In any given business whether it be a corporation or an LLC there is always the chance that shareholders of the company will behave poorly or inappropriately, whether it be to other shareholders or in a way that has a negative impact on the company. In Minnesota, shareholders are well protected, in order to protect themselves from corporate violations and also to protect the corporation.
Once someone contributes to a business and becomes a shareholder, he or she has certain rights as a shareholder of that company. Some of these include having voting rights, the right to employment in the company, the right to a share in the dividends, the preemptive right to buy stocks (right of first refusal), and the right to be treated according to the shareholder’s reasonable expectations. A shareholder’s reasonable expectations are based off of documents that are issued at formation of the company. The shareholder control agreement explicitly discusses the agreements made between the shareholders, the relations among shareholders, and other information relating to the control of the business and business operations. Additionally, shareholders have what are called fiduciary duties to one another. What this means is that each shareholder owes the others a certain quality of behavior including honesty, faithfulness, loyalty, and acting candidly with other shareholders. A shareholder does not deserve to be treated with disrespect by other shareholders. Yet another right that a shareholder has is to not be treated differently if he or she owns fewer shares than other shareholders. Oftentimes within a company there are majority shareholders and minority shareholders. Majority shareholders hold a dominant amount of the company’s shares and therefore exercise dominant control of the company’s management, whereas minority shareholders’ opinions on management get pushed to the side because they own fewer shares. This is referred to as shareholder oppression, and is a violation of a shareholder’s rights.
When the rights of a shareholder are violated, the shareholder has several options for recourse. First, the shareholder can seek equitable remedies (money) as well as attorneys fees when rights such as voting rights, rights to dividends, and rights to buy and preemptively buy shares are violated. Minn. Stat. § 302A.467.
Equitable Relief, Forced Dissolution, or Mandatory Buy-Out
Second, if a shareholder takes a claim of violation of rights to court, a court may decide to provide either that the shareholder receive equitable relief, force the company into dissolution, or compel a mandatory buy-out of the aggrieved shareholder’s shares in the company. Minn. Stat. § 302A.751. A court may decide to grant this relief when any of the following occurs:
- the company’s directors are deadlocked in the management of the business affairs and the shareholders are unable to break the deadlock,
- the directors acted fraudulently or illegally toward the shareholder,
- the directors acted in a manner unfairly prejudicial to the shareholder,
- the shareholders are so divided in voting power that in two consecutive meetings they failed to elect successor directors,
- the corporate assets are being misapplied or wasted, or
- the period of duration of the company provided in the articles of incorporation or organization has expired.
When the court decides to order the sale of the aggrieved shareholder’s shares, the price of the shares is the fair value. This is different from the fair market value of the shares. The fair value of the shares ends up being a little more than the fair market value of the shares, and this is meant to provide additional compensation to the shareholder.
Third, a shareholder has dissenter’s rights when certain actions occur. Minn. Stat. § 302A.471-473. Exercising dissenter’s rights means that the shareholder can opt out of certain proposed transactions. If the dissenting shareholder dissents correctly, then the shareholder may receive the fair value of his or her shares from the corporation. A shareholder can dissent to the following situations:
- an amendment of the articles of incorporation or organization in a way that negatively affects the shares of the dissenting shareholder,
- a sale, lease, or transfer of the corporation’s assets,
- a planned merger,
- a planned exchange in which the corporation’s shares will be acquired by another organization, (5) a plan of conversion by the corporation, or
- any other corporate action taken that requires a shareholder’s vote regarding the articles of incorporation or organization, or the by-laws.
If a shareholder dissents to any of the above-mentioned corporate actions, and nonetheless the proposed action was approved by the board, the dissenting shareholder can pursue an action to obtain payment for his shares at fair value.
Shareholder’s Derivative Suit
Lastly, a shareholder can bring a shareholder’s derivative suit. Minn. Stat. § 302A.241. The shareholder can pursue this recourse as a remedy for the company when the shareholder discovers behavior by other shareholders that is injuring the company. The directors of the corporation have the authority to establish committees, including a special litigation committee. When a shareholder has a concern that there is an injury being committed to the corporation, he or she must notify the company and submit the claim to the special litigation committee. The special litigation committee of a company will consist of one or more independent directors or other independent persons. Those individuals then consider the legal rights and remedies of the corporation and whether or not those rights and remedies should be pursued.
In conclusion, when an individual is a shareholder in a company, he or she should normally expect the business to be run by the books. Unfortunately, however, there are some times when shareholders conduct bad business. If a shareholder suspects that others are conducting business inappropriately, are acting negatively towards other shareholders, or acting in a way that detrimentally hurts the corporation, that shareholder can seek recourse. If the shareholder himself is personally injured by a violation of his rights by fellow shareholders he or she can see monetary relief, can have a court force the company to dissolve, or have the court mandate that the corporation buy-out the shares of the injured shareholder. Additionally, if the shareholder dissents to certain corporate actions, which are then passed regardless of the dissent, the dissenting shareholder can seek to have his or her shares bought out. When the behavior of shareholders negatively impacts the corporation, a shareholder has the right to speak up and submit a claim to the company. The idea of fellow shareholders conducting business in a wrongful manner can be daunting for a shareholder who catches himself in the midst of it. Because of this, shareholders in Minnesota are highly protected, allowing them opportunities to get out of bad situations and receive just compensation.