Can a Shareholder Be Forced to Sell Their Shares?

When Can a Shareholder Be Forced to Sell Their Shares in Minnesota?

A Minnesota shareholder can be forced to sell in four main ways. The first two are a buy-sell or drag-along agreement that binds them and a cash-out merger or share exchange the majority approves. The others are a reverse split followed by a cash payment for the resulting fraction and a court order under Minn. Stat. § 302A.751.

Each route has its own rules and its own protections:

1. A contract. A shareholder agreement can require a sale on a death, a departure, or a buyer’s offer. A shareholder control agreement signed by all the shareholders “is valid and specifically enforceable” (§ 302A.457, subd. 2). Its terms decide when the duty to sell arises.
2. A cash-out merger or share exchange. “The plan of merger or exchange is adopted when approved by the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote” (§ 302A.613, subd. 2). In an exchange, the acquirer may “acquire all of the outstanding shares of one or more classes or series” of the corporation (§ 302A.601, subd. 2). A parent “owning at least 90 percent of the outstanding shares of each class and series of a subsidiary” may merge the subsidiary into itself “without a vote of the shareholders or other owners of itself or any subsidiary” (§ 302A.621, subd. 1), and the subsidiary’s other shareholders have dissenters’ rights (subd. 6). The Minnesota Supreme Court has said “shareholders may be forced out involuntarily by statute, for example, in a cash-out merger.” A freeze-out merger or share exchange gives the minority dissenters’ rights, covered below.
3. A reverse stock split. The board combines shares so the minority’s holdings become fractions, then pays cash for the fractions under § 302A.423, subd. 1, which lets the corporation “pay in money the fair value of fractions of a share as of the time when persons entitled to receive the fractions are determined.”
4. A court order. In a shareholder lawsuit where a ground in subdivision 1(b) is established, 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” (§ 302A.751, subd. 2), if the order is fair and equitable to all parties. The sale is at fair value, or at a binding buy-sell price unless the court finds it unreasonable.

The quoted line about cash-out mergers comes from U.S. Bank N.A. v. Cold Spring Granite Co., 802 N.W.2d 363 (Minn. 2011). The court added that “it is unreasonable for a shareholder to expect that their shares may never be redeemed involuntarily,” absent some other support for that expectation.

How Does a Majority Shareholder Approve a Sale of the Company?

A sale of the whole business starts with the board. Under Minn. Stat. § 302A.661, subd. 2, a sale of all or substantially all of the assets outside the usual course of business needs a vote of “a majority of the directors present” and then approval “by the affirmative vote of the holders of a majority of the voting power of the shares entitled to vote.”

The same majority runs the other exits. A merger follows the same order: board approval first, then the shareholders (§ 302A.613, subds. 1 and 2). A voluntary dissolution “shall be commenced” once it is approved “by the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote” (§ 302A.721, subd. 2). The articles can raise these thresholds: “If the articles require a larger proportion or number than is required by this chapter for a particular action, the articles control” (§ 302A.437, subd. 1).

Several limits apply to a controlling owner:

• Notice to everyone. For an asset sale, “Written notice of the meeting shall be given to all shareholders whether or not they are entitled to vote at the meeting” (§ 302A.661, subd. 2). A merger or exchange put to a shareholder vote, and a dissolution, need the same written notice to every shareholder, voting or not (§ 302A.613, subd. 1; § 302A.721, subd. 2). In a parent-subsidiary merger, the subsidiary’s other shareholders must receive “notice of the action, including a copy of the plan of merger” (§ 302A.621, subd. 2). When the action carries dissenters’ rights, the meeting notice “shall inform each shareholder of the right to dissent” (§ 302A.473, subd. 2).
• No vote when a significant business remains. “Shareholder approval is not required under paragraph (a) if, following the sale, lease, transfer, or other disposition of its property and assets, the corporation retains a significant continuing business activity” (§ 302A.661, subd. 2).
• Replacing the board. If the directors will not act, the majority can remove them. Directors “may be removed at any time, with or without cause, by the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote at an election of directors” (§ 302A.223, subd. 3). A director “elected solely by the holders of a class or series of shares” can be removed only by a majority of that class or series (subd. 3). The rule applies “unless modified by the articles, the bylaws, or an agreement described in section 302A.457” (subd. 1), and cumulative voting can protect a minority-elected director (subd. 4).
• Acting without a meeting. A written action needs every shareholder entitled to vote, unless the articles of a corporation that is not publicly held allow action by the voting power a meeting would require (§ 302A.441, subd. 1). Adding that provision after the initial articles “requires the approval of all of the shareholders entitled to vote on the amendment” (subd. 1). When fewer than all shareholders sign, those who did not sign “must be notified of its text and effective time” (subd. 3).
• The minority’s rights. A shareholder who opposes an asset sale that needs a vote, a merger, or a share exchange acquiring the corporation’s shares may be able to dissent and be paid fair value. The exclusions in § 302A.471, covered below, limit that right.

