The Corporate Freeze-Out: Court Must Step In to Enforce Minority Shareholder Protections

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We’ve written frequently on this blog about the importance of entering clear, written contracts governing the rights of LLC members. A recent case decided by Judge Leibensberger in the Business Litigation Session demonstrates that despite clear contractual protections of minority shareholders, the enforcement of those protections sometimes requires a court’s intervention.

In Penebre v. Kurland, the parties’ company, Shakensoft, sold a successful software application to bars and restaurants that allowed convenient processing of customer orders. The LLC had three members: Dylan Penebre, a minority shareholder, and Daniel and Scott Kurland, who combined owned 77% of the LLC.

After an unresolved managerial impasse, Daniel and Scott used their combined 77 percent interest to vote to immediately close Shakensoft’s Boston office and terminate all of its employees, including the Plaintiff. Despite the minority shareholders’ protestations that the vote was invalid under the LLC operating agreement’s “Major Decisions” clause, the majority shareholders nevertheless unilaterally removed all office equipment and shut down employee access to the company’s computers. Penebre, along with a fellow minority shareholder, responded by filing suit and seeking a preliminary injunction restoring the Boston office.

The Court agreed with the Plaintiffs, concluding that they had shown a likelihood of success on their claims that the majority shareholders did not have the 85% vote necessary for their conduct and had impermissibly refused to allow the minority shareholders to invoke their right to the buy-sell process laid out in the operating agreement. The Court specifically noted that the protections in the operating agreement “express[] and guarantee[] a valuable protection against tyranny by the majority” and made a sweeping order restoring the Boston office of Shakensoft and requiring the parties to comply with the operating agreement’s buy-sell provisions.

The minority shareholders here did just about everything they could have done to ensure protections for themselves against unilateral action by the majority. That they had to hire counsel and obtain a court order to have the agreement enforced is troubling, but unfortunately not surprising.

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