Breach of a Shareholder Agreement in Minnesota

What Law Governs a Breach of a Minnesota Shareholder Agreement?

Contract law governs the breach itself, and chapter 302A adds enforcement rules for agreements among shareholders. A breach is a failure to perform a promise in the agreement without a legal excuse, and a written agreement on control of the corporation that meets the statute’s conditions is “valid and specifically enforceable.”

The Minnesota Supreme Court defined the wrong in Lyon Financial Services, Inc. v. Illinois Paper & Copier Co., 848 N.W.2d 539 (Minn. 2014), a case answering certified questions from a federal appeals court. The Court wrote: “A breach of contract is a failure, without legal excuse, to perform any promise that forms the whole or part of the contract.” Quoting an earlier decision, it listed the elements as “(1) formation of a contract, (2) performance by plaintiff of any conditions precedent to his right to demand performance by the defendant, and (3) breach of the contract by defendant.” For a shareholder agreement, that means showing which promise the other owner made, that you met any condition the agreement put on your right to demand it, and how the other owner failed to perform.

Chapter 302A recognizes the shareholder agreement directly. Under Minn. Stat. § 302A.457 subd. 1, “A written agreement among the shareholders of a corporation and the subscribers for shares to be issued, relating to the control of any phase of the business and affairs of the corporation, its liquidation and dissolution, or the relations among shareholders of or subscribers to shares of the corporation is valid and specifically enforceable as provided in subdivision 2.” The statute calls this a shareholder control agreement.

An agreement that misses those conditions still counts. Subdivision 4 states that the section “does not apply to, limit, or restrict agreements otherwise valid, nor is the procedure set forth in this section the exclusive method of agreement among shareholders or between the shareholders and the corporation with respect to any of the matters described in this section.” A buy-sell agreement signed by fewer than all shareholders can still be an agreement “otherwise valid,” and its breach is proved with the contract elements from Lyon.

When Can a Court Order a Co-Owner to Follow the Agreement?

A court can order a shareholder control agreement performed when it is signed by all persons who, on the date it first becomes effective, are then the shareholders, along with any subscribers for shares, and it binds only the parties and people who knew of it. A written restriction on selling shares is specifically enforceable when it is not manifestly unreasonable and is noted conspicuously on the share certificate or in the notice sent for uncertificated shares. It does not bind shares issued before its adoption unless their holders are parties to the agreement or voted for it. A certificate that states the restriction exists and refers to a separate document creating or describing it meets the conspicuous-notice condition.

Under Minn. Stat. § 302A.457 subd. 2, a written 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, whether or not the shareholders all have voting shares, and the subscribers for shares, whether or not voting shares, to be issued.” The same subdivision limits its reach: “The agreement is enforceable by the persons who are parties to it and is binding upon and enforceable against only those persons and other persons having knowledge of the existence of the agreement.” Specific enforcement means a court order to do what the agreement requires, such as offering shares to the corporation first or voting as the agreement directs, rather than a money award.

Transfer restrictions follow their own rules. Under Minn. Stat. § 302A.429 subd. 2, a written restriction on transferring shares must be “not manifestly unreasonable under the circumstances” to be enforced. When that restriction is noted conspicuously on the certificate or in the uncertificated-share notice, it “is valid and specifically enforceable against the holder of the restricted securities or a successor or transferee of the holder, including a pledgee or a legal representative.” Unless it is noted that way, “a restriction, even though permitted by this section, is ineffective against a person without knowledge of the restriction.” The same subdivision adds that “A restriction under this section is deemed to be noted conspicuously and is effective if the existence of the restriction is stated on the certificate and reference is made to a separate document creating or describing the restriction.” Minnesota’s version of Uniform Commercial Code Article 8, Minn. Stat. § 336.8-204, states the same rule. An issuer’s restriction “is ineffective against a person without knowledge of the restriction unless” the security is certificated and “the restriction is noted conspicuously on the security certificate” or, for uncertificated shares, the registered owner has been notified.

