Employee/Shareholders & "Unfairly Prejudicial" Actions Under 302A.751

Minnesota Statute § 302A.751

Minn. Stat. § 302A.751, subd. 1(b)(3), provides the basis for relief for terminated employee/shareholders:

“A court may grant any equitable relief it deems just and reasonable in the circumstances . . . in an action by a shareholder when it is established that the directors or those in control of the corporation 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.”

The reasonable expectations of shareholders play a role for courts in deciding whether to grant equitable relief under the statute, and if so, what relief to grant. Minn. Stat. § 302A.751, subd. 3a, states the following:

“In determining whether to order equitable 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 as they exist at the inception and develop during the course of the shareholders’ relationship with the corporation and with each other.”

That subdivision adds a second sentence that often controls the outcome: “any written agreements, including employment agreements and buy-sell agreements, . . . are presumed to reflect the parties’ reasonable expectations concerning matters dealt with in the agreements.” Minn. Stat. § 302A.751, subd. 3a.

The relief here is not limited to shutting the company down. The most common remedy in a closely held corporation dispute is a court-ordered buy-out: on motion, 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 . . . if the court determines in its discretion that an order would be fair and equitable to all parties under all of the circumstances of the case.” Minn. Stat. § 302A.751, subd. 2. Dissolution is a last resort. Before ordering it, 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 to permanently relieve the circumstances established under subdivision 1.” Minn. Stat. § 302A.751, subd. 3b.

For Minnesota limited liability companies, the parallel relief now appears in Minn. Stat. § 322C.0701. The section this discussion once cited, § 322B.833, no longer exists: chapter 322B, the former Minnesota Limited Liability Company Act, was repealed effective January 1, 2018 (2014 Minn. Laws ch. 157, art. 1, § 91), and all Minnesota LLCs are now governed by chapter 322C. The successor provision does not restate the corporate “honest, fair, and reasonable manner” and reasonable-expectations standard. It instead lets a member petition for judicial dissolution when those in control “have acted, is acting, or will act in a manner that is illegal or fraudulent” or “in a manner that is oppressive and was, is, or will be directly harmful to the applicant.” Minn. Stat. § 322C.0701, subd. 1(5). As with a corporation, the court may order a buy-out in lieu of dissolution: “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.” Minn. Stat. § 322C.0701, subd. 2.

Cases Involving 302A.751

Gunderson v. Alliance of Computer Prof’ls, Inc., 628 N.W.2d 173 (Minn. Ct. App. 2001), provides a great look at how the statute protects employee/shareholders in situations where ordinary employees and shareholders would be left in the cold. Plaintiff Gunderson became a shareholder, officer, director, and employee of ACP soon after the company was founded. The closely held corporation implemented a buy-sell agreement allowing for a 75% shareholder vote to buy out a shareholder at a price determined by the agreement. Gunderson received assurances from a majority shareholder that he would “always be taken care of” and exhortations to “stick with me and I will make you rich when we sell the company.” A few years after the company was formed, Gunderson was fired as an employee and bought out as a shareholder.

Gunderson brought suit for breach of contract (based on the promises) and equitable remedies under 302A.751 (arguing that it was “unfairly prejudicial” for ACP to buy out his shares). The district court dismissed both on summary judgment. The court of appeals agreed that there was no remedy for Gunderson as an employee on the contract theory because the promise wasn’t firm enough for a contract, and that there was no remedy for the share buy-out because a shareholder who helped draft a reasonable buy-sell agreement should reasonably expect it to be enforced. But the court reversed summary judgment on Gunderson’s separate statutory claim, holding that he may have a remedy for actions “unfairly prejudicial” in his capacity as an employee/shareholder, because genuine fact issues remained on whether the majority shareholders had frustrated his reasonable expectation of continued employment.

“Typical close-corporation shareholders commonly have an expectation of continuing employment with the corporation. . . In fact, because of the unique characteristics of close corporations, employment is often a vital component of a close-corporation shareholder’s return on investment and a principal source of income. . . The discharge of a shareholder-employee may thus be grounds for equitable relief.” 628 N.W.2d at 189.

