Employment Issues Related to Minority Shareholder Rights

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:

In Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d 173 (Minn. Ct. App. 2001), the plaintiff was a shareholder of a company from its inception. He wrote the business plan for the company as a part of his MBA class project. Id. at 179. Despite starting out as a majority shareholder, by the time the events that brought about the lawsuit occurred, he was a minority shareholder, working as an at-will employee. In its discussion of avenues for recovery, the court noted that “even though Gunderson was an at-will employee and, therefore, not wrongfully discharged in the breach-of contract or tort sense, his employment termination triggers a separate inquiry into whether [defendant] unfairly prejudiced Gunderson in his capacity as a shareholder-employee.” Id. at 190. (emphasis supplied). In effect, the court confirmed the availability of recovery where the events that occurred meet specific doctrines.

The Doctrine of Wrongful Termination and the Doctrine of Oppression

Two specific doctrines were identified: the doctrine of wrongful termination and the doctrine of oppression. Id. Under the doctrine of wrongful termination, in a shareholder-employee setting, it is possible to be granted recovery by establishing express or implied agreement or a promise of employment inducing reliance. Id. Meanwhile, the doctrine of oppression can lead to relief if a reasonable expectation of continued employment is demonstrated. Id.

Wrongful Termination of a Shareholder

Under the doctrine of wrongful-termination the shareholder’s recovery requires proving specific events out of which a judge can identify the presence of an express or implied agreement or a promise. Id. More often than not, this will be difficult to accomplish as majority of closely-held corporations in Minnesota are maintained with limited records. In addition, the presence of express agreement of employment would often eliminate the need for judicial intervention. An implied agreement often arises out of a collection of facts, at the center of which is a contested promise. As proof of the promise, the courts can consider the extent of reliance by the shareholder on that promise.

The Doctrine of Oppression

The doctrine of oppression on the other hand considers whether it was reasonable for a shareholder to expect the employment to continue either indefinitely, or for the claimed period of time. Id. When considering the reasonableness of the expectation, the shareholders own actions can be telling, and the expectations of the other shareholders, as well as the needs of the corporation can weigh on the reasonableness of the expectation. Id. at 190-91. For example, if the investment made into the corporation was done with an expectation of employment, that investment would be put into jeopardy upon termination of employment. Id. Also, when the salary and benefits are substitutes for dividends, expectation will lean towards being reasonable. Id. at 191. On the other hand, if other shareholders were unaware of the expectation of employment by the aggrieved shareholder, or if sub-par performance of the shareholder-employee affects the corporation, the reasonableness of the expectation will be questionable. Id.

The Gunderson court found the likely presence of a promise of employment as pushing the expectation of employment towards being reasonable. However, not enough facts were present to make a determination regarding the making of the promise. Meanwhile, the lack of knowledge of the expectation of continued employment for the plaintiff by other shareholders suggested against finding of reasonable expectation of employment. Also, the terms of the investment into the corporation were silent on the terms of the employment. Being unsatisfied regarding the extent of discovery done into the “reasonab[leness of] expectation” the case was sent back to the trial judge for further fact finding. Id. at 192.

More recently, in Haley v Forcelle, 669 N.W.2d 48 (Minn. Ct. App. 2003), a part of the rubric discussed in Gunderson was affirmed. The plaintiff in Haley personally guaranteed a $4.3 Million loan for the corporation and was a shareholder/employee since its inception. The court started the analysis by restating the factors considered during evaluation of oppression doctrine, summarizing them as:

Factors to be considered in determining whether a shareholder’s expectation of continued employment are reasonable include whether (1) the shareholder made a capital investment in the company; (2) continued employment could be considered part of the shareholder’s investment; (3) the shareholder’s salary could be considered a de facto dividend; and (4) continued employment was a significant reason for making the investment. Further, the shareholder’s expectation of continued employment is only reasonable if that expectation is known and accepted by other shareholders and properly balanced against the majority or controlling shareholders’ need for flexibility in running the business. Oppression liability does not arise and a shareholder’s expectation of continued employment is not reasonable when the employee-shareholder is terminated for misconduct or incompetence.

Id. at 59-60.

