Contributor: Lee Grossman

Understanding Corporate Freeze-Outs Under North Dakota Law

Corporate freeze-outs are a significant issue for minority shareholders, particularly in close corporations where the stock is not publicly traded. In these cases, majority shareholders or directors may employ various strategies to diminish the power, influence, or financial benefits of minority shareholders. North Dakota law, particularly through its codified statutes and case law, offers protections to minority shareholders facing such tactics, ensuring that corporate governance remains fair and equitable.

What Is A Freeze-Out?

A corporate freeze-out typically occurs when majority shareholders or directors engage in actions designed to force minority shareholders out of the corporation or reduce the value of their shares. These tactics can include:

• Withholding dividends that would otherwise be payable to shareholders.
• Removing minority shareholders from key decision-making roles.
• Engaging in mergers or restructurings that dilute the minority shareholders’ interest.
• Implementing excessive compensation plans for majority shareholders, reducing the corporation’s profitability and value for minority holders.

In a closely-held corporation, where shares are not easily sold on the open market, these tactics can be particularly damaging. Without liquidating their shares or receiving dividends, minority shareholders may feel trapped, with no viable exit strategy except for a sale at an undervalued price to the majority shareholders.

Protections For Minority Shareholders

North Dakota is unique in offering some of the strongest shareholder rights in the United States, particularly for minority shareholders in close corporations. The North Dakota Business Corporation Act (NDBCA), found in Chapter 10-19.1 of the North Dakota Century Code, provides a robust framework that seeks to balance the power between majority and minority shareholders.

Fiduciary Duty Of Majority Shareholders

One of the key aspects of North Dakota law is its recognition that majority shareholders owe a fiduciary duty to minority shareholders. Under N.D.C.C. § 10-19.1-50, majority shareholders must act in good faith and cannot use their power to oppress or unfairly disadvantage minority shareholders. This fiduciary duty means that majority shareholders must consider the interests of the minority, and they cannot use their control of the corporation to benefit themselves at the expense of others.

Remedies

In cases where a minority shareholder believes they are being oppressed or unfairly treated, North Dakota law provides several remedies. Shareholders can petition the court for relief in cases where an officer or director of the corporation violates the law.

If a court finds that oppression has occurred, it can order a variety of remedies, including:

• Dissolution of the corporation.
• A forced buyout of the minority shareholders’ interest at a fair value.
• Appointment of a receiver to manage the affairs of the corporation.
• An award of attorney’s fees.

These remedies are designed to protect minority shareholders from being unfairly squeezed out or having their shares devalued by the actions of the majority.

Shareholder Agreements And Buyout Rights

North Dakota law also allows shareholders to enter into agreements that govern their relationships and the operation of the corporation. These agreements can include provisions for resolving disputes, mandatory buyouts, and other mechanisms to prevent or address freeze-outs. Under N.D.C.C. § 10-19.1-83, these agreements are enforceable, providing a clear legal structure to protect minority shareholders from being subjected to freeze-outs.

Conclusion

Corporate freeze-outs are a serious issue, especially in closely-held corporations where the ability to liquidate shares or escape oppressive conditions is limited. However, North Dakota’s legal framework, particularly its recognition of fiduciary duties and robust protections against oppression, ensures that minority shareholders have a path to seek relief. By enforcing fiduciary duties, providing judicial remedies for oppression, and allowing for detailed shareholder agreements, North Dakota law strives to protect the rights and interests of minority shareholders in corporate governance.

Consult with experienced legal professionals at SW&L Attorneys to learn appropriate legal remedies. If you need to consult with an attorney about corporate freeze-outs, please contact us!

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