Minnesota Shareholder Disputes

A “shareholder dispute” is a dispute among shareholders in a closely-held corporation. Similarly, members of limited liability companies (often referred to as “LLCs”) and partners in a partnership may find themselves involved in similar disputes with fellow owners. Our attorneys represent both majority and minority stakeholders in business disputes.

In addition to case law, the Minnesota law governing these business disputes may be found in the following chapters:

Corporations – Chapter 302A of the Minnesota Statutes
Limited Liability Companies – Chapter 322C of the Minnesota Statutes
Partnerships – Chapter 323A of the Minnesota Statutes

Our attorneys routinely provide advice to shareholders, members, and partners involved in disputes with fellow owners. When a dispute cannot be resolved through discussion and typical governing processes, such as board meetings, or if the owners controlling the entity act unfairly towards the non-controlling owners, our shareholder litigation attorneys can explain how litigation can help business owners protect their rights.

Abuse of Minority Shareholders or Members

In the context of business disputes, a "minority owner" is someone who holds less than 50 percent of the shares or membership units in a company. This means that where voting is concerned, a minority owner can never out-vote the other side because they do not have a large enough stake in the company. Historically, minority owners were sometimes subject to abuses and unfair practices imposed by majority owners. Legislatures and courts stepped in to remedy the situation. Although minority owners cannot control a company, the playing field has been leveled, and certain minority shareholder abuses have been banned.

When a dispute arises among shareholders of a corporation or members of an LLC, the person or group in control of the company may act lawfully and properly. However, the majority owner(s) might overstep the legal boundaries established by Minnesota law. This could involve stealing from the company, taking money out of the company without sharing an appropriate percentage with other owners, firing or terminating the employment of a minority owner, or taking "loans" from the company without proper approvals. Likewise, a majority owner might improperly induce an investor to become a minority shareholder based on false claims about the value of the shares or the future prospects of the company. The list of improprieties that can occur in this context is lengthy, but where wrongdoing does occur, the law provides a remedy through litigation.

Breach of Duty of Loyalty and Breach of Fiduciary Duty

The duty of loyalty is a fundamental principle in corporate law that requires directors and officers to act in the best interests of the corporation and its shareholders, rather than in their own personal interests. A breach of this duty can occur when majority shareholders or corporate officers engage in self-dealing, misappropriate corporate opportunities, or otherwise place their personal interests above those of the corporation and its minority shareholders.

A fiduciary duty is a broader concept that encompasses the duty of loyalty as well as the duty of care, which requires directors and officers to act with the same care that a reasonably prudent person would use in similar circumstances. Breaches of fiduciary duty can occur in various forms, including but not limited to, failure to disclose conflicts of interest, mismanagement of corporate assets, and fraudulent activities.

Under Minnesota law, when majority shareholders or corporate officers breach these duties, minority shareholders have the right to seek judicial intervention. This can include actions for damages, equitable relief, or both, depending on the nature and extent of the breach.

Unfairly Prejudicial Conduct

Inequitable or unfairly prejudicial conduct that frustrates the reasonable expectations of a minority shareholder is illegal under Minnesota law. Where it occurs, a minority owner may ask a court to force a majority owner to pay the minority shareholder damages, including payment for lost wages (if a termination occurred) and for the "fair value" of the ownership interest (unless a valid contract requires a different method of valuation). Each case is unique, and our shareholder litigation attorneys can evaluate the specific facts of a business owner dispute and provide frank advice about strengths, weaknesses, and possible outcomes.

Pedro v. Pedro, 463 N.W.2d 285 (1990)

In Pedro v. Pedro, Alfred Pedro, a minority shareholder and employee in a closely held corporation, was discharged and brought a claim against the majority shareholders and the corporation. He sought dissolution of the corporation, appointment of a receiver, damages for lost wages, infliction of emotional distress, and slander. The jury found that the Stock Retirement Agreement (SRA) was valid and controlling of the buyout price for his stock and awarded him damages for the majority shareholders' failure to deal openly, fairly, and honestly, and for wrongful termination. The court vacated the judgment and remanded, noting that the trial court should determine whether the fair value of the shares was greater than the buyout price under the SRA and whether damages for wrongful termination could be awarded.

Wessin v. Archives Corp., 592 N.W.2d 460 (1999)

In Wessin v. Archives Corp., minority shareholders in a closely held corporation sued the corporation, the majority shareholder, and a corporate officer for corporate misconduct. The claims, which included allegations of waste and misappropriation of corporate assets, were deemed derivative rather than direct. The Supreme Court of Minnesota held that the shareholders must follow the procedural requirements of derivative actions, and the case was remanded for further proceedings.

Note: Don’t miss the derivative suit rule.

In Minnesota, derivative lawsuits are governed by Minn. R. Civ. P. 23.06. This rule outlines the specific procedural requirements that shareholders must follow when pursuing a derivative action on behalf of the corporation.