What Can a Minority Shareholder Do to Push for a Sale?

A minority shareholder has no vote that forces a sale. The business is “managed by or under the direction of a board” (Minn. Stat. § 302A.201, subd. 1), and a sale of the whole company starts with a board vote. What the minority holder has are meeting rights, contract rights, and the court remedy in § 302A.751.

In one exchange about a 10% stake, I explained that a 10% owner could be outvoted on almost every decision except the ones the contract gave them a say in, such as selling the business.

Minnesota gives minority holders these tools:

• Demand a regular meeting. If none has been held “during the immediately preceding 15 months,” holders of “three percent or more of the voting power” may demand one by written notice to the chief executive officer or chief financial officer (§ 302A.431, subd. 2). “Within 30 days after receipt of the demand by one of those officers, the board shall cause a regular meeting of shareholders to be called and held on notice no later than 90 days after receipt of the demand” (subd. 2). If the board does not, “the shareholder or shareholders making the demand may call the regular meeting by giving notice as required by section 302A.435, all at the expense of the corporation” (subd. 2). I suggest checking the current text of those periods before relying on them. At each regular meeting “there shall be an election of qualified successors for directors who serve for an indefinite term or whose terms have expired” (subd. 4), which matters when the board is the obstacle.
• Demand a special meeting. Holders of 10% or more of the voting power may call one, “except that a special meeting for the purpose of considering any action to directly or indirectly facilitate or effect a business combination, including any action to change or otherwise affect the composition of the board of directors for that purpose, must be called by 25 percent or more of the voting power of all shares entitled to vote” (§ 302A.433, subd. 1). The demand must state “the purposes of the meeting” (subd. 2), and the meeting is limited to them (subd. 4). A board that fails to have it called and held as subdivision 2 requires leaves the call to the demanding holders: “the shareholder or shareholders making the demand may call the meeting by giving notice as required by section 302A.435, all at the expense of the corporation” (subd. 2). Chapter 302A defines “business combination” only “when used in reference to any issuing public corporation and any interested shareholder of the issuing public corporation” (§ 302A.011, subd. 46), and an issuing public corporation is generally either “a publicly held corporation that has at least 50 shareholders” or “any other corporation that has at least 100 shareholders” (subd. 39).
• Use the contract. A buy-sell agreement may give a departing owner a right to be bought out (a “put”) or let any owner start a buy-or-sell offer.
• Sue. A shareholder can ask a court for a buyout, other equitable relief, or dissolution under § 302A.751, on the grounds in the next section.

A meeting lets the minority holder be heard and vote. It does not let the minority outvote the majority, and holders of a majority of the voting power can still decline a sale.

What Grounds Let a Court Order a Buyout or Dissolution?

A Minnesota court can order a buyout, other equitable relief, or dissolution when a shareholder establishes one of six grounds in Minn. Stat. § 302A.751, subd. 1(b). The broadest of them reaches conduct by those in control that is “unfairly prejudicial” toward one or more shareholders.

The six grounds are:

1. Deadlock. The directors “are deadlocked in the management of the corporate affairs and the shareholders are unable to break the deadlock.”
2. Fraud or illegality. Those in control “have acted fraudulently or illegally toward one or more shareholders in their capacities as shareholders or directors, or as officers or employees of a closely held corporation.”
3. Unfairly prejudicial conduct. Those in control “have acted in a manner unfairly prejudicial toward one or more shareholders in their capacities as shareholders or directors of a corporation that is not a publicly held corporation, or as officers or employees of a closely held corporation.”
4. Failure to elect directors. The shareholders are so divided that, over a period including two consecutive regular meetings, “they have failed to elect successors to directors whose terms have expired or would have expired upon the election and qualification of their successors.”
5. Waste. “the corporate assets are being misapplied or wasted.”
6. Expired duration. “the period of duration as provided in the articles has expired.”

