An Introduction to Minority Shareholder Rights in Minnesota

Minority Shareholders in Minnesota

If you own a minority interest in a Minnesota corporation or limited liability company (LLC), you can find yourself at the mercy of those who control the company. That risk is most acute in a closely held corporation, where a minority shareholder can be subject to conduct by the directors or those in control that is unfairly prejudicial toward the shareholder. Minn. Stat. § 302A.751, subd. 1(b)(3). To protect minority owners from unfairly prejudicial treatment, the Minnesota Legislature enacted the shareholder-relief provisions of the Minnesota Business Corporation Act, chiefly Minn. Stat. § 302A.751, modeled largely on the Model Business Corporation Act.

The statute does more than name the harm. Its central practical remedy is a court-ordered, fair-value buy-out of your shares. Under subdivision 2, in an action involving a corporation that is not publicly held, the court may “order the sale by a plaintiff or a defendant of all shares of the corporation held by the plaintiff or defendant to either the corporation or the moving shareholders,” at “the fair value of the shares as of the date of the commencement of the action or as of another date found equitable by the court.” Minn. Stat. § 302A.751, subd. 2. For most squeezed-out minority owners, that forced buy-out, not dissolution, is the relief they actually want.

Minn. Stat. § 302A.751

The centerpiece statute protecting minority shareholders of closely held corporations is Minn. Stat. § 302A.751. It “authorizes equitable relief for minority shareholders who fail or are unable to bargain for and obtain adequate contractual safeguards in the articles, bylaws or a shareholder agreement.” (See footnote 1.) Where you did bargain for written protections, subdivision 3a presumes those agreements control: “any written agreements, including employment agreements and buy-sell agreements, between or among shareholders or between or among one or more shareholders and the corporation are presumed to reflect the parties’ reasonable expectations concerning matters dealt with in the agreements.” Minn. Stat. § 302A.751, subd. 3a. The equitable-relief safety net therefore matters most where such safeguards are absent or incomplete.

Section 302A.751 was modeled largely on Model Business Corporation Act § 14.30(a)(2)(ii), with a deliberate change. The Model Act let a shareholder seek judicial dissolution where “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.” Minnesota carried forward the “illegal” and “fraudulent” grounds essentially verbatim (now subdivision 1(b)(2)) but replaced the Model Act’s term “oppressive” with “unfairly prejudicial” (subdivision 1(b)(3)). See Minn. Stat. § 302A.751, subd. 1(b)(2)–(3).

The “oppressive” ground is only one of four shareholder grounds for judicial dissolution the Model Act recognizes, and Minnesota’s statute tracks the companion grounds: (i) director deadlock that threatens irreparable injury or prevents the business from being conducted to the shareholders’ advantage; (ii) illegal, oppressive, or fraudulent conduct by those in control; (iii) shareholder voting deadlock that fails to elect directors across at least two consecutive annual meetings; and (iv) misapplication or waste of corporate assets. Model Business Corporation Act § 14.30(a)(2).

The Legislature’s choice of “unfairly prejudicial” was deliberate. The Legislature enacted section 302A.751 in 1981 to give minority shareholders in closely held corporations enhanced protection. Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d 173, 184 (Minn. App. 2001). The change “was to lower the threshold for relief . . . by use of a term which has not been subject to narrow judicial interpretation and to allow consideration of injuries suffered by shareholders other than solely as investors.” (See footnote 2.) The statute reaches conduct against you not only in your capacity as a shareholder or director, but also “as officers or employees of a closely held corporation.” Minn. Stat. § 302A.751, subd. 1(b)(3). In the Cold Spring Granite litigation, the court of appeals read the statute the same way, holding that “given its broad remedial purpose, we read § 302A.751 to require a separate analysis of whether respondents’ conduct was unfairly prejudicial,” and the Minnesota Supreme Court quoted that reading on review. U.S. Bank N.A. v. Cold Spring Granite Co., 802 N.W.2d 363, 376 (Minn. 2011) (quoting the court of appeals’ decision).

The operative “unfairly prejudicial” standard lives in subdivision 1, not in subdivision 3a. Minn. Stat. § 302A.751, subd. 1(b)(3) authorizes a court to grant equitable relief or dissolution where the directors or those in control “have acted in a manner unfairly prejudicial toward one or more shareholders.” Subdivision 3a supplies the interpretive lens the court applies to that standard: in deciding whether to order relief, dissolution, or a buy-out, the court “shall take into consideration the duty which all shareholders in a closely held corporation owe one another to act in an honest, fair, and reasonable manner in the operation of the corporation and the reasonable expectations of all shareholders.” Minn. Stat. § 302A.751, subd. 3a.

