How many times have you agreed to “binding arbitration” in case of a dispute over a product you bought or a service you signed up for? Whether you know it (because you conscientiously read contracts before signing them) or not (you don’t), there’s a good chance your answer should be “a lot.” Arbitration provisions now crop up all over the place, from the terms for computer software to cable TV contracts to bank checking and savings accounts agreements to the purchase agreement for a new car. Arbitration clauses commonly appear in commercial contracts and professional services agreements. They might be included in a shareholder agreement for a closely held company. Sometimes they are used in places they aren’t supposed to be used. What does an arbitration agreement accomplish?
Securities fraud litigation bubbles up with the oil in the Bakken. For example, the U.S. District Court for the Southern District of New York was presented with the question whether defendant Eric Dany, an established stock commentator with his own “Stock Prospector” brand and newsletter, could be held responsible under the SEC’s Rule 10b-5 as the “maker” of allegedly misleading statements about the stock of Norstra Energy Inc., a would-be Bakken player. A third party paid Dany for the use of his name in publishing a statement in promotional materials: My name is Eric Dany. I’m editor and publisher of Eric Dany’s Stock Prospector, Main Street Research . . . Now I’m predicting that NORX could be my best ever call! I believe the company’s estimated 8.5 billion barrels of oil in place could easily fetch $25 a share in a takeover! Act now, before a takeover move, and you could make a fortune! . . . Don’t wait! As you’ll see when you read on, I believe one of the majors may be reading a takeover offer that, the minute it leaks out, could send this stock flying! The SEC sued Norstra Energy, its CEO, and Dany, alleging the statement (and others) was misleading. Exchange Act Rule 10b-5(b), 17 C.F.R. § 240.10b-5(b), prohibits making untrue statements of material fact in connection with the purchase or sale of securities. Dany argued that, as a matter of law, he could not be held responsible because he did not “make” the statement, since it was published by someone else. The Supreme Court decided in 2011 that “[f]or purposes of Rule 10b-5, the maker of a statement is the person or entity with ultimate authority over the statement.” Accordingly, showing that someone else published an allegedly fraudulent statement is not enough to escape responsibility. …
You own some shares of a business, but you don’t work there and you’re not on the board of directors. The CEO just sent a letter regretfully informing you and the other owners that there won’t be any dividends this year. But you know from one of his neighbors that the CEO just started a bottom-to-top renovation of his house, and he’s also driving a new vehicle that must have cost at least six times as much as the car he bought last year. How can you find out what’s going on inside the company? You’re the president of a company, and one of the smaller shareholders is demanding access to the company’s financial and customer data. Last month this same shareholder asked if you were interested in buying his shares. You suspect he’s now asking for company information because he wants to start his own competing business. Can you refuse to let him see any of the company records?
The National Football League won two high-profile legal battles against superstar players in 2016, in both cases winning on appeal after a federal district court judge ruled against them. The legal considerations that proved decisive in the Tom Brady and Adrian Peterson cases were not particularly complicated or new, and without celebrity and salient secondary issues swirling around them, the cases would neither have received nor deserved much attention. But they do provide excellent examples of the process by which American courts handle an arbitration award.
“Shareholder oppression” is action by the directors or controlling shareholders of a closely held corporation  that is unfairly prejudicial to a minority shareholder. Oppression can take many forms. Three examples – termination of a shareholder employee, financial freeze out, and exclusion from corporate affairs – are described here, but other types of oppression may also arise, limited only by the imaginations and opportunities of controlling shareholders. For example, the Minnesota Supreme Court once held that a reverse stock split could constitute unfairly prejudicial conduct, though the Court determined that no oppression had occurred in that particular case. See U.S. Bank N.A. v. Cold Spring Granite Co., 802 N.W.2d 363, 377-79 (Minn. 2011). See also 1 F. Hodge O’Neal & Robert B. Thompson, O’Neal & Thompson’s Oppression of Minority Shareholders and LLC Members § 1:3, ch. 3-4 (2d ed., 2018 supp.). Termination of Employment. A minority shareholder who is fired from employment at the corporation he partially owns may have a claim for shareholder oppression. In a close corporation, the pay received by the shareholders for working at the corporation they own may be a “vital component” of the shareholders’ return on their investment. Gunderson v. All. of Computer Professionals, Inc., 628 N.W.2d 173, 189 (Minn. Ct. App. 2001). This is because “dividends are rarely distributed in a close corporation. . . . Rather, ‘shareholders derive their income mainly from salaries and perquisites.’” Berreman, 615 N.W.2d at 367–68. In other words, even if a close corporation generates minimal profit each year or barely breaks even, the investors may be satisfied with the performance of their investment because the investment provides them with a job. In such a case, a shareholder terminated by the corporation essentially loses the entire value of his investment, since he likely will not receive any dividends from owning the stock. The …
The Minnesota Supreme Court decided two unrelated disputes about the enforcement of employment contracts within the space of thirty days this summer. Both decisions allowed the employee to elude, at least temporarily, the plain language of a contractual obligation. An employee who failed to timely return his employer’s property after leaving the company was allowed to seek a contractual payment of funds from the company, even though his employment agreement stated that failure to timely return the property allowed the employer to cancel the payment. Capistrant v. Lifetouch Nat. Sch. Studios, Inc., no. A16-1829 (July 25, 2018). An employee who left his employer to work for a competitor avoided an injunction against him continuing to work for the competitor, even though his employment contract stated that the employer was entitled to an injunction if he left the company work for a competitor. St. Jude Med., Inc. v. Carter, no. A16-2015 (June 27, 2018). This pair of decisions is educational on at least three levels. In general terms, the pair highlights the quandary of attempting to apply contractual obligations to the real world. As legal doctrine, the pair expressly resolves some basic questions of Minnesota contract law. Finally, the pair emphasize that an employer must show actual, not speculative, damage caused by the employee if the employer wishes to enforce a harsh term of the agreement against the employee.
