What Happens When Shareholders are Deadlocked About Selling or Liquidating a Business?

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What Happens When Shareholders are Deadlocked About Selling or Liquidating a Business?

Corporate disputes among shareholders, officers, and directors often arise when the business comes to an end. Some shareholders may wish to sell or liquidate the business, while other shareholders disagree. If shareholders become hopelessly deadlocked in this manner, there are some solutions.

One solution is to look to the corporation’s Articles of Incorporation for guidance. A well-drafted set of articles may specifically provide for the dissolution of a business in the event of a deadlock. This is always the first place to look if you find yourself in this situation. If the articles are ambiguous or silent on the issue, then it may be up to the court system to break the deadlock in one way or another.

Another potential solution is judicial dissolution. Arizona law provides for the judicial dissolution of a corporation upon the petition of one or more shareholders. Judicial dissolution can occur in the following situations:

·         Directors are deadlocked in corporate management affairs, in that they cannot be conducted to the benefit of the shareholders, the shareholders are unable to break the deadlock, and irreparable injury to the corporation is threatening to occur or is occurring.

·         The directors have acted, are acting, or will act in a manner that is illegal, oppressive, or fraudulent.

·         The shareholders are deadlocked and have failed for at least two consecutive annual meeting dates to elect one or more directors.

·         Corporate assets are being wasted, misapplied, or diverted for non-corporate purposes.

In the case of a non-publicly traded corporation, the corporation can opt to purchase the shares of the dissenting shareholder(s) for a fair price by giving notice no more than 90 days after the shareholder has a filed a suit for judicial dissolution. In this situation, it is up to the judge to dictate the terms of the sale, including the price of the shares.

Williams Mestaz, L.L.P., will offer you comprehensive representation at all stages of your business dispute. No matter what issues your case involves, we have the experience to get you the results that you are seeking. Contact our office at (602) 256-9400 and set up a time to meet with us today.

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