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 dissenting shareholder.
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 structure today.
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