Shareholder Oppression in Minnesota Closely Held Corporations

In Corporate Law, Shareholder disputes, Shareholder Strategies by BL AdminLeave a Comment

“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 …

Paying for the privilege of suit: When a company can pay the costs of defending claims against a minority shareholder and officer

In Minnesota Appellate Decisions, Shareholder disputes by Mary-Cate CiceroLeave a Comment

The Minnesota Court of Appeals, in an unpublished decision, recently confirmed that a corporate officer is entitled to indemnification for her attorneys’ fees in defending allegations of corporate misconduct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 …