Minority shareholders are easily subject to prejudicial treatment from majority shareholders and directors. The Minnesota Supreme Court explained that minority shareholders in a closely held corporation are often in a vulnerable position, because a majority shareholder can deny them income by refusing to employ them or pay dividends.
Shareholder attorneys will typically represent minority shareholders in situations where they have been treated in an unfairly prejudicial manner. The general rule under Minnesota law is that majority owners cannot treat the minority owners in a manner that is unfairly prejudicial to the reasonable expectations of the minority owner. Unfairly prejudicial conduct is “conduct that frustrates the reasonable expectations of all shareholders in their capacity as shareholders or directors of a corporation that is not publicly held or as officers or employees of a closely held corporation.” The oppression doctrine, on the other hand, affords closely-held-corporation shareholders relief when the controlling shareholders frustrate their reasonable expectations as shareholder-employees.
Examples of minority shareholder oppression may include:
- being denied access to corporate records
- being denied access to financial records
- having responsibilities unjustly stripped away
- being excluded from important corporate decisions
- being “squeezed out” or “frozen out” of the corporation
- refusal by the majority shareholder to declare profit distributions
- being unjustly terminated from employment without cause
- any other actions involving dishonesty, misrepresentation, or fraud
LEGAL RELIEF FOR OPPRESSED SHAREHOLDERS
In order to protect minority shareholders, the Minnesota legislature has provided the courts with broad equitable powers to protect the interests of minority shareholders. The Minnesota Business Corporation Act provides for the buy-out of a minority shareholder’s interest when “the directors or those in control of the corporation have acted in a manner unfairly prejudicial toward one or more shareholders in their capacities as shareholders or directors . . . or as officers or employees of a closely held corporation.” A Minnesota shareholder that has been treated in an unfairly prejudicial manner may have the right to sue the corporation and/or the majority shareholders for equitable relief including the forced buy-out of their shares for “fair value.”
A court may grant any equitable relief it deems just and reasonable or may dissolve a corporation and liquidate its assets and business in an action by a shareholder if it is established that: (1) the directors or those in control of the corporation have acted fraudulently or illegally toward one or more shareholders in their capacities as shareholders or directors, or as officers or employees of a closely held corporation; or (2) the directors or those in control of the corporation have acted in a manner unfairly prejudicial toward one or more shareholders in their capacities as shareholders or directors of a corporation that is not a publicly held corporation, or as officers or employees of a closely held corporation.
In determining whether to order equitable relief, dissolution, or a buy-out, the court shall take into consideration the duty that all shareholders in a closely held corporation owe one another to act in an honest, fair, and reasonable manner in the operation of the corporation and the reasonable expectations of all shareholders as they exist at the inception and develop during the course of the shareholders’ relationship with the corporation and with each other. Any written agreements, such as employment agreements or buy-sell agreements, between or among shareholders or between or among one or more shareholders and the corporation are presumed to reflect the parties’ reasonable expectations.
In deciding whether to order dissolution, courts should consider whether a lesser relief such as equitable relief, a buy-out, or a partial liquidation, would be adequate to permanently relieve the issue. Lesser relief may be ordered in any case where it would be appropriate under all the facts and circumstances of the case.
VALUATION OF A BUY-OUT
When a court grants a buy-out remedy, the court must also determine the “fair market value” of the shares to be bought.
In a dissenter’s rights dispute under Minn. Stat. § 302A.471-.743, the court will also apply the “fair value” method. Minnesota courts have broad discretion in determining fair value, including methods of measuring value such as market, book, replacement, and capitalization of earnings.
“Fair market value” is an estimate based on what a knowledgeable, willing, and unpressured buyer would probably pay to a knowledgeable, willing, and unpressured seller in the market. In distinguishing “fair market value” from “fair value,” a fair market valuation may apply a discount to the minority share to reflect the decreased value attributed to the shares’ lack of control over corporate decision-making. Discounts may include lack of control, minority interest, lack of marketability, and key person.
The Minnesota Supreme Court has held “that establishing a bright-line test as to the applicability of the marketability discount would be inconsistent with this legislative policy of flexibility and fairness to all parties and would hamper the courts’ ability to take into account circumstances that would lead to an unfair wealth transfer if the marketability discount were not applied.” The court concluded that “absent extraordinary circumstances, fair value in a court-ordered buy-out pursuant to section 302A.751 means a pro rata share of the value of the corporation as a going concern without discount for lack of marketability.” In that case, the court found the extraordinary circumstances were met where aspects of the corporations’ financial condition presented in a financial report indicated that rejecting a marketability discount would be clearly unfair to the remaining shareholders.
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