No distributions, no information, no say: signs a minority owner is being squeezed out

The pattern, not the single event, is the warning sign

You may be getting squeezed out if several of these happen together: you stop receiving financial information, distributions stop while the majority's compensation rises, you are removed from your job or the board, meetings happen without you, and an offer arrives to buy your interest at a price that seems low. Any one of these can have an innocent business reason. A pattern of them, especially after a disagreement, usually means the majority is trying to make your ownership worth less to you than it is to them.

I handle member buyouts, claims of minority shareholder oppression and enforcement of shareholder agreements as part of my business litigation practice. What follows is general information about how these situations tend to unfold under Texas law and what to do first. It is not advice about your company. Your rights depend heavily on your documents, so talk to a licensed Texas attorney before you act.

Common squeeze-out tactics I see

Majority owners rarely announce that they want you gone. They use the control they already have. Because a minority owner usually cannot sell to an outsider easily, cutting off the economic benefits of ownership is often enough to pressure a sale on the majority's terms.

• Stopping distributions while the company remains profitable
• Raising the majority owners' salaries, bonuses or perks to absorb profit
• Ending the minority owner's employment or officer role
• Withholding financial statements, tax documents or bank records
• Holding meetings or taking written consents without notice to the minority
• Issuing new ownership interests or making cash calls that dilute the minority
• Moving business opportunities, customers or assets into a separate company the majority controls

When it is probably not a squeeze-out

Not every unwelcome decision is an attack. A company that stops distributions because it is saving for an expansion, repaying a loan or riding out a slow year may be making an ordinary business judgment, especially if the majority owners are taking the same cut. A role change can reflect a real performance problem. Late financial statements can be a bookkeeping backlog rather than a cover-up.

The questions that help separate the two: Are the majority owners treating themselves the same way they are treating you? Was the decision made through the process the agreement requires? Is there a documented business reason? Did it follow a disagreement in which you opposed the majority? In my experience with Dallas companies, honest answers to those questions usually make the situation clearer, and sometimes a direct conversation, ideally with an advisor present, resolves a misunderstanding before it becomes a dispute.

Phantom income: when ownership costs you money

One of the sharpest pressure points involves taxes. Many closely held companies are pass-through entities, meaning the company's income is reported on the owners' personal returns whether or not any cash is distributed. If the majority stops distributions in a profitable year, a minority owner can owe tax on their share of income they never received. Practitioners call this phantom income, and it is one of the governance issues I advise on when drafting company and shareholder agreements.

Well-drafted agreements often require tax distributions large enough to cover each owner's tax on allocated income. If your agreement has that provision and it is being ignored, that is a concrete issue to raise. If your agreement does not have it, the analysis is harder, and you should talk to your CPA and an attorney together about where you stand.

Texas law gives minority owners fewer default protections than many expect

Owners are often surprised to learn how much depends on what was written at formation. In a 2014 decision, Ritchie v. Rupe, the Supreme Court of Texas rejected a court-created claim for minority shareholder oppression, leaving a narrower statutory path focused on a rehabilitative receivership. In practice, that puts more weight on what the company agreement or shareholder agreement says, and on other claims that may be available depending on the facts.

LLC owners face a related surprise. Under the Texas Business Organizations Code, a member of a limited liability company may not withdraw or be expelled from the company, unless the company agreement provides otherwise. That means you generally cannot simply quit and demand to be paid out, and the majority generally cannot simply remove you as an owner. Exit terms have to come from the agreement or from a negotiated deal. This is why I spend so much time on buy-sell terms when companies form; my guide on partners who never wrote down a buyout explains what those terms do.

What to gather before you confront anyone

The instinct is to send an angry email. Resist it. The strongest position comes from documents, not from arguments, and anything you write may be read later by a judge or an arbitrator. Quietly assemble what you already have access to, and write a dated timeline of events while your memory is fresh.

Do not take company property or access systems you are no longer authorized to use. If you are still an employee or officer, keep doing your job properly. How you behave during this period matters, both to any later negotiation and to any later dispute.

• The certificate of formation and every version of the company agreement, bylaws or shareholder agreement
• Any buy-sell agreement, right of first refusal or employment agreement
• Your capital contributions and the records showing your ownership percentage
• Tax forms showing income allocated to you, and records of distributions received
• Minutes, consents and notices of meetings, or evidence that you were not given notice
• Emails and messages about compensation, distributions or your role
• Any offer to buy your interest, with its date and terms

Reading your own documents for the provisions that matter

Once you have the documents, look for the provisions that tend to decide these disputes. Many owners have never read their agreement since signing it, and some discover terms that help them considerably. Others find that the agreement gives the majority more power than they realized, which is just as important to know before you spend money on a fight.

Read for these questions. What decisions require unanimous or supermajority approval? Is there a right to receive financial information or inspect records? Must the company make tax distributions? Is there a buyout trigger, and how is price set? Can the majority issue new interests or make cash calls, and on what notice? Is there a dispute resolution clause requiring mediation or arbitration? Write down what you find, page by page, so an attorney can review it efficiently.

Your realistic options, from negotiation to litigation

Most of these situations resolve with a negotiated buyout or a restructured relationship rather than a trial. The question is what leverage each side has, and that depends on the documents, the facts and the cost of fighting. An attorney can often change the tone simply by asking, formally, for the records and distributions the agreement requires.

Valuation is usually the center of the negotiation. Before you accept or reject an offer for your interest, you need a defensible idea of what the business and your share are worth, which may involve a valuation professional. The guide on knowing what a business is worth before you answer an offer is a useful primer on that side of the question.

When negotiation fails, the options may include mediation, arbitration if the agreement requires it, or litigation over breach of the agreement or other claims the facts support. I handle trials, arbitrations and appeals, and my approach is cost-sensitive: I help clients concentrate on the facts that will actually decide the matter rather than every grievance. No attorney can promise how a dispute will end, and you should be wary of anyone who does.

Mistakes that weaken a minority owner's position

Waiting too long is the most common. Deadlines can apply to legal claims, and evidence becomes harder to gather as time passes. Signing documents the majority puts in front of you without review is another: a consent, a release, an amended agreement or a new employment contract can give up rights you did not know you had.

Others hurt their own position by competing with the company, taking customer lists or venting publicly. And many minority owners accept the first buyout offer simply to end the stress, without understanding what the interest is worth or what the tax consequences of the sale will be. A short consultation before you sign anything is almost always worth it.

How I approach these cases for owners in Dallas

When an owner calls me about a squeeze-out, the first step is reviewing the documents and the timeline. I tell you what the agreement says, where I see leverage and risk, and what a sensible first move would be, whether that is a formal records request, a negotiation, or preparing to enforce the agreement. We discuss cost before anything else happens, so you decide how far to go.

I work from One Campbell Centre in Dallas and handle matters in Texas state courts and in the federal courts of the Northern and Western Districts of Texas. If you are on the other side of this, a majority owner trying to resolve a stalemate fairly, the same principles apply: clear documents and an honest valuation end most disputes faster than litigation. Before you sign the next version of your agreement, read my guide on what to ask an attorney before you hire one, and plan for the yearly records and filings that keep a company in good standing, because sloppy records cause many of these disputes.

Questions people ask me