Mandating Shareholder Buyouts in Closely Held Corporations

May 14, 2012

Case Analysis for Mandating Shareholder Buyouts in Closely Held Corporations

Applicable Statute: 302A.751, subd. 3a – 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 the shareholders as they exist at the inception and develop during the course of the shareholders’ relationship with the corporation and with each other.

The court in the case of Pedro v. Pedro 489 N.W.2d 798 (M.N. Court of Appeals 1992), held that when the shareholder shows enough evidence of liability, the shareholder could recover both lost wages and damages for breach of fiduciary duty.

In this case, the court found that defendant shareholders in the closely held corporation breached a fiduciary owed to the plaintiff shareholder when evidence was presented that they harassed and fired the plaintiff after he insisted on resolving a discrepancy in financial records, even though there was no showing of diminution in value of corporation or value of plaintiff’s stock.

The shareholder/employee of the closely held corporation who prevailed on the claim that other shareholders had breached fiduciary duty in firing him, was entitled to damages in the amount of the difference between fair value of his stock and the lesser amount which defendants were contractually required to pay him pursuant to stock retirement agreement.

The trial court has broad equitable powers in fashioning relief for buyout of shareholders in closely held corporations. The court can look to shareholder’s ownership interest as well as his reasonable expectations when awarding damages under M.S.A. 302A.751, subd. 3a.

These cases typically hinge on whether or not the plaintiff can show sufficient evidence for the trial court to determine that there was a breach of fiduciary duty. When that is shown, the trial court can order an equitable buyout.

The Minnesota Supreme Court in Advanced Communication Design, Inc. v. Follett 615 N.W.2d 285 (2000) held that:

  1. “Fair Value” for purposes of determining the price to be paid in a court-ordered buy-out of a minority shareholder pursuant to Minn. Stat. 302A.751 should equal the shareholder’s proportionate ownership interest in the corporation without a discount for lack of marketability, except in extraordinary circumstances.
  2. Where the appraised value of the shares of a minority shareholder in a court-ordered buy-out pursuant to Minn.Stat 302A.751 results in an unfair wealth transfer from the remaining shareholders to the minority shareholder, an extraordinary circumstance is presented warranting the application of a marketability discount.
  3. A non-controlling shareholder holding only nonvoting shares in a closely held corporation owes no fiduciary duty to the corporation or its other shareholders.

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