Summary of Rule 23.06

Rule 23.06 of the Minnesota Rules of Civil Procedure specifies the requirements for shareholders seeking to enforce a right that belongs to the corporation. The rule is designed to ensure that the interests of the corporation are adequately protected and that the shareholders' claims are properly addressed.

Procedure for Pursuing a Derivative Lawsuit in Minnesota

Demand Requirement:
- Before filing a derivative lawsuit, a shareholder must make a written demand on the corporation’s board of directors, requesting that the board address the alleged wrongdoing. This demand must allow the board a reasonable amount of time to investigate and decide whether to pursue the claim.
Shareholder Status:
- The plaintiff must be a shareholder of the corporation at the time of the alleged wrongdoing or must have acquired the shares by operation of law from someone who was a shareholder at that time. The plaintiff must also continue to be a shareholder during the litigation.
Particularity in Pleading:
- The complaint must be verified and must allege with particularity the efforts made by the plaintiff to obtain the desired action from the directors or the reasons for not making such efforts.
Fair and Adequate Representation:
- The plaintiff must fairly and adequately represent the interests of the shareholders similarly situated in enforcing the rights of the corporation.
Court Approval for Settlement or Dismissal:
- Any settlement, compromise, or dismissal of the derivative lawsuit must receive court approval. Notice of the proposed dismissal or settlement must be given to shareholders in the manner directed by the court.
Discontinuance and Dismissal:
- If the plaintiff decides to discontinue or dismiss the action, they must seek the court's approval. The court may also require that notice be given to other shareholders.
Court's Discretion in Derivative Claims:
- The court has discretion to dismiss the derivative action if it finds that the corporation has already taken action to address the alleged wrongdoing or if it determines that continuing the lawsuit is not in the best interest of the corporation.

Practical Steps for Pursuing a Derivative Lawsuit

Prepare and Serve a Written Demand: The shareholder may prepare a detailed written demand outlining the alleged wrongdoings and the actions they expect the board to take. This demand should be served on the board of directors.
Wait for the Board’s Response: Allow a reasonable period for the board to respond to the demand. If the board takes appropriate action, the need for a lawsuit may be avoided.
File the Verified Complaint: If the board does not take action or rejects the demand, the shareholder may file a verified complaint in court. The complaint must detail the demand made, the board’s response (if any), and the reasons for filing the lawsuit.
Provide Adequate Representation: Ensure that the lawsuit is filed on behalf of the corporation and that the plaintiff is prepared to represent the interests of all similarly situated shareholders.
Seek Court Approval for Any Settlement: If a settlement or resolution is reached, the plaintiff must seek court approval and provide notice to other shareholders as directed by the court.
Proceed with Litigation: If the case proceeds to litigation, the plaintiff must be prepared to demonstrate that the lawsuit is in the best interest of the corporation and that they have met all procedural requirements outlined in Rule 23.06.

Berreman v. West Publishing Co.

In Berreman v. West Publishing Co., Thomas Berreman, a long-time employee and minority shareholder of West Publishing Company, brought a lawsuit against West and three of its directors. Berreman alleged breach of fiduciary duty, unfairly prejudicial conduct, and fraud. The crux of Berreman’s claim was that West's directors had a duty to inform him about preliminary discussions regarding the potential sale of the company before he retired and sold his shares back to the company. Berreman argued that this nondisclosure was a violation of his rights as a shareholder and that it adversely affected his decision to retire and the value at which his shares were repurchased .

The district court granted summary judgment in favor of West Publishing on all counts. The lower court determined that the discussions about a potential sale were preliminary and speculative, and therefore not material information that required disclosure under fiduciary duty principles. Additionally, the court found that West’s actions did not amount to unfairly prejudicial conduct under Minnesota Statute § 302A.751, subd. 1(b)(3). The court reasoned that Berreman’s reasonable expectations as a shareholder were not frustrated by West’s conduct, particularly given the buy-back agreement terms that Berreman had agreed to upon acquiring his shares.

On appeal, the Court of Appeals of Minnesota affirmed the lower court’s decision. The appellate court agreed that the directors’ fiduciary duty to disclose did not extend to the early and speculative discussions about a potential sale. Furthermore, the court held that the nondisclosure did not constitute fraud, as there was no duty to disclose such speculative information. The court emphasized that the buy-back agreement terms were clear and binding, and that Berreman had no reasonable expectation of being informed about internal corporate deliberations that had not yet reached a concrete stage. This case underscores the stringent standards for proving breach of fiduciary duty and unfairly prejudicial conduct, particularly in the context of preliminary corporate decisions in closely held corporations.

US Bank NA v. Cold Spring Granite Co.

