Minority Business Owners' Right to Demand Company Information

The Fiduciary Duty Behind the Right

Minnesota law recognizes that the owners of a closely held business owe one another heightened, partnership-like duties. For corporations, that duty is reflected in Minn. Stat. § 302A.751, subd. 3a, which directs a 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” along with their reasonable expectations.

Minnesota courts have tied that fiduciary relationship directly to information. Shareholders in a closely held corporation owe each other a fiduciary duty to deal openly, honestly, and fairly, which includes the duty to disclose material information about the corporation. Berreman v. West Publishing Co., 615 N.W.2d 362, 367-71 (Minn. Ct. App. 2000), review denied (Minn. Sept. 26, 2000). Berreman recognized this disclosure duty as a legal principle, but it found no breach on the facts, because the preliminary and remote merger discussions at issue were not material at the time of the plaintiff’s retirement.

That duty of disclosure is broad. A narrow statutory or contractual duty to respond to information requests does not eliminate a fiduciary’s broad common-law duty to disclose all material facts. Appletree Square I Ltd. Partnership v. Investmark, Inc., 494 N.W.2d 889, 892 (Minn. Ct. App. 1993), review denied (Minn. Mar. 16, 1993). Where a fiduciary relationship exists, silence about material information may itself constitute fraud. Absent a fiduciary relationship, a party to an arm’s-length transaction has no duty to disclose material facts to the other. Partners and co-owners may change these common-law and statutory duties in a written agreement, but a clause requiring disclosure only upon reasonable demand does not by itself contract around the broad duty.

Written agreements among the owners (including shareholder, employment, and buy-sell agreements) are presumed to reflect the parties’ reasonable expectations on the matters they address. Minn. Stat. § 302A.751, subd. 3a. Such an agreement can define, and can limit, the contours of those expectations, so the practical scope of your information rights often turns on what you signed.

Here are the more common statutory rights.

Minnesota Corporations

The rights of shareholders in Minnesota corporations, including S corporations, are governed by Minn. Stat. ch. 302A, the Minnesota Business Corporation Act. The Act defines a corporation as one “organized for profit and incorporated under or governed by this chapter.” Minn. Stat. § 302A.011, subd. 8.

Financial statements

As owners of corporations, shareholders are entitled to certain company financial statements under Minn. Stat. § 302A.463. A corporation must prepare annual financial statements, including at least a balance sheet and a statement of income, within 180 days after the close of its fiscal year. On a shareholder’s written request, the corporation must furnish (deliver or mail, postage prepaid) its most recent annual financial statements no later than ten business days after it receives the request.

The inspection right

You also have a right to examine and copy the corporation’s records under Minn. Stat. § 302A.461. For a corporation that is not publicly held, a shareholder has an absolute right, upon written demand, to examine and copy the share register (which lists each shareholder’s name, address, and shares held) and the documents listed in subdivision 2. Those subdivision 2 documents include the records of shareholder proceedings and of board proceedings for the last three years, the articles and all amendments, the bylaws and all amendments, and the financial statements required by section 302A.463. The corporation must make these records available within ten days after an officer receives the written demand.

This inspection right belongs not only to a record shareholder but also to a beneficial owner of shares and a holder of a voting trust certificate. Minn. Stat. § 302A.461, subd. 4(a).

Records beyond that core set are available only if you demonstrate a proper purpose. A “proper purpose” is one reasonably related to your interest as a shareholder, beneficial owner, or voting trust certificate holder. Minn. Stat. § 302A.461, subd. 4(d). A purpose of competing with the business or harming it is not reasonably related to that interest, so it is not a proper purpose, and the corporation may withhold the requested records other than those to which the statute grants absolute access.

If the corporation or one of its officers or directors refuses a proper demand, a Minnesota court may specifically enforce the inspection right and award your expenses, including attorney fees and disbursements. Minn. Stat. § 302A.461, subd. 4(e). This is the practical recourse when a majority owner simply refuses access.

The corporation has counterweights of its own. On its application, a court may issue a protective order permitting the corporation to withhold portions of its board-proceeding records for a reasonable period, not to exceed twelve months, in order to prevent premature disclosure of confidential information likely to cause competitive injury. Minn. Stat. § 302A.461, subd. 4a. And an owner who gains access may not use or furnish the records for any purpose other than a proper purpose. Minn. Stat. § 302A.461, subd. 4b.

Minnesota LLCs

Like shareholders, members of a limited liability company have rights to information. Minnesota LLCs are governed by Minn. Stat. ch. 322C, the Minnesota Revised Uniform Limited Liability Company Act, which governs all Minnesota LLCs.

In a member-managed LLC, the company must furnish to each member, without demand, any information concerning the company’s activities, financial condition, and other circumstances that the company knows and that is material to the proper exercise of the member’s rights and duties (except to the extent the company reasonably believes the member already knows it). A member may also obtain, on demand, any other information about the company, limited only where the demand or the information demanded is unreasonable or otherwise improper. Minn. Stat. § 322C.0410, subd. 1.