For a closely held corporation, which chapter 302A defines as one that “does not have more than 35 shareholders” (§ 302A.011, subd. 6a), subdivision 3a directs the court to weigh “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 as they exist at the inception and develop during the course of the shareholders’ relationship with the corporation and with each other.” Written agreements, “including employment agreements and buy-sell agreements,” are “presumed to reflect the parties’ reasonable expectations concerning matters dealt with in the agreements” (subd. 3a).

Reviewing a reverse stock split in Cold Spring Granite, the Supreme Court held that “unfairly prejudicial conduct under Minn.Stat. § 302A.751 includes conduct that violates the reasonable expectations of the shareholder.” A shareholder oppression claim is built on those expectations, and a controlling owner defending an oppression claim answers them. A separate statute, § 302A.467, lets a court “grant any equitable relief it deems just and reasonable in the circumstances and award expenses, including attorneys’ fees and disbursements, to the shareholder” when the corporation, an officer, or a director “violates a provision of this chapter.”

How Does a Court-Ordered Buyout Work Under § 302A.751?

Once a shareholder establishes one or more of the grounds in a corporation that was not publicly held when the action was commenced, the court may act on a motion. It may order either side to sell all of its shares to the corporation or to the moving shareholders, if the order “would be fair and equitable to all parties under all of the circumstances of the case” (§ 302A.751, subd. 2).

The order runs on these rules, all from subdivision 2 unless noted:

• Price. The price is “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.”
• Financial information. “Within five days after the entry of the order, the corporation shall provide each selling shareholder or beneficial owner with the information it is required to provide under section 302A.473, subdivision 5, paragraph (a).” That information includes recent financial statements and the corporation’s estimate of fair value.
• An agreed price first. If the shares are subject to purchase under “the bylaws of the corporation, a shareholder control agreement, the terms of the shares, or otherwise, the court shall order the sale for the price and on the terms set forth in them, unless the court determines that the price or terms are unreasonable under all the circumstances of the case.”
• Court valuation. “If the parties are unable to agree on fair value within 40 days of entry of the order, the court shall determine the fair value of the shares under the provisions of section 302A.473, subdivision 7.” That provision lets the court use “any method or combination of methods that the court, in its discretion, sees fit to use” and appoint appraisers (§ 302A.473, subd. 7).
• Payment and exit. The price may be paid in installments. Once the buyer posts a bond or otherwise satisfies the court that the price will be paid, “the selling shareholders shall no longer have any rights or status as shareholders, officers, or directors, except the right to receive the fair value of their shares plus such other amounts as might be awarded.”
• Dissolution last. Before dissolving the company, 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” (subd. 3b).
• Bad-faith expenses. If a party “has acted arbitrarily, vexatiously, or otherwise not in good faith,” the court may award “reasonable expenses, including attorneys’ fees and disbursements, to any of the other parties” (subd. 4).
• Venue. The case “shall be brought in a court within the county in which the registered office of the corporation is located” (subd. 5).

On discounts, the Minnesota Supreme Court’s decision is Advanced Communication Design, Inc. v. Follett, 615 N.W.2d 285 (Minn. 2000), a § 302A.751 buyout of a minority shareholder in a closely held corporation. The Supreme Court held that, “absent extraordinary circumstances, fair value in a court-ordered buy-out pursuant to section 302A.751 means a pro rata share of the value of the corporation as a going concern without discount for lack of marketability.” On its own facts, where the undiscounted price exceeded five times the company’s net worth, the court found extraordinary circumstances and remanded for a discount “of between 35% and 55%.” The step-by-step process is in my page on the court-ordered buyout under § 302A.751.

How Does a Reverse Stock Split Force Out a Minority Shareholder?

A reverse stock split forces out a minority shareholder in two steps. The board combines shares at a ratio that turns the minority’s holdings into fractions of one share, and the corporation then pays cash for the fractions. In Minnesota the board can do both without a shareholder vote unless § 302A.402 or the articles require one, and § 302A.423 bars the cash payment if it “would result in the cancellation of more than 20 percent of the outstanding shares of a class or series.”

The first step is Minn. Stat. § 302A.402. Under subdivision 3, “a share dividend, division, or combination may be effected by action of the board alone, without the approval of shareholders under sections 302A.135 and 302A.137.” Shareholder approval is required instead if “the rights or preferences of the holders of outstanding shares of any class or series will be adversely affected,” or if the percentage of unissued authorized shares would rise (subd. 2). The board-alone route also yields to “any provision in the articles that states that section 302A.402, subdivision 3, does not apply” (subd. 3). A change in voting power that “arises solely from the increase or decrease in the number of shares outstanding is not an adverse effect,” and “any increase in the percentage of authorized shares remaining unissued arising solely from the elimination of fractional shares under section 302A.423 must be disregarded” (subd. 4).

