Corporate Governance & 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:

Corporate governance is a broad concept that describes a variety of topics associated with governing a corporation. As a shareholder of a closely-held corporation, or as a member of an LLC, one normally expects some degree of participation in the process of making decisions that concern the governance of the organization. The degree of participation can lessen with the growth of the organization. However, despite the lessening of this degree of participation, each shareholder or member still retains entitlement to certain expectations.

As was observed by other commentators, shareholders are protected from “the use of threats or other intimidating tactics, and refusals to communicate; self-dealing or usurpation of corporate opportunities; dishonesty; and ‘breach of fiduciary duty.’ ” (See footnote 1.) Beyond this, the parties can agree to specific expectations in the incorporation documents, or other agreements.

A central issue encountered regularly by the shareholders of a closely-held corporation is who can be fired and hired, and when can such an action be undertaken. In the Gunderson case discussed above, beyond the reasonableness of expectation of employment, another issue addressed by the court was the presence of authority to terminate him in the hands of other shareholders. Gunderson, 628 N.W.2d at 184. The authority granted to others to terminate Gunderson was found in a buy-sell agreement drafted – ironically – at the behest of Gunderson and with direct guidance from Gunderson. Id. at 186. The court first noted that Minn. Stats § 302A.751, subd. 3a specifically identifies presence of shareholder’s expectations in written agreements, but also added that these expectations can be identified through other ways. Id. However, because the terms of the agreement were unambiguous, drafted with assistance of counsel, signed as a part of an at arms-length transaction, and negotiated by the party who is attempting to challenge their completeness, the court found no reason not to uphold it. Id. The big takeaway from this holding is that written agreements are of paramount importance in a corporate settings and their content should not be taken lightly. An attorney’s assistance should be sought at the earliest stages of drafting any kind of corporate documents to preserve the intent of all the parties involved and avoid future complications.

Another important duty entrusted to shareholders is the need to make decisions regarding purchase and sale of assets. Depending on size of the asset(s) involved, there could be a change in corporations business at the end of the transaction, or the corporation can either cease to exist, or merge with another, after a large enough exchange of assets. In addition, shareholders should be aware of another major feature of corporate governance that often requires participation from all the shareholders: the amendment of the corporation’s Articles of Incorporations and its by-laws.

Recognizing the significance of these decisions and the ease with which majority can abuse their power, the legislature granted certain rights to all shareholders in the relevant corporate statutes. One example is found in Minn.Stat § 302A.471; it authorizes the right to dissent, and seek payment of fair value for the shares, where an amendment to the Articles “materially and adversely affects a minority shareholder.” Whetstone v. Hossfeld Mfg.Co., 457 N.W.2d 380, 385 (Minn. 1990). Having the right to dissent when certain corporate governance actions are undertaken by the majority shareholders or the directors of a closely-held corporation provides protection for shareholders. However, there are limits to this protection as not all scenarios that resemble “unfairly prejudicial” treatment can be remedied.

In U.S. Bank N.A. v. Cold Spring Granite Co., 802 N.W.2d 363 (Minn. 2011), a curious transaction resulted in the involuntary elimination of the minority shareholders. The Board of Directors for the defendant approved a reverse stock-split which would convert 7,132.23 shares of common stock into 1 share. Id. at 369. Upon completion, the reverse stock split would give majority shareholders 10 shares of common stock, and convert the minority shareholders stock holdings into fractional shares. Id. The fractional shares were redeemable at the discretion of the corporation, unless otherwise provided for in the articles, and absent such a provision, could be redeemed, pursuant to Minn.Stat § 302A.423, resulting in eliminations of the minority. The Court found itself restrained by relevant statutes that governed this transaction. Id. at 371. Each step, the reverse-stock split, and the redemption of fractional shares when less than 20% is being redeemed, were in full compliance with the statutory authority. Id. at 370-71. Faced with restrictions in the statutory provisions, the Court upheld the buy-out, informing the legislature of the unreasonableness of this scenario:

It is clear that the use of a reverse stock split to redeem minority shareholder interests is a powerful weapon in the majority shareholder’s arsenal, particularly where, as in the Minnesota statutory scheme, neither the administration of the reverse stock split nor the valuation process is subject to contemporary judicial supervision. While the fairness of this approach is open to debate, these policy decisions are within the province of the Legislature.

Id. at 371.

The corporate governance challenges faced by minority shareholders vary with the size of the corporation or an LLC. The Minnesota statutes have codified some of the protection developed by the common law. However, even after years of evolution, certain creative transactions cannot be accounted for, U.S. Bank N.A. case being the perfect example.

This article was written by Dmitriy Bondarenko.

[1] 20A2 Minn. Prac., Business Law Deskbook § 36:9 (2012 ed.) (internal footnotes omitted).