This post is part of a series of posts related to Minnesota minority shareholder rights. The following posts cover specific issues related to minority shareholder rights:
- Introduction to minority shareholder rights
- Employment issues
- Dividends
- Accessing Corporate records
- Corporate Governance
- Squeeze-outs
If you are a minority owner who also works in the business, losing your job can put both your paycheck and your investment at risk. Minnesota law gives you two distinct paths to recovery, and which one fits depends on the facts.
In Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d 173 (Minn. Ct. App. 2001), the plaintiff was a shareholder of a company from its inception. He wrote the business plan for the company as a part of his MBA class project. Id. at 179. Despite starting out as a majority shareholder, by the time the events that brought about the lawsuit occurred, he was a minority shareholder, working as an at-will employee. In its discussion of avenues for recovery, the court noted that “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 [defendant] unfairly prejudiced Gunderson in his capacity as a shareholder-employee.” Id. at 190 (emphasis supplied). In effect, the court confirmed the availability of recovery where the events that occurred meet specific doctrines.
The Doctrine of Wrongful Termination and the Doctrine of Oppression
Two specific doctrines were identified: the doctrine of wrongful termination and the doctrine of oppression. Id. at 190. Under the doctrine of wrongful termination, in a shareholder-employee setting, it is possible to be granted recovery by establishing an express or an implied contractual agreement or a promise inducing reliance. Id. at 181. Meanwhile, the doctrine of oppression can lead to relief when the controlling shareholders frustrate a minority shareholder-employee’s reasonable expectation of continued employment. Id. at 189-90.
Wrongful Termination of a Shareholder
Under the doctrine of wrongful termination the shareholder’s recovery requires proving specific events out of which a judge can identify the presence of an express or implied agreement or a promise. Id. at 181. More often than not, this will be difficult to accomplish, as the majority of closely held corporations in Minnesota are maintained with limited records. In addition, the presence of an express agreement of employment would often eliminate the need for judicial intervention. An implied agreement often arises out of a collection of facts, at the center of which is a contested promise. As proof of the promise, the courts can consider the extent of the shareholder’s reliance on that promise.
The Doctrine of Oppression
The doctrine of oppression, on the other hand, considers whether it was reasonable for a shareholder to expect the employment to continue, either indefinitely or for the claimed period of time. Id. at 190. When considering the reasonableness of the expectation, the shareholder’s own actions can be telling, and the expectations of the other shareholders, as well as the needs of the corporation, can weigh on the reasonableness of the expectation. Id. at 190-92. For example, if the investment made into the corporation was done with an expectation of employment, that investment would be put in jeopardy upon termination of employment. Id. at 191. Also, when the salary and benefits are substitutes for dividends (that is, de facto dividends), the expectation will lean toward being reasonable. Id. On the other hand, if the other shareholders were unaware of the expectation of employment, or if sub-par performance of the shareholder-employee affects the corporation, the reasonableness of the expectation will be questionable. Id. at 191-92.
These reasonable-expectations principles are anchored directly in the statute. Minn. Stat. § 302A.751, subd. 1(b), authorizes judicial relief when the directors or those in control of a corporation that is not publicly held “have acted in a manner unfairly prejudicial toward one or more shareholders in their capacities as shareholders . . . or as officers or employees of a closely held corporation.” Subdivision 3a then directs the court to weigh “the reasonable expectations of all shareholders,” and it provides that “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. Minnesota courts interpret “unfairly prejudicial” conduct liberally, and unfair prejudice exists when a shareholder’s reasonable expectations have been frustrated. Bolander v. Bolander, 703 N.W.2d 529, 545 (Minn. Ct. App. 2005).
Not every expectation of continuing employment is reasonable. An expectation is protected only where continuing employment can fairly be characterized as part of the shareholder’s investment, and it is reasonable only if it is known and accepted by the other shareholders and properly balanced against the controlling shareholders’ need for flexibility in running the business. Gunderson, 628 N.W.2d at 191. A signed at-will or buy-sell agreement permitting termination is a common defeater: 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,” and under the subdivision 3a presumption a written employment or buy-sell agreement will ordinarily control. Id. at 190-91.