Taking into consideration the personal guarantee on the $4.3 million loan, the knowledge of the expectation on part of other shareholders, evidence that salary received can be considered a de facto dividend on the investment, and lack of proof of inability to perform the needed duties, the court found the expectation of continued employment reasonable. Id. at 60.

Another interesting case involving employment related issues is Bolander v. Bolander, 703 N.W.2d. 529 (Minn. Ct. App. 2005). In that action the President and COO was a minority shareholder. While the company he was in charge of was not doing well, Bolander took some company funds to remain “solvent.” Id. at 538. Around the time when Bolander was appropriating the funds, his employment contract expired; but, he continued to perform his duties and others continued to regard him as being in his position legitimately. Id. During trial, Bolander claimed that his contract was renewed for two year orally; the opposing party denied any such agreement. Id.

This case being on appeal after trial, three holdings are worth noting. First, the court affirmed the denial of summary judgment on the issue of oral extension of the employment contract. Id. at 545. Bolander’s continued performance of his duties without interruption contributed significantly to upholding the judgment of the court below. Id. Second, the court upheld the jury finding that Bolander’s employment agreement did not require him to adhere to fiduciary duties. Id. at 547. Third, the court reversed the denial of the breach of common law fiduciary duties to the corporation claim against Bolander. Id. at 549. Identifying the withdrawal of funds from an underperforming corporation as being against its interests. Id.

There are at least two very important takeaways from this case. First, if an employment contract expires, it is possible to prove its renewal through own action affirmed by the actions of others. If, as in Bolander, one continues in the same position and performs same duties with others acting as if the contract is still active, that can be later interpreted as a contract renewal. Second, lack of a statement regarding fiduciary duties associated with a given position in a corporation or an LLC does not eliminate the application of the fiduciary duties inherent in a given position. “All close-corporation shareholders have a procedural obligation, on the other hand, not to engage in oppressive or unfair negotiating tactics that may otherwise “conform to the rough ‘moral[s] of the marketplace.’ ” Gunderson, 628 N.W.2d at 185 (internal quotations omitted).

Loss of Shareholder Status After Termination

In Drewitz v. Motorwerks, Inc., 728 N.W.2d. 231 (Minn. 2007), the Minnesota Supreme Court tackled another question that a shareholder/employee can face. The defendant, Motorwerks, attempted to convince the Court that upon termination of employment, the shareholder loses the shareholder status as well, and has to sell shares back to the corporation. Id. at 235-56. The Court first tackled the statutory authority cited by the defendant; however, relying on legislative intent and principles of statutory construction dismissed the allegation as unpersuasive. Id. at 236. The other argument submitted by Motorwerks rested largely on the construction of the shareholder agreement. In response, the Court referred to “Minn. State. § 302A. 751 Subd. 2 which provides that if a ‘shareholder control agreement’ exists, its terms shall govern the buy-out of a shareholder who brings an action under that section unless the court determines that those terms are unreasonable.” Id. at 237. Controlled by this authority, the Court evaluated the agreement that existed between the plaintiff and the defendant, and despite the language being “unambiguous,” was unable to identify anything supporting the defendant’s claim. Id. For future reference, the Court concluded its analysis holding that “when the parties are governed by a shareholder agreement, shareholder status terminates when the corporation or other purchaser tenders payment for the shareholder’s shares that conforms with the terms of the shareholder agreement.” Id. In effect, identifying the actual exchange of payment for shares as the point in time when shareholder status ends.

Proving Minority Shareholder’s Eligibility for Redress

To summarize, the availability of recourse for unfairly prejudicial treatment in employment context is evident. Proving minority shareholder’s eligibility for redress is however not a simple matter, largely because, as courts in Minnesota observed, there is a continuous lack of documented proof of the employee’s expectations. Haley, 669 N.W.2d. at 59 (quoting Gunderson). To deal with uncertainty brought on by lack of documentation, the courts have fashioned methods for identifying the underlying expectations of the parties involved. Where there is documentation, the courts will uphold the intent of the parties, unless the terms are found to be unreasonable. To avoid uncertainty inherent in undocumented agreements and drafting of agreements that can later be found to be unreasonable, future shareholders should enlist the assistance of a shareholder rights attorney as soon as they begin considering formation of a corporation or an LLC.

This article was written by Dmitriy Bondarenko.