An elementary principle of litigation is keeping an eye on the elements. A federal appellate court decided in August that the federal mail and wire fraud statutes allow a defendant to be convicted for engaging in a “scheme to defraud” even if the defendant’s deceptive statements were made to different people than the victims who actually lost their money. The defendant had argued that the conduct he was accused of engaging in – lying to banks and credit card processors about unauthorized credit card charges, and using unauthorized credit card charges to obtain money from customers – was not wire fraud because he lied to different people than he stole from. The court’s decision to reject the I-stole-from-her-but-lied-to-him defense may seem obvious, but it’s a little more complicated than it looks. The reason requires an understanding of the legal principle of “elements.”
The Minnesota Court of Appeals, in an unpublished decision, recently confirmed that a corporate officer is entitled to indemnification for her attorneys’ fees in defending allegations of corporate misconduct for her personal benefit. The underlying message: if you sue your business partner for taking money from the company, she may nevertheless get her legal fees paid by the company. The parties in Dodge v. Stack were the two co-owners of a mental health clinic, each of whom received income from the company based in part on their respective provision of clinical services. Ultimately, they had a dispute about how the income should be allocated, and that dispute ended up in court. The details of who was to get paid what in that dispute will have no impact outside the confines of the suit itself. But other potential litigants should pay attention to what the Court of Appeals said about a corporation’s duty to indemnify its officers’ attorneys fees. The lower court in Dodge denied the victorious shareholder’s request for payment of her attorney’s fees. She had requested those fees under Minnesota’s corporate indemnification statute, Minn. Stat. section 302A.521, subd. 2(a), which provides that a corporation must indemnify a corporate officer or director who is made party to a proceeding by reason of her official capacity with the corporation. The lower court held that the victorious shareholder had incurred fees “on behalf of her as [an] individual and not in her capacity as an officer or shareholder of [the company].” This ruling appears reasonable, since the dispute was about the amount of personal benefits she took from the company. But not so fast, said the Court of Appeals. The higher court noted that everything she allegedly did wrong — from paying herself excessive funds, to failing to properly document expenditures, to managing the …
In a dispute over whether a defendant could claim immunity from being sued, the Minnesota Supreme Court recently relied upon a principle of grammar to determine the meaning of the word “or” in the applicable statute. The Court deployed the terms “conjunctively” and “disjunctively” to explain its decision, and the cases cited in the Court’s opinion show that legal disputes concerning the meaning of “or” arise with some frequency — which means “conjunctively” and “disjunctively” are apt to recur as well. What, exactly, do these grammar terms mean?
Many companies doing business in Minnesota must register with the Minnesota Secretary of State, annually filing their name, address, registered agent for service of process, an officer’s contact information, and other data. Minnesota corporations and limited liability companies generally also file their articles of organization or articles of incorporation with the Secretary of State. On occasion, this information can be useful to third parties, and much of it is available through the Secretary of State’s website. For example, the online records show that 3M, a quintessential Minnesota company, is actually a “foreign” corporation, having been incorporated in Delaware, though 3M has also been registered in Minnesota since August 6, 1929. And though actual copies of documents filed with Secretary of State are not visible online, the website allows users to request hard copies of the filings by selecting the document desired and clicking a button. For publicly traded companies, of course, the Securities & Exchange Commission’s searchable website provides much more information through regularly required federal securities filings. But if you’re looking for background on a private Minnesota company, the Minnesota Secretary of State’s page may be a good place to start. (In Wisconsin, try the Department of Financial Institutions.)  See Minn. Stat. §§ 302A.821, 5.34, 303.14.  See Minn. Stat. §§ 322B.18, 302A.151.  Many companies based in other states choose to incorporate in Delaware, to take advantage of Delaware’s well-developed corporate laws and judicial precedents. In fact, Delaware claims more than one million business entities.