The Oklahoma Bar Journal January 2023

T ransactional L aw

Remedies for the Freeze-Out: Employment Rights of Minority Shareholders of CloseCorporations

By D. Benham Kirk and Alexandra J. Gage

A “FREEZE-OUT,” ALSO KNOWN AS A “SQUEEZE-OUT,” is a classic problem in the world of close corporations in which a minority shareholder is ousted by the major ity. Depending on the state in which you reside, there are remedies currently available to minority shareholders in this situation. However, this issue is currently unsettled under Oklahoma law. This article explores how the issue may be decided under Oklahoma law in the future and provides options lawyers may consider to protect their clients in the interim.

shareholders’ agreement or any employment agreements. It is now 10 years later, and the business has flourished. The company has never paid a dividend. Any amounts not paid out to the shareholders in the form of salaries have been retained to grow the business. Steve and Audra suddenly have a serious falling out with Jon regarding a matter unrelated to Jon’s performance. At the next annual meeting of the share holders, after giving proper notice and following all corpo rate procedures correctly, Steve and Audra amend the bylaws to reduce the number of direc tors to two and elect only them selves as directors. They fire Jon as an officer and employee, change the locks to the plant and issue orders to the compa ny’s security guards to refuse Jon admittance to the premises. They also give themselves

50% of the shares, minority share holders are subject to situations like a freeze-out by the majority shareholders. A freeze-out can be explained by the following example: Steve, Jon and Audra start their own manufacturing business by incorporating under Oklahoma law using the standard form of certificate of incorporation available from the secretary of state’s office. Each founder contributes $5,000 for one-third of the authorized stock and begins working full time for the company as an officer and employee. The bylaws provide that the board will consist of three directors elected annually by majority vote of the share holders, all officers and employ ees will serve at the pleasure of the board, and the bylaws may be amended by majority vote of the board or shareholders. The founders do not enter into a

WHAT IS A FREEZE-OUT? To understand the issues involved in a freeze-out, one must first have a basic understanding of close corporations. A close corpo ration (also commonly referred to as a “closely held corporation”) is a privately held corporation whose shares are owned by a small group of investors and are not available to the public. 1 This is also known as a privately held corporation. Within a close cor poration, there may be minority shareholders and majority share holders. However, the expectations of a minority shareholder are generally similar to those of the majority shareholder: 1) an active participating role in management, 2) an employment or consulting role for compensation and 3) a return on investment. A minority shareholder holds less than 50% of the shares, while a majority shareholder holds more than 50% of the shares. By holding less than

12 | JANUARY 2023

THE OKLAHOMA BAR JOURNAL