Forced Buyouts in a Business Divorce – Valuable Weapon or Trap for the Unwary?

by Jaburg Wilk

Many part-owners of a business are not aware that, as shareholder of an Arizona corporation, they gain the right to seek to dissolve the corporation under certain circumstances, but at the same time subject themselves to mandatory buyout procedures which do not apply to other types of business organizations. 

Under the Arizona Corporation Statute, A.R.S. § 10-1430(C), a corporation may be judicially dissolved, on petition of a shareholder, upon a determination that:

  1. The directors are deadlocked in the management of the corporate affairs, the shareholders are unable to break the deadlock and irreparable injury to the corporation is threatened or being suffered or the business and affairs of the corporation cannot be conducted to the advantage of the shareholders generally because of the deadlock;
  2. 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;
  3. The shareholders are deadlocked in voting power and have failed for a period that includes at least two consecutive annual meeting dates to elect one or more directors; or
  4. Corporate assets are being wasted, misapplied or diverted for non-corporate purposes.

This statutory provision is, of course, a valuable weapon in the hands of a minority shareholder.  However, a companion section of the statute, A.R.S. § 10-1434, significantly limits its value and usefulness by providing that, in the case of non-publicly traded corporations, the corporation may elect, by notice given within 90 days of the filing of the action for judicial dissolution, to purchase the shares of the dissenting shareholder for “fair value.”  The statute further provides that fair value is to be decided by a judge, without a jury, who is entitled not only to set the price but also determine the terms of sale.

By way of comparison, the Arizona limited liability company statute, A.R.S § 29-795, provides for judicial dissolution of an LLC, on application of a member, on the grounds that:

  1. It is not reasonably practicable to carry on the limited liability company business in conformity with an operating agreement;
  2. Unless otherwise provided in an operating agreement, the members or managers are deadlocked in the management of the limited liability company and irreparable injury to the limited liability company is threatened or being suffered or the business of the limited liability company cannot be conducted to the advantage of the members generally because of the deadlock;
  3. Unless otherwise provided in an operating agreement, the members or managers of the limited liability company have acted or are acting in a manner that is illegal or fraudulent with respect to the business of the limited liability company;
  4. Unless otherwise provided in an operating agreement, substantial assets of the limited liability company are being wasted, misapplied or diverted for purposes not related to the business of the limited liability company.

While the grounds for dissolving an LLC are essentially the same, the statutes are different in one extremely important respect. That is, unlike a corporate shareholder, an LLC member bringing an action to dissolve the company is not subject to a mandatory buyout of his or her membership interest. 

Sophisticated business owners can take advantage of their knowledge of these statutes in a number of ways:

For the minority owner, these may include, under appropriate circumstances:

  • Causing the business to be operated in the form of a limited liability company, rather than a corporation,
  • Obtaining an agreement by the corporation and controlling shareholders to waive any statutory buyout rights, or
  • Causing the business to be incorporated under the law of another state (provided that the laws of that state otherwise are favorable to a minority owner.)         

Conversely, as the majority or controlling owner, the approach should be to resist any of the minority-owner strategies outlined above.  Depending on other considerations, including tax issues, the appropriate course of action may be:

  • Insisting that the business be operated in the form of an Arizona corporation, or
  • Having in effect a well-drafted operating agreement, with appropriate provisions requiring the purchase and sale of the minority owner’s interest at an agreed-upon price or formula.   

Of course, the best course of action in a given case will depend on the specific facts and circumstances, including, among other things, the terms of any existing agreements, the relative bargaining positions of the parties and the amount of money at stake.  

The experienced business attorneys at Jaburg & Wilk can assist the co-owners of a business at the formation stage, both in selecting the proper form of organization for their business and in drafting documents to protect their particular interests, whether as a minority or majority owner.  Alternatively, for co-owners who are already involved in disputes with their partners, we can provide effective and knowledgeable advice and assistance in resolving those disputes through negotiation or litigation.  


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Jaburg Wilk | Attorney Advertising

Written by:

Jaburg Wilk

Jaburg Wilk on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.