The Minnesota Supreme Court reaffirmed this framework in U.S. Bank N.A. v. Cold Spring Granite Co., 802 N.W.2d 363, 377 (Minn. 2011), restating the standard in capacity-specific terms: unfairly prejudicial, and thus oppressive, conduct is conduct that frustrates the reasonable expectations shareholders hold in their capacity as shareholders. Applying that standard, the court declined to grant relief under section 302A.751 on the facts before it. That decision, the most recent controlling Minnesota authority on the standard, confirms that the reasonable-expectations doctrine set out in the earlier Court of Appeals cases remains good law.
The Gunderson court found the likely presence of a promise of employment as pushing the expectation of employment toward being reasonable. Not enough facts were present to make a determination regarding the making of the promise. Meanwhile, the other shareholders’ lack of knowledge of the plaintiff’s expectation of continued employment suggested against a finding of reasonable expectation. Also, the terms of the investment into the corporation were silent on the terms of employment. Because genuine issues of material fact remained on whether Gunderson reasonably expected continued employment, the court reversed the dismissal of that oppression claim and remanded to the trial court for further proceedings. Id. at 192.
More recently, in Haley v. Forcelle, 669 N.W.2d 48 (Minn. Ct. App. 2003), the court applied the rubric discussed in Gunderson. The plaintiff in Haley personally guaranteed, along with the other shareholders, approximately $4.3 million of the corporation’s debt and had been a shareholder-employee since its inception. The court began the analysis by restating the factors considered in evaluating the oppression doctrine, summarizing them as follows:
Factors to be considered in determining whether a shareholder’s expectation of continued employment are reasonable include whether (1) the shareholder made a capital investment in the company; (2) continued employment could be considered part of the shareholder’s investment; (3) the shareholder’s salary could be considered a de facto dividend; and (4) continued employment was a significant reason for making the investment. Further, the shareholder’s expectation of continued employment is only reasonable if that expectation is known and accepted by other shareholders and properly balanced against the majority or controlling shareholders’ need for flexibility in running the business. Oppression liability does not arise and a shareholder’s expectation of continued employment is not reasonable when the employee-shareholder is terminated for misconduct or incompetence.
Id. at 59-60.
Taking into consideration the personal guarantee of approximately $4.3 million of company debt, the other shareholders’ knowledge of the expectation, evidence that the salary received could be considered a de facto dividend on the investment, and the lack of proof of an inability to perform the needed duties, the court concluded that the expectation of continued employment seemed reasonable and affirmed the temporary injunction as showing a likelihood that the shareholders would prevail on their claim under Minn. Stat. § 302A.751. Id. at 60.
Another case involving employment-related issues is Bolander v. Bolander, 703 N.W.2d 529 (Minn. Ct. App. 2005). There the president and chief operating officer was a minority shareholder whose employment contract expired, but he continued to perform his duties and others continued to treat him as holding his position legitimately. Id. at 538. At trial Bolander claimed his contract had been renewed orally for two years; the opposing party denied any such agreement. Id.
On appeal after trial, three holdings are worth noting. First, the court affirmed the denial of summary judgment and judgment notwithstanding the verdict on the oral-extension claim, holding that a genuine issue of material fact existed as to whether the parties, by express agreement or conduct, extended the employment agreement after its written term expired; Bolander’s uninterrupted performance of his duties contributed to that result. Id. at 545. Second, the court held that the employment agreement “does not make adherence to fiduciary obligations a condition of employment,” and on that basis upheld the jury’s verdict that Bolander did not materially breach the agreement. Id. at 547. Third, the court reversed the dismissal of the counterclaim for breach of the common-law fiduciary duty an officer owes the corporation, and remanded for the district court to grant equitable relief, identifying Bolander’s withdrawal of funds from an underperforming corporation as against its interests. Id. at 549. That remedy flows from the fiduciary breach itself, not from the contract: where an officer or director breaches the fiduciary duty owed to the corporation, Minn. Stat. § 302A.467 authorizes a court, in an action brought by a shareholder, to grant any equitable relief it deems just and reasonable and to award expenses, including attorneys’ fees, and the court noted that such relief “may include, but is not limited to, equitable forfeiture of the compensation” awarded to the breaching officer. Id. at 548-49.
