An Introduction to Minority Shareholder Rights in Minnesota

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:

Minority Shareholders in Minnesota

In Minnesota, an individual, or an entity, can occupy the position of a minority shareholder in at least two distinct, but similar, types of legal entities, a corporation or a limited liability company (LLC). Occupying a minority position in either of these entities, especially in a closely-held corporation, puts the shareholder at the mercy of the majority. To ensure some degree of protection from unfairly prejudicial treatment towards the minority shareholders, the Minnesota legislature promulgated a serious of statutes, modeled largely on the Model Business Corporation Act (Model Act).

Minn.Stat § 302A.751

The centerpiece statute which provides protection for minority shareholders of closely-held corporations is Minn.Stat § 302A.751. “Section 751 [] authorizes equitable relief for minority shareholders who fail or are unable to bargain for and obtain adequate contractual safeguards in the articles, bylaws or a shareholder agreement.”(See footnote 1.) Section 751 was modeled largely on Model Act §14.30 (a)(2)(ii), with a slight modification. The Model Act provision provided grounds to seek relief by a shareholder if a controlling shareholder or a director acted in an “oppressive” manner. Upon adoption, that specific term was changed to “unfairly prejudicial” manner. See Minn. Stat. § 302A.751 Subd. 1(b)(3). The “legislative intent” behind this change “was to lower the threshold for relief…by use of a term which has not been subject to narrow judicial interpretation and to allow consideration of injuries suffered by shareholders other than solely as investors.”(See footnote 2.) To give further guidance in administering relief under this provision of the statute, the legislature also included in Subdivision 3a of Section 751 language permitting finding of “unfairly prejudicial” conduct where events that can be interpreted to be a “breach of fiduciary duty” occur, or there is a failure of “shareholder’s reasonable expectations with respect to his relationship to the corporation”(See footnote 3.) is found.

With respect to minority shareholders of LLCs, identical relief for “unfairly prejudicial” actions by controlling shareholders or directors is found in Minn.Stat § 322B.833 Subd. 1(2)(iii). As such, the protection envisioned by the legislature for corporate minority shareholders, extends to minority members of LLCs.

The practical implications of adopting such sweeping language are immense. By using broad concepts instead of delineating specific instances, the type of behavior that warrants grant of “equitable relief” is “left to judicial determination on a case by case basis with reference to the extensive precedent.” (See footnote 4.) The intentional creation of this uncertainty can be viewed as positive and negative.

The existence of the uncertainty regarding recovery, or existence of claim for that matter, creates incentive to seek other avenues of conflict resolution, such as good old fashioned negotiation over a drink, or the help of a disinterested counsel. The uncertainty becomes a bargaining chip, if framed correctly during negotiations. Uncertainty also necessitates evaluating one’s position, hopefully with input from a qualified disinterested party before engaging the judiciary.

The presence of the uncertainty regarding what conduct can result in a valid ground for recovery has its drawbacks as well. For the shareholders, be they in the majority or in minority, this uncertainty makes risk assessment of any action very difficult. Not knowing risk value of an action in today’s market makes the true financial value of a transaction very difficult to predict. For example, a breach of a contract comes with an ascertainable degree of risk, the value of the non-performance of the contract; however, when one cannot predict whether a given action will result in a breach, risk becomes very difficult to assess.

Despite being faced with the risk brought on by uncertainty, the shareholders, in majority or minority, still often resort to legal recourse. The risk is often justified by the authority that the courts are granted, with respect to relief they may grant. Minn. Stat. § 302A.467 as it applies to corporations, and Minn. Stat § 322B.38 as it applies to LLCs, permits the courts to “grant any equitable relief it deems just and reasonable in the circumstances and award expenses, including attorneys’ fees and disbursements” to shareholders/members upon a finding of a “viola[tion]” of any provision of the “chapter.”

What follows is an evaluation of the current status of law covering some scenarios in which shareholders/members of a closely-held corporation or an LLC can find themselves in. The overview will focus on the cases out of the 21st century, unless a specific area of law lacks a contemporaneous decision.

[1] Joseph Edward Olson, Statutory Changes Improve Position of Minority Shareholders in Closely-Held Corporations, 53 Hennepin Law 10, 11 (Sep./Oct. 1983).

[2] Id. at 16.

[3] Id. at 17.

[4] Id. at 23.

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