The Force Out: Protecting Minority Shareholder Rights

Scott Benson 

If you’re a shareholder and you’ve been demoted, your duties have been changed, you’ve been basically frozen out of the business, other employees are told not to talk to you. Those are all signs that either there’s trouble on the horizon or you’re already really in the midst of trouble with regard to your stake as a shareholder.

Pat Milan 

Hi guys! I’m reading one of the chapters of your book that’s due out, well, Thanksgiving holiday, right? 2024. And I think, looking through the chapters, I see a trend that clearly plays out in the case of McGrath versus MICO. And here’s the trend. Whenever family members are hell bent on forcing another family member out of the business, they tend to get sneaky and play loose with the rules. And in this, I think we’ll talk about this a little bit here, but to the point that they end up jeopardizing, and in some cases, losing everything they own out of their own spite. You guys know this, I’m talking about the case of Dan McGrath, whose brothers Larry and Brent, conspire with an employee to get Dan to give up, leave the company, and just sell his shares cheaply. That’s really the setup on what was going on there. And with this case in mind, and using your experience, I’m wondering if you guys could share some of the signs that a family business owner should be looking for when they suspect the others are trying to force them out without necessarily saying we’re trying to force you out. What are the things you start to see?

Scott Benson 

Well, in the McGrath case, of course, this is an example of probably doing everything you can to try to get your sibling out of the business. But very early on, in that case, the brand, McGrath, the brother, who was the president of the company, had proposed bylaws that would essentially eliminate shareholder meetings, have very few board meetings, and consolidate his power. And he brought those bylaws to a vote in a board meeting after his parents who owned all the voting shares had left the meeting. And the changes to the bylaws were supposedly approved. But the bylaws couldn’t be approved just by a board vote, they needed a shareholder vote, and the voting members weren’t at the meeting. And so that was probably the first sign of, in that case, for Dan McGrath that there was an ominous warning for him that he was going to have tough times ahead. In other circumstances, of course, if if you’re a shareholder and you’ve been demoted, your duties have been changed,  you’ve been basically frozen out of the business, other employees are told not to talk to you. Those are all signs that either there’s trouble on the horizon, or you’re already really in the midst of trouble with regard to your stake as a shareholder. 

Pat Milan 

Mark, when you’re talking to a family member, who’s a shareholder, usually a minority shareholder, is the frequency of board meetings one of the first things to go look for to see how they’re doing things in the cadence that a company should be doing?

Mark Briol 

Well, obviously, it’s one thing. I got a case in this last week, where as you just suggested, the regularity of board meetings and shareholder meetings was not there. They called the shareholders meeting, followed by a board meeting. It was the only board meeting and shareholders meeting they had in 27 years. And they called it in to one, get a number of changes done. Which they did without checking the bylaws because they violated the bylaws, but that didn’t seem to bother them in any sense. And then followed by a board of directors meeting where they essentially stacked the board against my client, and then started moving forward making changes under the new board that they now had a majority of. So yeah, they don’t follow the rules for 27 years, and then all of a sudden they started following the rules in order to shore up their otherwise unlawful positions.

Pat Milan 

And maybe that’s one of the the biggest trip wires in family businesses; they think about his family business. And particularly, I think you get into the second generation, maybe you guys have seen it with both, but I think they forget, it’s still a legal entity, there’s rules to be followed. And if that’s not happening, and you find yourself on the wrong end of a stick, that bad behavior works in your favor, does it not?

Scott Benson 

Yeah, it certainly does. And, again, usually you don’t see numerous signs of that kind of bad behavior going on. And for folks who are reading the book, you’ll see virtually everything I think that could exist in the McGrath vs MICO case, that shows shareholder oppression. And you ask a good question of when does the shareholder need to act. And sometimes when you have very early warning signals, there isn’t enough there to show oppression. But it seems like that’s what’s going to happen in the future. And so at some point, we may say, you know, it seems like they’re out to get you but really enough hasn’t happened yet for us to make a case out for shareholder oppression. A number of times in those cases, though, the other thing that will happen is there’ll be deadlock on the board. And that’s another in Minnesota under the statute, that’s another reason to move forward with a buyout if there’s complete deadlock.