Timing also matters. Under § 302A.429 subd. 1, “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.” I suggest checking your share certificates and the date each owner received shares, because they bear on whether a transfer restriction reaches a particular sale. The other facts are whether the restriction is manifestly unreasonable, whether a buyer knew of a restriction not noted on the shares, and whether holders of earlier-issued shares are parties to the agreement or voted for it. How these clauses are written is covered in buyout clauses in shareholder agreements.

What Damages Can You Recover for a Breached Shareholder Agreement?

You can sue for money damages by proving the agreement, your own performance of any conditions it sets, and the breach. A deliberate breach does not by itself support punitive damages, and attorney fees are recoverable only when the agreement or a statute allows them.

The elements from Lyon set what you must prove. Breaches of shareholder agreements can include a missed buyout payment, a sale to an outsider without first offering the shares as the agreement requires, a vote cast against the agreement’s terms, and compensation or distributions outside its limits. Each requires proof of the promise, the failure, and the money it cost. When the money was taken from the corporation, as with excess compensation, the claim for that injury is derivative, under the Wessin rule covered with § 302A.751.

The other owner’s motive does not raise contract damages. In Barr/Nelson, Inc. v. Tonto’s, Inc., 336 N.W.2d 46 (Minn. 1983), a jury found that a construction surety breached its covenant of good faith willfully and maliciously but committed no fraud. The Minnesota Supreme Court reversed the punitive award, holding: “Unless the willful and malicious conduct constitutes an independent tort, Minnesota law does not permit recovery of punitive damages.” It added that the malicious motive “is immaterial insofar as damages for contract breach are concerned.”

The same decision states the fee rule: “We have long held that attorney fees are not recoverable in litigation unless there is a specific contract permitting or a statute authorizing such recovery.” I suggest reading the agreement’s fee clause before you send a demand, because under that rule a specific contract or a statute authorizing fees decides whether fees are recoverable. In a § 302A.751 case, subdivision 4 also lets a court award reasonable expenses, including attorneys’ fees, to the other parties when a party “has acted arbitrarily, vexatiously, or otherwise not in good faith.”

How Does a Breach Support a Claim Under Minn. Stat. § 302A.751?

In a corporation that is not publicly held, the owners in control who ignore a shareholder agreement may be acting in a manner “unfairly prejudicial” toward one or more shareholders under Minn. Stat. § 302A.751. In a closely held corporation, a written agreement among shareholders, or between shareholders and the corporation, is presumed to reflect the parties’ reasonable expectations on the matters it covers, and frustrating those expectations is what the statute reaches. A claim for an injury to the corporation itself, such as excess compensation, must still be brought as a derivative claim.

Under § 302A.751 subd. 1, a court “may grant any equitable relief it deems just and reasonable in the circumstances or may dissolve a corporation and liquidate its assets and business” in a shareholder’s action when “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 Minnesota Court of Appeals reads “unfairly prejudicial” to mean “conduct that frustrates the reasonable expectations of all shareholders in their capacity as shareholders or directors of a corporation that is not publicly held or as officers or employees of a closely held corporation,” in Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d 173 (Minn. Ct. App. 2001).

Whose injury it is decides how the claim is brought. In Wessin v. Archives Corp., 592 N.W.2d 460 (Minn. 1999), minority owners alleged that the majority owner misappropriated and wasted corporate assets. The Minnesota Supreme Court held: “Where the injury is to the corporation, and only indirectly harms the shareholder, the claim must be pursued as a derivative claim.” The claims stayed derivative even though the Wessins pled them as violations of § 302A.751. The court also held that “despite the smaller number of shareholders in a closely held corporation, such shareholders are still subject to the derivative pleading requirements” for those claims. A derivative claim is brought on the corporation’s behalf. The court reinstated the trial court’s dismissal, without prejudice, because the Wessins had not followed those requirements.

The written agreement anchors those expectations. Subdivision 3a provides: “For purposes of this section, 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.”