The second step is § 302A.423. It caps the tactic: “A corporation shall not pay money for fractional shares if that action would result in the cancellation of more than 20 percent of the outstanding shares of a class or series.” It also protects the board’s number: “Subject to the rights, if any, of dissenting shareholders under section 302A.471, a determination by the board of the fair value of fractions of a share is conclusive in the absence of fraud” (subd. 2).

The Minnesota Supreme Court addressed this tactic in Cold Spring Granite. The board combined the Class A common shares so that only the controlling family’s holding company kept whole shares, then redeemed every other holding for cash. The corporation had more than 300 shareholders, so it was not closely held under the 35-shareholder definition, but the court treated it as closely held under the common law. Applying the 2010 statutes, the court held:

• the board needed no shareholder vote for the split;
• the board’s valuation stood because no common-law fraud was shown;
• “Minn.Stat. § 302A.471 does not provide for dissenters’ rights in the event of a reverse stock split”;
• “even in the absence of fraud, Minn.Stat. § 302A.423 does not preclude relief under Minn.Stat. § 302A.751 for a reverse stock split”; and
• a fiduciary-duty claim needs “some conduct beyond the mere use of a reverse stock split to redeem the stock of the minority shareholders.”

On that record, the court concluded “that the Moores have not shown that they had a reasonable expectation that they would not be cashed out involuntarily,” and it affirmed.

The court called the reverse split “a powerful weapon in the majority shareholder’s arsenal.” The dissenters’ rights holding read the statute as it stood then. Today, § 302A.471, subd. 1(f) lists “an amendment of the articles in connection with a combination of a class or series under section 302A.402 that reduces the number of shares of the class or series owned by the shareholder to a fraction of a share if the corporation exercises its right to repurchase the fractional share so created under section 302A.423.” A minority holder facing a split should check whether it fits that clause, because it opens the court valuation process described next.

What Rights Does a Shareholder Have When the Majority Sells or Merges?

A Minnesota shareholder who opposes certain corporate actions may dissent and be paid the fair value of the shares instead, subject to the statute’s exclusions. The actions include an asset sale needing a shareholder vote, a merger, a share exchange acquiring the corporation’s shares, and an articles amendment combining shares that leaves a repurchased fraction. Minn. Stat. § 302A.471, subd. 1 provides that a shareholder “may dissent from, and obtain payment for the fair value of the shareholder’s shares” for the listed corporate actions.

The asset-sale trigger excludes “a disposition in dissolution described in section 302A.725, subdivision 2, or a disposition pursuant to an order of a court, or a disposition for cash on terms requiring that all or substantially all of the net proceeds of disposition be distributed to the shareholders in accordance with their respective interests within one year after the date of disposition.” The merger trigger applies “except as provided in subdivision 3, and except for a plan of merger adopted under section 302A.626.” The exchange trigger covers “a plan of exchange, whether under this chapter or under chapter 322C, to which the corporation is a party as the corporation whose shares will be acquired by the acquiring organization, except as provided in subdivision 3.” Subdivision 3 also removes the right for some shares, including shares “listed on any national securities exchange.”

The right is lost if the steps are missed. When the corporation holds a shareholder meeting, the dissenter “must file with the corporation before the vote on the proposed action a written notice of intent to demand the fair value of the shares owned by the shareholder and must not vote the shares in favor of the proposed action” (§ 302A.473, subd. 3). Later, the dissenter “must demand payment and deposit certificated shares or comply with any restrictions on transfer of uncertificated shares within 30 days after the notice required by paragraph (a) was given” (subd. 4(b)). The corporation’s notice must state the date by which the demand must be received (subd. 4(a)). I suggest checking the current text of that period before relying on it. I also suggest calendaring that date the day the notice arrives, because a late demand can forfeit the right.

The corporation then pays its own estimate of fair value. A dissenter who believes that payment is too low may send “the dissenter’s own estimate of the fair value of the shares, plus interest, within 30 days after the corporation mails the remittance under subdivision 5, and demand payment of the difference” (subd. 6). “Otherwise, a dissenter is entitled only to the amount remitted by the corporation” (subd. 6). I suggest checking the current text of that period before relying on it. On receiving that demand, the corporation must either pay the amount demanded or agreed or “file in court a petition requesting that the court determine the fair value of the shares, plus interest” (subd. 7).