The management structure matters, and this is the point owners most often miss. Those automatic rights belong to owners only in a member-managed LLC. In a manager-managed or board-managed LLC, the informational rights run to the managers or governors, not to the members. A member must then make a written demand describing with reasonable particularity the information sought and a purpose material to the member’s interest, and the company has ten days to respond (and may decline, stating its reasons). Minn. Stat. § 322C.0410, subd. 2. Because many Minnesota operating agreements opt into manager or board management, this distinction often determines a member’s real-world access.

An LLC may also impose reasonable confidentiality and nondisclosure conditions on the information it furnishes. In a dispute over whether a restriction is reasonable, though, the company bears the burden of proving reasonableness. Minn. Stat. § 322C.0410, subd. 7.

Minnesota Partnerships

Partners in Minnesota have similar rights. Minnesota partnerships are governed in part by the Minnesota Uniform Partnership Act of 1994, codified at Minn. Stat. ch. 323A.

Under Minn. Stat. § 323A.0403, a partnership must provide partners (and their agents and attorneys) access to inspect and copy its books and records during ordinary business hours. The records must be kept at the partnership’s chief executive office, and the partnership may impose a reasonable charge, covering the costs of labor and material, for copies of documents furnished. Former partners retain the same access to books and records pertaining to the period during which they were partners.

Beyond physical inspection, each partner and the partnership must furnish, without demand, any information about the partnership’s business and affairs reasonably required for the proper exercise of a partner’s rights and duties, and, on demand, any other information about the partnership’s business and affairs, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances. Minn. Stat. § 323A.0403.

These are just a few of the important statutes that protect business owners who own a minority percentage of a closely held company.

This area of law is fascinating because, although it is relatively complex, there is a sense of justice when minority shareholders are able to use the law to assert their rights.

Video Transcript

What information must a company share with its owners? That’s the question I’m answering today. I’m Aaron Hall, an attorney in Minneapolis, Minnesota, representing business owners. Imagine you are a business owner. Maybe you are a minority owner, which means you own less than 50% of the shares in the company. And whoever’s controlling the company isn’t sharing with you information that you want. What are your rights?

Well, whether it’s a corporation, LLC, or partnership, you have a right to important financial information about the company. I’m not going to go through all the details because it depends on which entity you’re in, but I’ll just tell you, generally speaking, you’re entitled to know who are the other owners, what is their ownership percentage? You’re entitled to a recent copy of financial statements and you are often entitled to all information that is material to the business as long as you’re requesting it for a proper purpose.

All right, let’s break that down. Proper purpose, what is that? Well, you can’t be requesting information to compete with the business or to harm the business. But if you’re trying to figure out what your rights are, and understanding better what’s going on with the business you own, that’s a proper purpose. There is a lot of gray area there, but most cases it’s pretty obvious. If a person is requesting information from a company they own, either they’re doing it because they want to know about something related to their ownership interest of the company, or they’ve got a very wrong purpose for asking for it, harassing the company or competing with the company. So that’s a wrongful purpose, or a proper purpose.

Now let’s talk about what information is material to the company. This is a broad term that lawyers could argue about all day. The simple idea is it can’t be trivial or minuscule information about the company. It has to be information that actually makes a difference that has a significant impact on the value of the company or the future of the company, the success or the failure of the company, that sort of thing. So of course, financial information would be part of that, contact information for other shareholders, et cetera. What is a person entitled to if they’re an owner of the company? Generally speaking, for a privately owned company, for a small business, a business owner’s entitled to all information that is important or material to the business.

Now does that mean you get a copy of the QuickBooks financial information? No, that’s going too far. There’s no reason you need to have all of that detail. I’ve seen that requested before and the company is welcome to push back and say, “No, that’s going too far.” If you can explain to us the purpose that you need it, like for example, you have credible a reason to believe that there is some sort of improper spending, you could perhaps request that, or maybe even negotiate to have a CPA you hire examine that information at the company. Well, if there’s an important enough reason to see some details, you may have a right to that, for example, an allegation of fraud.

But for the most part, that level of detail, all the expenses and how much every customer paid into the business, that’s way too much detail. Typically, you’re entitled to financial reports and big significant information affecting your rights. So this gives you a quick overview of what your rights are as a business owner and what your obligations are if you’re running a company and a business owner requested information. There are, though, specific statutes. In Minnesota, we have them for corporations, LLCs, and partnerships. Most states are similar and these statutes tell you exactly what needs to be provided. In addition to the statute, there may be a common law duty to provide all information that is material to the business. That, though, is something to discuss with your attorney.

As I’ve mentioned on previous videos, please see the description below, if you want more information on this. Specifically, there’s a link to the statutes for Minnesota, so you can see exactly what business owners have a right to, depending on whether you have a corporation, LLC or partnership. Second, there’s a disclaimer below and that mentions that I do these educational videos to help you learn more and identify issues to spot with your attorney.

This is not a replacement for hiring an attorney who can understand your circumstances and apply the law to those circumstances in the jurisdiction where you live. If you’d like to learn more on these types of topics, feel free to subscribe to the channel here and again, see the link in the description below. For more information at aaronhall.com on specific rights of business owners. I’m Aaron Hall, an attorney in Minnesota, representing business owners.