When business partners or members of an LLC stop seeing eye-to-eye, tensions can escalate to a point where one or more partners or members try to shut another partner or member out of the business. A partner or managing member may change the locks, eliminate access to bank accounts, and/or stop distributions. Sometimes, a “squeeze-out” is more subtle, such as changing compensation schemes or negotiating a sale of the business to the detriment of a single partner.
The first question in such situations is whether the partners doing the squeezing out (let’s call them the “controlling partners”) have the authority to engage in such conduct. For example, does the partnership or operating agreement give them the right (by majority vote or by virtue of being the managers) to change compensation or control access to the premises? If not, then the conduct is probably unlawful.
But even if the controlling partners have the votes or authority, that does not mean they can simply squeeze out partners/members with whom they disagree. Partners and members in a closely-held LLC owe fiduciary duties to one another. That means that actions must be taken for the benefit of the business as a whole, and not just for the benefit of those in control.
But what can the partner/member who is the object of the squeeze-out do? The key is to address the situation as early as possible, and with the benefit of legal advice. Sometimes, gently reminding fellow partners of their fiduciary obligations can discourage hasty conduct. If not, then it is important to have a strategy and “be ready” if and when the squeeze-out occurs.
Once a squeeze-out occurs, quick action is often (though not always) the best course. For example, the partner being squeezed out may file a motion for a temporary restraining order prohibiting interference with his or her rights in the business. Although seeking such emergency court intervention is time-consuming and costly, it can help lead to a relatively quick resolution. The alternative is often years of litigation during which the that partner remains locked out of the business.
A squeezed out partner or member needs to try to remove emotion for the situation, develop a sound legal strategy, and execute on that strategy. Rash reactions often end up weakening that partner’s legal position and increasing the cost of the dispute.