U.S. Bank N.A. v. Cold Spring Granite Co., 802 N.W.2d 363 (Minn. 2011) addresses which corporations subdivision 3a reaches. The Minnesota Supreme Court said of subdivision 3a: “By its terms, this provision applies only to statutory closely held corporations”. Under Minn. Stat. § 302A.011 subd. 6a, a closely held corporation is “a corporation which does not have more than 35 shareholders.” For a larger corporation sharing many closely held features, the court still found that subdivision 3a “informs our interpretation” of the term “unfairly prejudicial” in subdivision 1.

The presumption cuts both ways. In Gunderson, the owner who sued had helped draft the buy-sell agreement and proposed the removal clause and price formula later used against him. The court affirmed summary judgment against his shareholder-capacity claim, holding that “written agreements should, nonetheless, be honored to the extent they specifically state the terms of the parties’ bargain.” It also noted that “written agreements are not dispositive of shareholder expectations in all circumstances.” The court affirmed dismissal of his breach-of-employment-contract claim. It reversed dismissal of his unfair-prejudice claim “as it relates solely to his reasonable expectations as a shareholder-employee” and remanded “for further proceedings on that claim.” It found fact questions remained “because the buy-sell agreement does not address the parties’ expectations on employment matters and the record is insufficiently developed.” That shareholder-employee track is covered in fired as a minority shareholder, and the statute’s other grounds are covered in shareholder oppression claims.

How Does a Buy-Sell Agreement Set the Price in a Court-Ordered Buyout?

When a court orders a buyout under § 302A.751 and the shares are subject to a shareholder control agreement or a similar purchase provision, the court must use the agreement’s price and terms unless it finds them unreasonable under all the circumstances. The court can order the sale of the shares held by the owner who sued or by a defendant. In Gunderson, an agreed price lower than the appraised value did not, by itself, establish a claim for breach of fiduciary duty.

Under Minn. Stat. § 302A.751 subd. 2, in an action under subdivision 1, clause (b), “involving a corporation that is not a publicly held corporation at the time the action is commenced and in which one or more of the circumstances described in that clause is established,” “the court may, upon motion of a corporation or a shareholder or beneficial owner of shares of the corporation, 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, whichever is specified in the motion.” The owner who sues can therefore be the one ordered to sell. The court must determine “in its discretion that an order would be fair and equitable to all parties under all of the circumstances of the case.” When the shares are subject to sale under the bylaws, a shareholder control agreement, 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.” The motion process is covered in court-ordered buyout under § 302A.751.

Gunderson applied that rule to a formula price far below both sides’ appraisals. The court stated that “Minnesota courts are required to honor shareholder agreements setting the purchase price of shares, unless the court determines that the price is unreasonable under all the circumstances.” It held that a contractual purchase price lower than the appraised value “does not, by itself, establish a claim for breach of fiduciary duty.” On his reasonable-expectations claim, it concluded that “in the absence of evidence that the controlling shareholders used the buy-sell agreement manipulatively to force the sale of Gunderson’s shares, the facts do not support Gunderson’s claim that the controlling shareholders frustrated his reasonable shareholder expectations by enforcing the buy-sell agreement.”

A different measure can apply when misconduct forced the sale. In Pedro v. Pedro, 489 N.W.2d 798 (Minn. Ct. App. 1992), the trial court awarded the third brother-owner, Alfred Pedro, the price the owners’ stock retirement agreement set for his shares, and it found that the other two brothers breached fiduciary duties they owed him. The Court of Appeals affirmed damages on this measure, quoting its earlier decision in the same dispute: “If the fair value of the shares is greater than the purchase price for the buyout as calculated from the formula in the SRA, the difference is the measure of respondent’s damage resulting from having been forced to sell his shares in the company.”

When Does Breaching the Agreement Also Breach a Fiduciary Duty?

A breach of the agreement can also breach a fiduciary duty when owners in a closely held corporation fail to deal openly, honestly, and fairly with another owner. That duty exists alongside the contract, so one course of conduct can support both claims. The Minnesota Supreme Court has held that an owner with only nonvoting shares who was not a director owed no fiduciary duty as a shareholder.