In US Bank NA v. Cold Spring Granite Co., minority shareholders, represented by trustees Thomas Moore, Ann McCabe, and US Bank (collectively referred to as the “Moores”), challenged a reverse stock split that resulted in their shares being converted into cash. The Cold Spring Granite Company (“CSG”) and its chairman, Patrick D. Alexander, were defendants in the case. The Moores alleged the valuation of their shares by CSG's board was fraudulent and that the process deprived them of their rightful interests. The district court appointed a special master who recommended dismissing all claims by the Moores. The court accepted these recommendations, and the decision was upheld by the Court of Appeals. The Moores then petitioned for review, which was granted by the Minnesota Supreme Court.

The Supreme Court reviewed several key issues, including whether the board's determination of the share value was fraudulent, if dissenters' rights were available, and if the board's conduct was unfairly prejudicial or constituted a breach of fiduciary duty. The Court concluded that the board's valuation was not the product of fraud, as there was no material misrepresentation or concealment of facts that would affect the valuation. Furthermore, the reverse stock split did not trigger dissenters' rights under Minnesota Statute § 302A.471, nor did it result in conduct that was unfairly prejudicial to the minority shareholders. The Court also found that the procedures followed for the reverse stock split were permissible under the law and that the board did not breach its fiduciary duty to the minority shareholders.

Ultimately, the Supreme Court affirmed the lower courts' decisions, holding that the valuation method used by the board was reasonable and supported by evidence, and that the minority shareholders received fair value for their shares. The Court emphasized that the statutory provisions governing such transactions were adhered to, and that there was no basis for awarding the Moores additional interest, fees, or costs. This case underscores the importance of adhering to statutory procedures and the high threshold for proving fraud and unfair prejudice in corporate governance matters.

Note: Dissenters’ Rights Should Not be Overlooked.
Dissenters' rights provide a legal mechanism for minority shareholders to object and seek fair compensation when significant corporate actions adversely affect their interests. Under Minn. Stat. § 302A.471, dissenters' rights are activated in specific situations, such as amendments to the articles of incorporation that materially and adversely affect shareholder rights, mergers, consolidations, and sales of substantially all corporate assets. This statute aims to ensure that minority shareholders can liquidate their investments at a fair value when they disagree with fundamental changes in the corporation.
In US Bank NA v. Cold Spring Granite Co., the minority shareholders argued that a reverse stock split, which converted their shares into cash, should trigger dissenters' rights. The court concluded that such an event did not fall within the statutory situations enumerated in § 302A.471. Specifically, the Supreme Court held that the reverse stock split did not constitute an amendment of the articles that materially and adversely affected the rights or preferences of the shares, thereby not triggering dissenters' rights. The court emphasized that the conclusivity provision of § 302A.423, which validates the board’s determination of the fair value of fractional shares in the absence of fraud, takes precedence, thus precluding dissenters' rights in this context.
Moreover, in Lund as Trustee of Revocable Trust of Kim A. Lund v. Lund, the court highlighted that even if dissenters' rights are not triggered under § 302A.471, equitable relief could still be sought under § 302A.751 if the directors or those in control have acted in a manner that is unfairly prejudicial toward the shareholders. This broad remedial provision allows the court to consider the fairness of corporate actions beyond the strict statutory triggers for dissenters' rights, providing an additional layer of protection for minority shareholders against unfair corporate practices.

Lund as Trustee of Revocable Trust of Kim A. Lund v. Lund

In Lund v. Lund, Kim Lund, a minority shareholder and beneficiary of several family trusts, filed a lawsuit against her brother Tres Lund and other family members, alleging breach of fiduciary duty, unfairly prejudicial conduct, and civil conspiracy. Kim sought various remedies, including a buy-out of her interests in the closely held family corporations, the removal of trustees, and damages. The district court granted Kim's buy-out motion under Minnesota Statutes §§ 302A.751 and 322B.833 [this section has since been repealed], which allow for equitable relief when those in control of a corporation act in a manner unfairly prejudicial to minority shareholders.

The court determined that the Lund family had frustrated Kim's reasonable expectations of liquidity and financial independence by failing to provide an exit strategy despite long-standing assurances. This failure to address Kim's desire for liquidity over two decades was deemed unfairly prejudicial. Consequently, the court ordered a buy-out of Kim's interests, setting the valuation date at the close of the Lund entities' 2016 fiscal year. The court determined the fair value of the Lund entities to be $191.5 million, with Kim's share valued at $45.2 million. Additionally, the court ordered Tres Lund removed as trustee of certain trusts but allowed another trustee, Stanley Rein, to remain.

On appeal, the Court of Appeals upheld the district court's decisions, affirming that the buy-out was a proper equitable remedy for the unfairly prejudicial conduct. The appellate court agreed with the lower court's assessment of the valuation date and the fair value of Kim's interests. It also supported the decision to remove Tres as trustee while maintaining Rein's position. The case highlights the broad equitable powers of courts under Minnesota law to protect minority shareholders in closely held corporations and to address unfairly prejudicial conduct by those in control.

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