For a shareholder who has the appraisal right, appraisal replaces a lawsuit to stop the deal unless the action is fraudulent. Shareholders with the right “do not have a right at law or in equity to have a corporate action described in subdivision 1 set aside or rescinded, except when the corporate action is fraudulent with regard to the complaining shareholder or the corporation” (§ 302A.471, subd. 4). My page on dissenters’ rights walks through each step.

How Do Drag-Along and Buy-Sell Agreements Change the Answer?

A drag-along or buy-sell agreement can decide the whole question. If it binds the shareholder, it can require a sale on the terms it sets. If the shares are then subject to sale and purchase under it, a Minnesota court in a § 302A.751 case will use its price and terms unless they are unreasonable under all the circumstances.

Three statutes decide how far such an agreement reaches:

1. Enforceability. A written shareholder control agreement “is valid and specifically enforceable, if the agreement is signed by all persons who, on the date the agreement first becomes effective, are then the shareholders of the corporation” (§ 302A.457, subd. 2). It “is binding upon and enforceable against only those persons and other persons having knowledge of the existence of the agreement.” Agreements that do not meet that test can still be valid contracts (subd. 4).
2. Transfer restrictions. A transfer restriction must be written and “not manifestly unreasonable under the circumstances,” and noted on the certificate or sent to holders of uncertificated shares (§ 302A.429, subd. 2). Without that notice, the restriction “is ineffective against a person without knowledge of the restriction” (subd. 2). “A restriction is not binding with respect to securities issued prior to the adoption of the restriction, unless the holders of those securities are parties to the agreement or voted in favor of the restriction” (subd. 1).
3. Price in court. In a § 302A.751 buyout, shares already “subject to sale and purchase pursuant to the bylaws of the corporation, a shareholder control agreement, the terms of the shares, or otherwise” sell at that price and on those terms “unless the court determines that the price or terms are unreasonable under all the circumstances of the case” (§ 302A.751, subd. 2). Written buy-sell agreements are also “presumed to reflect the parties’ reasonable expectations” (subd. 3a).

For a holder, the practical step is to read the clause’s trigger, its price formula, and who must sign before anyone treats a sale as required.

What Are the Ways to Resolve It Without a Lawsuit?

A negotiated sale of one owner’s shares can end an ownership dispute without a lawsuit, and a lawsuit is one of several ways to reach a sale. The choice should turn on what each owner wants (out, in control, or a sale to a third party) and what each path costs.

The options, with when each fits:

• An owner-to-owner conversation. One owner proposes a price and terms directly. It fits when the relationship still works and the buy-sell agreement already sets a price formula. The risk is a casual message read later as a binding offer, so I suggest labeling early numbers as non-binding.
• A negotiated buyout. The owners trade an appraisal, a price, and payment terms, and may add a release. A negotiated buyout of a co-owner lets the parties set terms a court might not, such as a consulting period or a payout over time.
• A deadlock clause or mediation. Where the documents have one, a deadlock resolution clause can force a decision without a trial if its terms do so. A mediation step leads to a result only if the owners agree.
• A third-party sale. If both sides would rather cash out, the board and the required majority can approve a sale of the company’s assets under § 302A.661 or a merger under § 302A.613. The buyer then pays for the whole company rather than one owner’s stake.
• A lawsuit under § 302A.751. It fits when the controlling owner will not negotiate and a ground exists. The plaintiff should weigh that the court may order “the sale by a plaintiff or a defendant” (subd. 2) and may shift expenses against a party that acted “arbitrarily, vexatiously, or otherwise not in good faith” (subd. 4).

For a majority owner, sequence matters too. Someone once wrote to me about a minority shareholder who was also an officer. I suggested holding off on confronting him, cutting his access, or changing his compensation until there was a plan. Steps taken in the wrong order tend to generate his claims rather than resolve the writer’s own.

Choosing Your Next Step

Whether a shareholder can force a sale, or be forced to sell, turns on four documents and facts. They are the shareholder agreement and bylaws, the articles, who holds a majority of the voting power, and how those in control have treated the minority. A majority, or the larger share the articles require, can approve a sale or merger, and a reverse split can cash out a minority within the § 302A.423 cap. A minority holder’s strongest tools are dissenters’ rights and a claim under § 302A.751, where either side can end up selling at fair value.

If you are a shareholder of a Minnesota company weighing whether to push for a sale or how to answer a buyout demand, email [email protected] with a brief description. I can then start an intake and conflict check before you send any confidential documents. More on this area is on my ownership disputes page.