A Shareholder Agreement Trap for Shareholder Employees

In Corporate Law, Shareholder Agreements, Shareholder Strategies by Joseph Pull

Shareholder agreements are common among owners of closely held corporations or LLCs. These agreements are generally enforceable under Minnesota law.[1] Frequently, such agreements include provisions governing the transfer of ownership interests. The interaction of certain combinations of common provisions governing the transfer of ownership interests can create unfortunate incentives that minority shareholder employees should be aware of. Specifically, many shareholder agreements require that an individual must remain employed by the company to remain a shareholder. Such a provision may appear to be an innocuous safeguard against absentee ownership. But these provisions can create perverse incentives when coupled with another provision that requires a departing shareholder to sell his interest at a buyout price determined by a fixed formula – book value or perhaps even a fixed, nominal price.

Peeking Behind Company Curtains

In Corporate Law, Shareholder Strategies by Joseph Pull

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?

Shareholder Oppression in Minnesota Closely Held Corporations

In Corporate Law, Shareholder disputes, Shareholder Strategies by Briol & Benson

“Shareholder oppression” is action by the directors or controlling shareholders of a closely held corporation [1] 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 …

Who’s in Charge Here?

In Corporate Law by Joseph Pull

In a one-person business,[1] there is no confusion about who calls the shots.  There is also no chance of disagreement concerning the operation of the business’s affairs. Confusion and disagreement can arise, however, when there is more than one person involved. Such confusion is unnecessary. Minnesota, like other states, has well-established rules determining who makes decisions on behalf of corporations. These rules define three different decision-making roles: the shareholder, the director, and the officer. Though the same individual can hold two or even three of the roles at the same time, each role has distinct powers. Blurring or confusing the roles can give rise to conflict and even litigation, and remaining mindful of the differences between the roles can help prevent disputes. Shareholder.  A shareholder is an owner of the corporation. The basic rights of a shareholder are (1) to receive money from the corporation in the form of dividends, if and when the corporation chooses to distribute profits; and (2) to vote in elections to select the corporation’s directors.[2] While shareholders may have the right to approve certain important corporate decisions, as a general matter a shareholder does not have the right to make decisions concerning the corporation’s affairs. Director.  Rather, it is the board of directors that controls the corporation’s business and affairs.[3] The directors are elected by the shareholders, thereby giving the shareholders indirect control of the corporation, but direct control lies in the hands of the directors without the participation of the shareholders. “Minnesota law puts the boards of directors, not courts or shareholders, in charge of governing corporate affairs.”[4]  (There is an exception that allows shareholders by unanimous affirmative vote to take action in the same way as the board of directors may act,[5] but this exception quickly becomes difficult to use as the number of shareholders increases beyond two or three.) Officer.  …