What is a Forced Buy-Out?

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What is a Forced Buy-Out?

Disputes among shareholders can lead to the dissolution of a corporation, either through court action or agreement. Since the shareholders already disagree on major issues related to corporate operations, the likelihood that they will agree on the terms of a corporate dissolution are slim. For example, it may not be in the best interest of some shareholders to agree to the dissolution of a business. In that case, shareholders can turn to Arizona corporate law for help.

Under A.R.S. § 10-1430(B), a court has the power to dissolve a corporation in a proceeding brought by a shareholder in the following situations:

·         The directors are deadlocked over management of the corporation, shareholders are unable to break the deadlock, and irreparable injury is threatened or being suffered, or the deadlock is preventing the corporation from operating to the advantage of the shareholders.

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

·         The shareholders are deadlocked in voting power and have failed to elect one or more directors for at least two consecutive meetings.

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

This provision is a strong tool for the minority shareholder in a corporation. However, another related provision of Arizona law tends to undermine the power of the minority shareholder to exercise his or her rights under this provision. Under A.R.S. § 10-1434, if the corporation is not publicly traded, and a shareholder brings a proceeding to judicially dissolve the corporation as described above, the corporation can simply opt to purchase the shares of the dissenting shareholder for fair value. The majority shareholders need only give notice within 90 days of the filing of the court proceedings that it is electing a mandatory buy-out, and the minority shareholder is essentially powerless to stop the buy-out. Furthermore, unless the parties can within 60 days of the buy-out election agree on the fair value of the shares, the judge can determine the value of the shares, as well as the terms and conditions of the buy-out. If this election occurs, the petition of the minority shareholder is dismissed and the shareholder has no further power over the corporation, except to receive fair value for his or her shares.

At Williams Mestaz, L.L.P., we focus our efforts on representing your business interests throughout the duration of your case, including during a forced buy-out. When you need help that only an experienced business litigation attorney can offer you, contact Williams Mestaz, L.L.P., at (602) 256-9400.

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