Pat Milan 

But it’s not just shareholder meetings, because you know, the lack or the frequency of them. But there are certain kinds of important company decisions that have to be made with consent or approval of co-owners and shareholders. I mean, is that black and white? Or is it just a lot of gray area there? I guess I’m trying to think of a family member who’s watching this, who is a minority shareholder, they’re like, so we’ve already talked about right, these erratic meetings. But the other thing they notice is that big decisions get made without everybody having input. Is that another kind of big trip wire?

Scott Benson 

Yes, I would say that’s another trip wire that and frankly, sometimes the bylaws spell out what requires just a majority vote or what requires a supermajority vote. And so if you find that the company isn’t operating with regard to its bylaws that require a supermajority, usually those involve things like borrowing large sums of money, selling off pieces of the business, or basically discontinuing business. Those types of major decisions often in the bylaws require a supermajority. And if the company isn’t following that, and is actually not calling shareholder meetings or board meetings to approve those types of things, that is a major issue that can come up.

Pat Milan 

In the McGrath case, Scott, that you handled, the really bad actor in this family essentially waited for the dad to die because the mom and the dad had the majority of the shares, if I understand it, right. And then that’s when he kind of put in his plan of action. And the jury, I think the jury came back clearly saying, you know, there’s malice and bad faith here.

Scott Benson 

Yes, and the Father, in that case, really wanted the two sons to work together. Really wanted Brent and Dan to work together and run the company together. I think what he saw was, here are two people with complementary skills, although they were very different. And they would be best to work together. And in fact, they employed someone who would try to help them work together and work out their differences and grow the company. And exactly, in that case, Brent McGrath did start doing some of the things that he intended to do while his parents were alive, but really initiated the vast majority of the bad actions against his brother Dan, after his father had passed away. And at that point in time, before his father died, his father had actually come to Dan and said, ‘What if I gave you all the voting shares’ and Dan said ‘I don’t think that would be fair to Brent’. So clearly, Dan had the same mindset that the father did that they would work together and grow the company.

Pat Milan 

Hey, Mark, when you think about the wronged family member, and the fact that a lot of times they just don’t see what’s going on in the background, especially if they’re remote, right, they’re not there in the main part of the business. And while it’s easy for us to sit here and say, ‘Well, it’s all right there, it’s laid bare in email and text messages and decision making.’ For some of these people, you know, walking into the office of your father or your older brother or older sister and saying, ‘I want to see your email and your text messages’ is a terrible way to figure this out. How do they go about trying to figure that out? Or do they just boldly say, ‘I want to see the detail on decision making?’

Mark Briol 

Well, usually what happens is that they get so frustrated, because first of all, they’ll just say, I want to start seeing the books, I’d like to see financial statements. And then they promise the individual, they’ll get them the financial statements. And then either they don’t get them to them, or they get them part of them, but not really accurate ones. And then ultimately, what happens is they get so frustrated, they go see a lawyer, and that’s when it all comes out. It is very difficult to go in. After all the time has passed, after there has been a business practice set up of one shareholder bullying the other shareholder or shareholders for such a long period of time, it’s hard to turn that ship around. And the one shareholder who has been bullying the others for such a long period of time, feels complacent in his or her role of not giving and sharing that information, thinking that they’re the ones that are running the company, it’s their right to see these documents, and no one else’s. And really, it never works out once you start turning that, once you try turning the ship, especially that quickly, where you actually go in and have a confrontation. Nothing happens until you get a lawyer.

Pat Milan 

Yeah. Scott, in this particular case, the McGrath case, there was just so much going on. I mean, this is like, it’s almost like fiction, in that it was so bad and so obvious. I mean, you had what, you had siblings talking to co-owners, people being demoted, being given jobs they couldn’t possibly complete because they couldn’t get access to things they needed. I mean, this, this was the poster child for for suing your family.

Scott Benson 

It sure was. And rarely is there so much opressive activity going on from the majority shareholder to minority shareholder. And usually, when we start these cases, the first thing we do before we even sue is make a books and records request because Minnesota statutory law allows shareholders to request the books and records. Not providing those books and records that are demanded to be available to shareholders under the law is a violation of the law itself. And with Mark, we’re discussing how do you get at the emails and text messages and those kinds of things. Those really don’t come out until after you sued the other side and have discovery requests and probably motions to compel and all of those things in order to draw out that evidence. But the first thing we would do is ask for those books and records, records of shareholder meetings, records of balance sheets, andany kind of financial information that the company has. And the shareholders are entitled to that.