In Pedro, the Minnesota Court of Appeals stated: “Shareholders in closely held corporations owe one another a fiduciary duty.” It described that duty as dealing “openly, honestly and fairly with other shareholders,” words it quoted from an earlier Court of Appeals decision. The findings supporting the breach in Pedro included this one: “The trial court found that at no time since the action was commenced, did appellants ever implement payments admittedly due under the SRA.” The Court of Appeals reviewed those findings only for clear error. The Minnesota Supreme Court limited that duty in Advanced Communication Design, Inc. v. Follett, 615 N.W.2d 285 (Minn. 2000). Where a shareholder “has only nonvoting shares in a closely held corporation and is not a director,” the court held that the shareholder “owed no fiduciary duty as a shareholder to ACD or its shareholders.” Section 302A.751 subd. 3a restates the duty as “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.”

Two statutes change who answers for management decisions. Under Minn. Stat. § 302A.457 subd. 3, a control agreement has the effect “to relieve the board and the director or directors in their capacities as directors of, and to impose upon the parties to the agreement, the liability for acts or omissions imposed by law upon directors,” to the extent shareholders exercise directors’ powers under the agreement. The same subdivision adds: “A shareholder is not liable pursuant to this subdivision by virtue of a shareholder vote, if the shareholder had no right to vote on the action.” Under Minn. Stat. § 302A.251 subd. 4, “A director’s personal liability to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director may be eliminated or limited in the articles,” but not “for any breach of the director’s duty of loyalty to the corporation or its shareholders,” among other listed exceptions. The loyalty claim itself is covered in breach of the duty of loyalty.

How Do Noncompete and Arbitration Clauses Change a Breach Dispute?

A noncompete in a shareholder agreement may be void if it is between an employer and an owner who performs services for it, and the agreement was signed on or after July 1, 2023. The statute’s employer includes “any person or group of persons acting directly or indirectly in the interest of an employer in relation to an employee.” An arbitration clause can send the breach dispute to an arbitrator instead of a court.

Under Minn. Stat. § 181.988 subd. 1, a covenant not to compete “means an agreement between an employee and employer that restricts the employee, after termination of the employment, from performing” similar work for another employer, in a specified area, or in a similar capacity. “"Employee" as used in this section means any individual who performs services for an employer, including independent contractors.” Subdivision 2 provides: “Any covenant not to compete contained in a contract or agreement is void and unenforceable.” Two exceptions fit ownership disputes: a covenant that “is agreed upon during the sale of a business,” and one that “is agreed upon in anticipation of the dissolution of a business.” Each exception carries its own limit. A seller’s covenant must be “a temporary and geographically restricted covenant not to compete that will prohibit the seller of the business from carrying on a similar business within a reasonable geographic area and for a reasonable length of time.” A dissolution covenant reaches “a similar business within a reasonable geographic area where the business has been transacted.”

The ban has limits that matter to owners:

1. Other protective clauses survive. “A covenant not to compete does not include a nondisclosure agreement, or agreement designed to protect trade secrets or confidential information,” and “A covenant not to compete does not include a nonsolicitation agreement.”
2. The rest of the agreement stays in force. “Nothing in this subdivision shall be construed to render void or unenforceable any other provisions in a contract or agreement containing a void or unenforceable covenant not to compete.”
3. The signing date controls. The 2023 session law that enacted the ban, 2023 Minn. Laws ch. 53, art. 6, § 1, says the section “is effective July 1, 2023, and applies to contracts and agreements entered into on or after that date.”

