Minority shareholders who also work as employees for closely-held corporations often find themselves in abusive situations that they seemingly can’t get out of. Typically, shareholders have no secondary market in which to sell their shares, and buy-sell agreements with the corporation can limit shareholder options even further. Additionally, those buy-sell agreements may force the shareholder to sell his or her shares back to the company at a price below fair market value. Since Minnesota is an “at-will” employment state, a shareholder’s job within a corporation is similarly at risk, absent some sort of contractual agreement.
Minnesota law, however, provides protection for those who are both employees and shareholders of a corporation whose reasonable expectations of employment and ownership have been frustrated by majority owners. Courts have the power to craft equitable solutions under Minn. Stat. § 302A.751, and case law has established unexpected termination, in some scenarios, as a situation worthy of equitable.
Minnesota Statute § 302A.751
Minn. Stat. § 302A.751, subd. 1(b)(3) (2011) provides the basis for relief for terminated employee/shareholders:
“A court may grant any equitable relief it deems just and reasonable in the circumstances . . . in an action by a shareholder when it is established that 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 reasonable expectations of shareholders play a role for courts in deciding whether to grant equitable relief under the statute, and if so, what relief to grant. Section 302A.751, subd. 3a states the following:
“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 all shareholders as they exist at the inception and develop during the course of the shareholders’ relationship with the corporation and with each other.”
The same language is found in the Minnesota LLC Statute, Minn. Stat. § 322B.833.
Cases Involving 302A.751
Gunderson v. ALLIANCE OF COMPUTER PROF., 628 N.W.2d 173 (Minn. App., 2001), provides a great look at how the statute protects employee/shareholders in situations where ordinary employees and shareholders would be left in the cold. Plaintiff Gunderson became a shareholder, officer, director, and employee of ACP soon after the company was founded. The closely held corporation implemented a buy-sell agreement allowing for a 75% shareholder vote to buy out a shareholder at a price determined by the agreement. Gunderson received assurances from a majority shareholder that he would “always be taken care of” and exhortations to “stick with me and I will make you rich when we sell the company.” A few years after the company was formed, Gunderson was fired as an employee and bought out as a shareholder.
Gunderson brought suit for breach of contract (based on the promises) and equitable remedies under 302A.751 (arguing that it was “unfairly prejudicial” for ACP to buy out his shares). The district court dismissed both on summary judgment. The court of appeals agreed that there was no remedy for Gunderson as an employee because the promise wasn’t firm enough for a contract, and that there was no remedy for the share buy-out because a shareholder should reasonably expect a buy-sell agreement to be enforced. However, the court held that the Gunderson may have a remedy for actions “unfairly prejudicial” in his capacity as an employee/shareholder, because the majority shareholders had frustrated his reasonable expectation of continued employment.
“Typical close-corporation shareholders commonly have an expectation of continuing employment with the corporation. . . In fact, because of the unique characteristics of close corporations, employment is often a vital component of a close-corporation shareholder’s return on investment and a principal source of income. . . The discharge of a shareholder-employee may thus be grounds for equitable relief.” 628 N.W.2d at 189.
If Gunderson’s expectations of continued employment were reasonable, and he did not bring about his firing through misbehavior, he could recover under the statute.
Another case where an employee/shareholder’s reasonable expectations were violated was the case of Pedro v. Pedro, 489 N.W.2d 798 (Minn. App., 1992). Alfred Pedro worked in and partially owned a business that had been family owned and run for a long time. A co-owner with his two brothers, Alfred was fired and bought out after a disagreement stemming from accounting discrepancies. In determining Alfred’s reasonable expectations of employment, they looked at his father (who worked at the corporation until his death) and two brothers (Eugene worked for over 50 years at the corporation, and Carl, Jr. worked there for over 34 years). Alfred had already worked at the corporation for 45 years, and it was reasonable for him to expect to work there until he retired. In granting an equitable remedy under 302A.751, the court awarded damages for lost future wages until the age of 72, along with other damages for the brothers’ breach of fiduciary duty.
Effect on Employment Relationship
Because of courts’ special treatment of employee/shareholders, employers must be careful in awarding shares to key employees. While this benefit might help attract or keep better talent, and may increase productivity by giving employees an interest in the company, issuing shares to an employee may also create a reasonable expectation of continued employment. A corporation that fires such an employee, even though Minnesota is an “at-will” employment state, may be liable for future wage damages in a 302A.751 case.
Whether the employee/shareholder’s expectation of continued employment is reasonable depends on a number of factors. The amount of money the individual has invested into the company, the level of financial risk undertaken, the effort expended to build company success, discussions among shareholders about their employment expectations, and the corporations policy as applied to other employee/shareholders. Courts also want to allow corporations the flexibility to run their business as they see fit, however. If an employee has misbehaved or created the circumstances leading to their firing, they could not reasonably expect continuing employment, and their termination would not be “unjust”.
To avoid creating reasonable expectations of continued employment, employers should make their expectations clear, and do so in writing. In considering equitable relief, courts presume that any written agreements reflect the parties’ reasonable expectations (302A.751, subd. 3a). While reiterating the “at-will” status of an employee/shareholder might not exactly boost morale, it could avoid costly damages down the line if the employee does end up being fired.
Minnesota is an “at-will” employment state, and employees not covered by contract may be fired at any time. Minority shareholders who agree to buy-sell agreements usually have no recourse when their shares are bought out according to that agreement. Yet employee/shareholders may find protection under Minnesota law. If the employee/shareholders’ firing frustrates their expectations of continued employment, and those expectations are reasonable under the circumstances, 302A.751, subd. 1(b)(3) allows the courts to provide a remedy. In cases where the employee/shareholder has been with the company a long time, damages can be as severe as future wages for the rest of the employee’s career.