Pat Milan 

And Mark, you’ve pointed it out in other podcasts, but I think it’s worth pointing out here as well. Making the decision to hire you guys means there’s going to be a big shift in the ground. I mean, it’s a big moment, right?

Mark Briol 

Yes.

Pat Milan 

I mean, you have a speech you give folks when they come in the office.

Mark Briol 

Yeah, both for our clients and for the other side, we’re very aggressive. And we’ve been around, I’ve been practicing for 40 plus years, and people generally know who we are when we get involved in these cases that it usually sends a shockwave through the case.

Pat Milan 

 But you do tell clients, make sure this is what you really want to do – to make sure they understand where this is going.

Mark Briol 

Well we tell them you know, if you start this, it’s going to be very unpleasant. It’s going to be very emotional. It’s going to be very resource intensive. You’re gonna have to stay with it for a long period of time. You’re going to be invested in this emotionally, economically and it’s going to be a battle. And if you don’t want to do that, you should tell us now because it’s not going to get any easier. The first day they come in to your office is the is usually the best day of the case. It looks the best and people are in the right mood. It changes after two or three years.

Pat Milan 

That’s a long time. And you know what’s interesting, Scott, when I think about McGrath and you know what Mark was just pointing out, I mean, McGrath vs MICO is one of the biggest judgments in Minnesota history. Right, massive sibling infighting, obviously things were going very poorly. But it took years to get this thing decided.

Scott Benson 

Six years, I think. So yes. And in the end, there were not only compensatory damages and damages for the amount that Dan’s shares are valued at, but there were punitive damages awarded. That’s a rare case where punitive damages actually get awarded, at least certainly in this business. But the violations were so flagrant in this case, that punitive damages, I think were merited here.

Pat Milan 

And in the end, the bad behavior really unraveled the entire company.

Scott Benson 

Yes, in the end. And you had indicated I worked on this case, we actually worked on behalf of  brother Mark’s heirs. Mark was the one who was not involved in the company during the course of this. And when they stopped paying the dividends in order to pay the tax obligations and cut off the healthcare for board members, Mark was essentially left on his own without healthcare and with this massive tax bill to pay and he actually died a few months after all these decisions had been made. And so following this case, we represented his estate and his heirs in looking to get his shares bought out and the company eventually then sold.

Pat Milan 

Do you guys think there are a lot of family companies that are really doing siblings and shareholders wrong? Or is this a real small percentage of family owned companies where this kind of poor behavior is happening and shareholders are not getting their due? What’s your take on it?

Mark Briol 

I think it happens more frequently than you know. It’s just that many people, having never hired a lawyer in their life, just don’t know what to do. I mean, obviously, they don’t understand how the finances work, they don’t understand the laws and shareholder rights and board rights and bylaw rights. And I mean, they just don’t know what to do. They don’t know where to go. There’s not that many people that do minority shareholder litigation. And so, you know, trying to find the right one. It’s nott like you can go next door and say, so who can we find to represent us in this case, and, you know, maybe people know a DUI lawyer or a divorce lawyer, but finding a minority shareholder lawyer is something that’s a little bit more time intensive.

Pat Milan 

Well, and you guys are among the best in helping people navigate these complex family businesses and the shareholder challenges. I appreciate you sharing the notes on this onem it’s really interesting. It’ll be a great chapter in the book, which is coming out. We’re shooting for Thanksgiving 2024. I guess we’re more than shooting that’s our deadline, right guys? And just want to remind people, whether it’s minority shareholder rights, security fraud, high networth divorce, or patent litigation, Briol and Benson are prepared to answer your questions and figure out if you have a case, and how to get control of your rights. And for more information, go to Briollaw.com. And if you have questions about your family business, or other complex commercial cases, send them to us by emailing podcast@Briollaw.com. To submit to the podcast, you can subscribe actually to the podcast, and you can find it on Apple Podcast, Spotify, or YouTube. I’m Pat Milan, thanks, guys, for being here. We really appreciate it and we’ll see on the next podcast. 

Scott Benson 

Thanks for having us.