In closely held corporations, the shareholders are often also employees. In Minnesota, one’s employment status is presumed to be “at-will” unless proven otherwise. At-will employment means that an employer may fire an employee at any time and for any reason, as long as that reason is not illegal (i.e., because of the employee’s race or sexual orientation). This puts minority shareholders who are also employees in a potentially precarious position. They may have invested in the company from the beginning with the expectation that, as long as the company is there, so too is a job.
The Minnesota Supreme Court had previously acknowledged the unique relationship between shareholders in a closely held corporation, calling it “a partnership in corporate guise.”
Minnesota courts have interpreted the Minnesota Business Corporations Act to provide potential relief for minority shareholders forced out of their work with the company. In the seminal case of Pedro v. Pedro, the Minnesota Court of Appeals held that a minority shareholder who has the reasonable expectation of lifetime employment is not an at-will employee and cannot be fired except for cause. In determining whether one has a reasonable expectation of lifetime employment, the courts look to the negotiations, “the parties’ situation, the type of employment and the particular circumstances of the case.”
A minority shareholder in a closely held corporation is in a strong position to have a reasonable expectation of permanent employment. Along with their ownership interest, the Pedro court held that minority shareholders in a closely-held corporation generally expect their share to come with “a job, salary, a significant place in management, and economic security for [their] family.” The mere fact that the employee is also a shareholder may be viewed as evidence of an expectation that the employment is something other than at-will. This is particularly true in the case of family owned and operated corporations, as was the case in Pedro v. Pedro.
Pedro claims are often difficult to advance and the Minnesota Court of Appeals recently issued a decision in the case of Roberts v. HydraMetrics, LLC, No. A18-0390, (Minn. Ct. App. 2019) that indicated some skepticism for Pedro claims altogether, may have been an invitation for the Minnesota Supreme Court to weigh in on this area of the law.
The easiest way to ensure that the intentions of the parties are honored is to state them explicitly, either in the shareholder agreement or an employment contract. It may be wise to seek legal counsel from an experienced Minnesota shareholder attorney to ensure that any written document states exactly what each party intends. The Roberts Court resoundingly confirmed that a written agreement stating that an owner-employee is employed “at-will” will virtually always defeat such a Pedro claim.