarely include the exit, pay, and governance terms that prevent a freeze-out.
What you should do now
A USA earns its value even when prevention fails. If a dispute comes anyway, you are not asking a judge to work out what you were promised; you hand over a document that already says it. That is the difference between an oppression claim and a right you can simply enforce.
If you are about to take on a partner, put the agreement in place before you start. If you are already in business without one, it is not too late — but it is far easier to negotiate while things still work than after the first real disagreement.
These terms are far cheaper to agree than to litigate. Presvelos Law P.C. can walk you through where you stand and what to put in place.