Starting a business with partners, whether friends, family, or colleagues, is often fueled by shared vision and excitement. You draft plans, invest capital, and pour your energy into building something valuable. But even in the best partnerships, disagreements can arise. When those disagreements escalate, particularly in closely held Wisconsin businesses (like LLCs or corporations with a small number of owners), they can threaten the company’s future and the owners’ investments.
At Halling & Cayo, S.C., we regularly help Wisconsin business owners navigate the complex, and often emotionally charged, landscape of owner disputes. Understanding your rights and obligations under Wisconsin law is the crucial first step.
What is a “Closely Held” Business?
We’re generally talking about Limited Liability Companies (LLCs) and Corporations that aren’t publicly traded and have only a handful of owners (members in an LLC, shareholders in a corporation). In these setups, owners are often involved in management, relationships can be personal, and the lines between owner, manager, and employee can sometimes blur. This structure, while offering flexibility, can also become a battleground when trust breaks down or disputes arise.
The Weight of Control: Duties of Majority Owners in Wisconsin
If you hold a majority stake or controlling interest in a Wisconsin LLC or corporation, you have significant power. But with that power comes legal responsibility. Wisconsin law imposes fiduciary duties on those in control. Think of these as duties of trust and confidence owed to both the company itself and the minority owners.
- Duty of Loyalty: This means you must act in the best interests of the company and all its owners, not just yourself. You must avoid self-dealing (using your position to benefit personally at the company’s expense) and usurping corporate opportunities.
- Duty of Care: This requires you to act with the care that a reasonably prudent person in a similar position would exercise under similar circumstances. Essentially, you need to be informed and act responsibly when making decisions.
- Duty of Good Faith and Fair Dealing: This is a fundamental obligation to act honestly and fairly towards the minority owners and the company.
For Wisconsin corporations, these duties are well-established in statutes (see Wis. Stat. § 180.0828) and case law. Majority shareholders and directors cannot engage in conduct that is “oppressive” to minority shareholders – a term Wisconsin courts interpret as burdensome, harsh, wrongful conduct, or a departure from fair dealing.
For Wisconsin LLCs, the rules have become clearer with the implementation of the Wisconsin Uniform Limited Liability Company Law (WULLCL) effective January 1, 2023 (applicable to newer LLCs and older ones that didn’t opt out). This law explicitly states that members in member-managed LLCs and managers in manager-managed LLCs owe fiduciary duties of loyalty and care, along with the obligation of good faith and fair dealing. While your LLC’s operating agreement might modify these duties to an extent, they generally cannot be eliminated entirely, especially regarding bad faith actions or intentional misconduct.
Actions that might breach these duties and lead to claims of minority oppression include:
- Refusing to declare dividends or distributions while paying excessive salaries to the majority.
- Terminating a minority owner’s employment without legitimate cause (especially if employment was a key expectation).
- Denying access to company books and records.
- Siphoning off company assets or opportunities for personal gain.
- Using company funds for personal expenses.
- Trying to force a “freeze-out” (making ownership unbearable) or “squeeze-out” (forcing a sale at an unfair price).
Standing Up for Your Stake: Rights and Claims of Minority Owners
If you’re a minority owner in a Wisconsin closely held business and feel the majority is acting improperly, you have rights and potential legal claims:
- Breach of Fiduciary Duty: You may be able to sue the controlling owners or directors for violating their duties of loyalty, care, or good faith. Depending on the specific harm, this could be a direct lawsuit (if the injury is primarily personal to you) or a derivative lawsuit (brought on behalf of the company if the company itself was the primary party harmed, like when assets are wasted). Determining the right type of suit is critical and fact-specific.
- Minority Oppression Claims: As mentioned, actions that are burdensome, harsh, or unfairly prejudicial can constitute oppression under Wisconsin law.
- Right to Information: You generally have the right to inspect the company’s books and records (See Wis. Stat. § 183.0405 for LLCs, similar rights exist for corporations). The new WULLCL potentially broadens these access rights for LLC members.
- Judicial Dissolution: In severe cases of deadlock, illegal, oppressive, or fraudulent conduct by the majority, or misapplication/waste of corporate assets, a shareholder can petition a Wisconsin court to dissolve the corporation under Wis. Stat. § 180.1430. Similar concepts apply to LLCs. While dissolution is a drastic remedy (essentially ending the company), the threat of it can be powerful leverage. Sometimes, courts might order a buyout instead of full dissolution.
- Dissenters’/Appraisal Rights (Corporations): If the corporation undergoes certain major changes (like a merger or sale of substantially all assets) that you object to, you may have the right under Wisconsin Statutes (§§ 180.1301–180.1331) to demand the corporation buy your shares at “fair value.”
Your specific rights might also be detailed in your company’s Shareholder Agreement or LLC Operating Agreement – these documents are vital.
The Tangled Web: Non-Competes and Restrictive Covenants
Disputes often arise when one owner wants to leave, voluntarily or not, and potentially compete or work elsewhere. This is where non-compete, non-solicitation, or confidentiality agreements come into play. Many owners sign these early on without fully considering their implications during a future breakup.
Wisconsin has a specific statute, Wis. Stat. § 103.465, governing these restrictive covenants. The key takeaway is that Wisconsin law disfavors agreements restricting someone’s ability to earn a living. A non-compete (or similar restriction) is enforceable only if it meets a strict five-part test:
- Is it necessary for the protection of the business?
- Does it have a reasonable time limit?
- Does it have a reasonable geographic limit?
- Is it unreasonable to the employee/owner bound by it?
- Is it unreasonable to the general public?
Crucially, under § 103.465, if a Wisconsin court finds any part of the restriction unreasonable, the entire covenant is illegal and void. Courts won’t rewrite it to make it reasonable. These agreements are heavily scrutinized, so overly broad or vague restrictions are often struck down. Their enforceability (or lack thereof) can significantly impact leverage and options during an owner dispute.
Finding a Path Forward
Disputes between business owners can be resolved through various avenues:
- Negotiation: Direct discussion between owners (often with legal counsel) to reach a settlement, buyout, or restructuring.
- Mediation: A neutral third party helps facilitate discussion and guide the owners toward a mutually agreeable solution.
- Litigation: Filing a lawsuit to have a court decide the outcome.
Given the complexities of Wisconsin corporate and LLC law, fiduciary duties, and the strict standards for restrictive covenants, navigating these disputes requires careful legal analysis and strategic planning.
Facing an Owner Dispute? Let’s Talk.
Whether you’re a majority owner trying to understand your obligations or a minority owner concerned about unfair treatment, navigating these situations under Wisconsin law requires experienced guidance. Ignoring problems rarely makes them disappear; often, they only fester.
At Halling & Cayo, S.C., we understand the financial and emotional stakes involved in closely held business disputes. If you’re facing conflict with your business partners in Wisconsin, please contact me, Sean Sweeney, to discuss your specific situation and explore your options.
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Sean M. Sweeney is a shareholder at Halling & Cayo S.C. His practice focuses on business litigation, offering transparent pricing for business litigation, and recovering investors losses as a result of stock broker fraud on contingent fees. Sean represents investors in FINRA Arbitrations and companies in Wisconsin, all over the United States, as well as internationally with clients in Canada, Germany, and Australia.
Email Sean: sms@hallingcayo.com
Call Sean: 414-755-5020 (Direct Line)