An arbitration clause in the agreement binds the owners who signed it. Under Minn. Stat. § 572B.06, “An agreement contained in a record to submit to arbitration any existing or subsequent controversy arising between the parties to the agreement is valid, enforceable, and irrevocable except upon a ground that exists at law or in equity for the revocation of contract,” and, in subsection (b), “The court shall decide whether an agreement to arbitrate exists or a controversy is subject to an agreement to arbitrate.” Subsection (c) gives two questions to the arbitrator: “An arbitrator shall decide whether a condition precedent to arbitrability has been fulfilled and whether a contract containing a valid agreement to arbitrate is enforceable.” Under Minn. Stat. § 572B.04, the parties “may waive or vary the requirements” of the arbitration chapter “to the extent permitted by law,” apart from the provisions its subsections (b) and (c) list. Those lists name “572B.06, subsection (a)” but not the court-decides rule in subsection (b), so the parties may vary that rule “to the extent permitted by law.” Section 302A.457 subd. 2 lists “the arbitration of disputes” among the subjects a control agreement may cover. A breach claim may still belong in court when the clause does not reach it, which is why the clause’s wording deserves a close read.

What Should You Do First After a Shareholder Agreement Is Breached?

I suggest starting with the signed agreement and the corporate records, then reading the agreement’s remedy, dispute, and fee clauses before you act, because those documents decide which remedies are open to you. The court that hears a § 302A.751 claim and the risk of a fee award are set by statute, and the filing deadline is set by statute unless the agreement validly shortens it.

I suggest taking these steps in this order:

1. Get the signed agreement. Under Minn. Stat. § 302A.457 subd. 2, “A shareholder, a beneficial owner of shares, or another person having a security interest in shares has the right upon written demand to obtain a copy of the agreement from the corporation at the expense of the corporation.”
2. Request the records. Under Minn. Stat. § 302A.461 subd. 4, a shareholder of a corporation that is not publicly held “has an absolute right, upon written demand, to examine and copy, in person or by a legal representative, at any reasonable time” the documents listed in subdivision 2, which include “shareholder control agreements described in section 302A.457.” The corporation must make them available within the period subdivision 4 sets. Other corporate records are available “only if the shareholder, beneficial owner, or holder of a voting trust certificate demonstrates a proper purpose for the examination.” The process is covered in your right to company information.
3. Read the clauses that control the dispute. I suggest marking the notice and cure periods, the buyout trigger and price formula, the amendment clause, the governing-law and forum clause, the arbitration clause, the fee clause, and any clause limiting the time to bring a claim. Each can change the remedy, the forum, the cost, or the deadline.
4. Identify the filing deadline. Minn. Stat. § 541.05 subd. 1 sets the time limit for actions “upon a contract or other obligation, express or implied, as to which no other limitation is expressly prescribed.” Henning Nelson Construction Co. v. Fireman’s Fund American Life Insurance Co., 383 N.W.2d 645 (Minn. 1986) was an insurance-policy dispute. There the Minnesota Supreme Court stated that unless a specific statute prohibits a different period, “the parties are then free to shorten the limitations period as long as the contractual period is not unreasonable in length.” I suggest confirming the period in the current statute text and in any claims-period clause of the agreement before negotiations run long, because either can set the deadline.
5. Know where a § 302A.751 case is filed. Under Minn. Stat. § 302A.751 subd. 5, “Proceedings under this section shall be brought in a court within the county in which the registered office of the corporation is located.”
6. Weigh the fee risk on both sides. Under § 302A.751 subd. 4, “If the court finds that a party to a proceeding brought under this section has acted arbitrarily, vexatiously, or otherwise not in good faith, it may in its discretion award reasonable expenses, including attorneys’ fees and disbursements, to any of the other parties.”

Next Steps When a Co-Owner Breaches the Agreement

A breached Minnesota shareholder agreement can lead to a contract claim, a court order to follow the agreement, or a § 302A.751 claim. A § 302A.751 case can end in a court-ordered sale of the shares of the owner who sued or of an accused owner, at the agreement’s price unless a court finds that price unreasonable. Which remedy fits depends on who signed the agreement, how it was noted on the shares, what it says about price, fees, and disputes, and how the people in control have treated the other owners. When the owners would rather separate than litigate, the same agreement frames a negotiated buyout of a co-owner.

More on disputes between business owners in Minnesota is on the practice page. If a co-owner has stopped following your shareholder agreement and you want to know which remedies fit your facts, email [email protected] with a brief description, and I can start an intake and conflict check before you send any confidential documents.