Minnesota’s courts, not a commentator, define what “unfairly prejudicial” means. The Court of Appeals in Berreman v. West Publishing Co. held that “unfairly prejudicial conduct . . . is conduct that frustrates the reasonable expectations of shareholders in their capacity as shareholders,” and directed that the term be liberally construed. 615 N.W.2d 362, 373-74 (Minn. App. 2000). Gunderson applied that reasonable-expectations test to the shareholder-employee context. 628 N.W.2d 173, 184–86 (Minn. App. 2001). The Minnesota Supreme Court reached the same conclusion in Cold Spring Granite, holding that subdivision 3a “informs our interpretation of the term ‘unfairly prejudicial’ in subdivision 1, and indicates that ‘unfairly prejudicial’ conduct includes conduct that violates the reasonable expectations of the minority shareholder.” 802 N.W.2d 363, 378 (Minn. 2011). The Court expressly left open “the possibility that conduct other than conduct violating the reasonable expectations of the shareholder may also be ‘unfairly prejudicial,’” so you should not treat the reasonable-expectations test as the outer limit of relief. Id.

A profitable company is no defense. In weighing relief the court “shall take into consideration the financial condition of the corporation but shall not refuse to order equitable relief, dissolution, or a buy-out solely on the ground that the corporation has accumulated or current operating profits.” Minn. Stat. § 302A.751, subd. 3.

If you are a minority member of a Minnesota LLC rather than a shareholder in a corporation, the analogous protection now lives in Minn. Stat. § 322C.0701, part of the Minnesota Revised Uniform Limited Liability Company Act (Chapter 322C). That chapter replaced the former LLC Act (Chapter 322B) for all Minnesota LLCs effective January 1, 2018. The statute an earlier version of this article cited, Minn. Stat. § 322B.833, was repealed (Laws 2014, ch. 157, art. 1, § 91) and is no longer law. Under Minn. Stat. § 322C.0701, subd. 1(5), a member may petition for judicial dissolution where the managers, governors, or those members in control “have acted, are acting, or will act in a manner that is illegal or fraudulent” or “have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.” And under subdivision 2, the court “may order a remedy other than dissolution, which may include the sale for fair value of all membership interests a member owns in a limited liability company to the limited liability company or one or more of the other members,” so a squeezed-out member can obtain a fair-value buy-out instead of dissolving the company. The LLC standard is close to, but not identical with, the corporate one: section 302A.751 turns on conduct that is “unfairly prejudicial,” while section 322C.0701 turns on conduct that is “oppressive.”

The practical effect of these broad standards is significant. By using broad concepts such as “unfairly prejudicial” conduct rather than delineating specific instances, the statute leaves the type of behavior that warrants a grant of equitable relief to judicial determination on a case-by-case basis, with reference to the extensive precedent. (See footnote 3.) The court weighs the shareholders’ duty to act in an honest, fair, and reasonable manner and the reasonable expectations of all shareholders. Minn. Stat. § 302A.751, subd. 3a. It also prefers tailored remedies over the drastic step of dissolution: in deciding whether to dissolve, “the court shall consider whether lesser relief suggested by one or more parties, such as any form of equitable relief, a buy-out, or a partial liquidation, would be adequate.” Minn. Stat. § 302A.751, subd. 3b. The intentional creation of this uncertainty can be viewed as both positive and negative.

The uncertainty regarding recovery, or the existence of a claim for that matter, creates an incentive to seek other avenues of conflict resolution, such as good old-fashioned negotiation over a drink or the help of disinterested counsel. The uncertainty becomes a bargaining chip if you frame it correctly during negotiations. It also forces you to evaluate your position, ideally with input from a qualified disinterested party, before you engage the judiciary.

The same uncertainty has drawbacks. Whether you are in the majority or the minority, it makes risk assessment of any action difficult. If you cannot value the risk of an action in today’s market, you cannot readily predict the true financial value of a transaction. A breach of contract, for example, comes with an ascertainable degree of risk, the value of non-performance; but when you cannot predict whether a given action will be found unfairly prejudicial, that risk becomes very difficult to assess.

Despite that risk, shareholders and members still often resort to legal recourse, and the relief a court can grant justifies it. Under Minn. Stat. § 302A.467, if a corporation or an officer or director of the corporation violates a provision of the Minnesota Business Corporation Act, a court may, in an action brought by a shareholder, “grant any equitable relief it deems just and reasonable in the circumstances and award expenses, including attorneys’ fees and disbursements,” to the shareholder. The former LLC counterpart, Minn. Stat. § 322B.38, carried nearly identical language, but it is no longer in force: it was repealed with the rest of Chapter 322B effective January 1, 2018 (Laws 2014, ch. 157, art. 1, § 91). For LLCs governed by Chapter 322C, the principles of law and equity supplement the chapter unless displaced by its particular provisions (Minn. Stat. § 322C.0107). The corporate provision, section 302A.467, remains in force.

What follows is an evaluation of how these principles play out in the scenarios a minority shareholder or member of a closely held corporation or LLC can face. The overview focuses on cases from the 21st century, unless a specific area of law lacks a contemporaneous decision.

[1] Joseph Edward Olson, Statutory Changes Improve Position of Minority Shareholders in Closely-Held Corporations, 53 Hennepin Law. 10, 11 (Sep./Oct. 1983).

[2] Id. at 16.

[3] Id. at 23.