There are at least two important takeaways from this case. First, if an employment contract expires, you may be able to prove its renewal through your own conduct affirmed by the conduct of others. If, as in Bolander, you stay in the same position and perform the same duties while others act as though the contract remains in force, that can later be read as a renewal. Second, the absence of any statement of fiduciary duties for a position does not eliminate the duties inherent in it. A corporate officer or director owes fiduciary duties to the corporation both by statute and under the common law, regardless of whether any agreement recites them. Bolander, 703 N.W.2d at 548. Chapter 302A sets the standard of conduct for directors in Minn. Stat. § 302A.251, subd. 1, and imposes the corresponding standard of conduct on corporate officers in Minn. Stat. § 302A.361. Those duties run in both directions. Those in control of a closely held corporation have a substantive obligation, for instance, not to withhold dividends or use corporate assets preferentially, and “all close-corporation shareholders have a procedural obligation, on the other hand, not to engage in oppressive or unfair negotiating tactics that may otherwise” conform to the rough “moral[s] of the marketplace.” Gunderson, 628 N.W.2d at 185 (internal quotations omitted).
Loss of Shareholder Status After Termination
In Drewitz v. Motorwerks, Inc., 728 N.W.2d 231 (Minn. 2007), the Minnesota Supreme Court addressed another question a shareholder-employee can face: whether termination of employment also strips shareholder status. Motorwerks argued that upon termination the shareholder loses shareholder status and must sell the shares back to the corporation. Id. at 235-36. Relying on legislative intent and principles of statutory construction, the court rejected that argument, finding nothing in chapter 302A that “explicitly terminates shareholder status simultaneously with employment termination.” Id. at 236. The court reasoned that a rule automatically divesting a shareholder at termination “would likely disrupt the settled expectations of many shareholder-employees,” and that automatic loss of status would strip a terminated shareholder-employee of the section 302A.751 protections, which subdivision 1(b) reserves for “a shareholder.” Id. at 236, 238.
Turning to the shareholder agreement, the court referred to Minn. Stat. § 302A.751, subd. 2, which provides that where the shares are subject to sale and purchase under a shareholder control agreement, the court shall order the sale for the price and on the terms set in that agreement unless it determines those terms are unreasonable under all the circumstances. Id. at 237. Examining the shareholder agreement, the court concluded that it did not support Motorwerks’ claim that shareholder status terminates automatically when employment ends. Id. Absent a controlling agreement, the default purchase price is the fair value of the shares as of the commencement of the action or another date the court finds equitable. Once the buyer posts a bond or otherwise assures payment, the selling shareholder retains no rights or status as a shareholder, officer, or director, keeping only the right to be paid fair value plus any amounts awarded. Minn. Stat. § 302A.751, subd. 2.
For future reference, the court concluded its analysis by holding that “when the parties are governed by a shareholder agreement, shareholder status terminates when the corporation or other purchaser tenders payment for the shareholder’s shares that conforms with the terms of the shareholder agreement.” Id. at 238. Because it could not determine on the record whether or when Motorwerks made a conforming tender, the court remanded for that determination, noting that if there was a conforming tender, shareholder status should be deemed to have terminated at that point. Id. In effect, the actual exchange of conforming payment for shares fixes the point in time when shareholder status ends.
Proving Minority Shareholder’s Eligibility for Redress
To recap, recourse for unfairly prejudicial treatment in the employment context is genuinely available, but proving your eligibility for redress is not a simple matter, largely because, as Minnesota courts have observed, there is often a lack of documented proof of the employee’s expectations. Haley, 669 N.W.2d at 59 (quoting Gunderson). The absence of written documentation does not bar relief, however. In close corporations the expectations of shareholders are not always encompassed in written agreements and written agreements are not always dispositive of shareholder expectations. Haley, 669 N.W.2d at 59 (quoting Gunderson v. Alliance of Computer Prof’ls, Inc., 628 N.W.2d 173, 186 (Minn. Ct. App. 2001)). In the absence of a specific agreement, your reasonable expectations are determined objectively, by examining the understanding that objectively reasonable close-corporation shareholders would have reached had they bargained over how their investments should be protected when the venture began. Id.
Where there is documentation, the court will honor the parties’ intent, ordering a buy-out on the price and terms the agreement sets unless it determines those terms are unreasonable under all the circumstances. Minn. Stat. § 302A.751, subd. 2. To avoid the uncertainty inherent in undocumented arrangements, and the risk of drafting terms a court may later find unreasonable, address these questions in writing before they arise. If you are considering forming a corporation or an LLC, or you already hold a minority stake and work in the business, a shareholder rights attorney can help you put the right agreements in place from the start.
