In a recent Washington Supreme court case (known as "Sound
Infinity"), our court approved the majority shareholders'
ouster of a minority shareholder notwithstanding the minority
shareholder's objections. The case has far reaching
implications for closely held corporations and limited liability
companies, because (among other things) the court ruled that
"in a small, closely held corporation, corporate actions to
restore harmonious relations, including ousting those who dislike
and distress the others are valid".
In Sound Infinity, two shareholders holding the majority of
stock in Sound Infinity (Infinity of Kirkland) ousted the minority
shareholder. According to the court, they ousted the minority
shareholder by completing a reverse stock split and mandatory
purchase of the minority shareholder's fractional shares. The
court went on to rule that the minority shareholder's sole
remedy was the statutory appraisal rights that are granted to a
Cases like Sound Infinity give significant guidance to owners of
businesses that are closely held. Business owners need to be very
careful when selecting business partners and structuring agreements
between owners. Whether in a partnership, a limited liability
company or corporation, majority owners have significant advantages
over minority owners in a closely held corporation. As the Sound
Infinity case demonstrates, the majority owners can take
significant adverse action against a minority interest owner.
I deal regularly with closely held businesses, and it is
imperative to carefully structure your company and its ownership.
You need to work closely with your attorney to carefully craft the
operative agreements (i.e. shareholders agreement, voting trust,
LLC Agreement, or partnership agreement), to properly serve the
company purposes and to address the varied and often complex
ownership issues that may arise during the company's life path.
. There is no "cookie cutter" approach as business
relationships will vary greatly. Take a hard look at your ownership
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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An increasingly important responsibility of the general counsel is to advise the corporation, and its officers and directors, on the application and extent of insurance/advancement and indemnification protections.
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