Two points from the same opinion sharpen the rule. First, at-will status does not bar the statutory claim: “even though Gunderson was an at-will employee and, therefore, not wrongfully discharged in the breach-of-contract or tort sense, his employment termination triggers a separate inquiry into whether [the company] unfairly prejudiced Gunderson in his capacity as a shareholder-employee.” Id. at 190. The doctrine of employment-based shareholder oppression is “distinct from the wrongful-termination doctrine,” so an at-will discharge can still support relief under the statute. Second, the expectation is not automatic. “Not all expectations of continuing employment are reasonable”; an expectation counts only if employment “can fairly be characterized as part of the shareholder’s investment,” and “shareholders who sign buyout agreements permitting termination of employment for any reason and obligating shareholders to sell their shares to the corporation upon termination of employment would not likely have a reasonable expectation of continuing employment.” Id. at 190-91. That is why the court affirmed dismissal of Gunderson’s shareholder-capacity claim, where his own involvement in preparing the buy-sell agreement meant that “no rational factfinder could conclude that the agreement did not reflect his reasonable expectations as a shareholder,” id. at 186, while reversing on his employee-capacity claim, id. at 190-92.

If Gunderson’s expectations of continued employment were reasonable, and he did not bring about his firing through misbehavior, he could recover under the statute.

Another case applying the statute’s equitable power to a fired shareholder-employee is Pedro v. Pedro, 489 N.W.2d 798 (Minn. Ct. App. 1992). Alfred Pedro worked in and partially owned a business that had been family owned and run for a long time. A co-owner with his two brothers, Alfred was fired and bought out after a disagreement stemming from accounting discrepancies. In assessing Alfred’s employment, the court noted the family’s long tenure: his father worked at the corporation until his death, one brother worked there for over 50 years, and another for over 34 years, and Alfred himself had worked there for 45 years. The trial court found that Alfred had a contract of lifetime employment and that his termination was wrongful. In granting an equitable remedy under 302A.751, the court awarded $256,740 in damages for lost future wages “until he reached the age of 72” based on that contract for lifetime employment, along with $563,417.67 in damages for the brothers’ breach of fiduciary duty. Pedro v. Pedro, 489 N.W.2d 798, 800 (Minn. Ct. App. 1992). The court of appeals held that the future-wage award was “wholly consistent with the court’s broad equitable powers found in § 302A.751, subd. 3a” and “warranted based upon its finding of a contract for lifetime employment.” Id. at 803.

The Pedro court rested these awards on a broader principle. Rejecting the brothers’ argument that no fiduciary breach could exist because the corporation’s value was undiminished, the court held that “an action depleting a corporation’s value is not the exclusive method of breaching one’s fiduciary duties.” Id. at 802. And because a shareholder-employee holds two separate interests, the court could compensate both without impermissible overlap: “appellants concede respondent has two separate interests, as owner and employee. Thus, allowing recovery for each interest is appropriate and will not be considered a double recovery.” Id. at 803.

Effect on Employment Relationship

Because of courts’ special treatment of employee/shareholders, employers must be careful in awarding shares to key employees. While this benefit might help attract or keep better talent, and may increase productivity by giving employees an interest in the company, issuing shares to an employee may also create a reasonable expectation of continued employment. A corporation that fires such an employee, even though Minnesota is an “at-will” employment state, may be liable for future wage damages in a 302A.751 case.

Whether the employee/shareholder’s expectation of continued employment is reasonable depends on a number of factors. The amount of money the individual has invested into the company, the level of financial risk undertaken, the effort expended to build company success, discussions among shareholders about their employment expectations, and the corporation’s policy as applied to other employee/shareholders. Courts also want to allow corporations the flexibility to run their business as they see fit, however. If an employee has misbehaved or created the circumstances leading to their firing, they could not reasonably expect continuing employment, and their termination would not be “unjust”.

To avoid creating reasonable expectations of continued employment, employers should make their expectations clear, and do so in writing. In considering equitable relief, courts presume that any written agreements reflect the parties’ reasonable expectations. Minn. Stat. § 302A.751, subd. 3a. While reiterating the “at-will” status of an employee/shareholder might not exactly boost morale, it could avoid costly damages down the line if the employee does end up being fired.

Summary

Minnesota is an “at-will” employment state, and employees not covered by contract may be fired at any time. Minority shareholders who agree to buy-sell agreements usually have no recourse when their shares are bought out according to that agreement. Yet employee/shareholders may find protection under Minnesota law. If the employee/shareholders’ firing frustrates their expectations of continued employment, and those expectations are reasonable under the circumstances, Minn. Stat. § 302A.751, subd. 1(b)(3), allows the courts to provide a remedy. In Pedro, where the shareholder-employee was found to have a contract for lifetime employment, that meant lost future wages running until retirement.