Shareholder oppression – what is it?

Principals of Success

Today’s blog takes a dive into what is a shareholder oppression claim in Minnesota.  Such a claim can help remedy a shareholder that has been squeezed out or been the subject of unfairly prejudicial conduct that frustrated their reasonable expectations.

Shareholders of a closely held corporation have a fiduciary duty to observe “the highest standard of integrity in their dealings with each other.” Evans v. Blesi, 345 N.W.2d 775, 779 (Minn. Ct. App. 1984), review denied (Minn. June 12, 1984).  That fiduciary duty includes the “duty to deal openly, honestly and fairly with other shareholders,” id., and to “act with complete candor in their negotiations with each other,” Gunderson v. All. of Comput. Prof’ls, Inc., 628 N.W.2d 173, 186 (Minn. Ct. App. 2001), review granted (Minn. July 24, 2001), appeal dismissed (Minn. Aug. 17, 2001).

Generally, the law requires directors and officers to discharge the duties of their position “with the care an ordinarily prudent person in a like position would exercise under similar circumstances.” Minn. Stat. § 302A.251, subd. 1.  The law holds directors and officers of closely held corporations to the higher standard that applies to shareholders of a closely held corporation: their fiduciary relationship “imposes the highest standard of integrity and good faith.” Wenzel v. Mathies, 542 N.W.2d 634, 641 (Minn. Ct. App. 1996), review denied (Minn. Mar. 28, 1996).

A court may grant relief for oppression of shareholder rights if the shareholder establishes that “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.” Minn. Stat. § 302A.751, subd. 1(b)(3).

“The term ‘unfairly prejudicial’ is liberally construed.”

Lund ex rel. Revocable Tr. of Kim A. Lund v. Lund, 924 N.W.2d 274, 280 (Minn. Ct. App. 2019), review denied (Minn. Mar. 27, 2019). “Unfairly prejudicial conduct under Minn. Stat. § 302A.751 includes conduct that violates or frustrates the reasonable expectations of a minority shareholder.” Id. at 279-80.  Minnesota courts have also noted that “[b]reaches of fiduciary duty are probably unfairly prejudicial.” Berreman v. W. Pub. Co., 615 N.W.2d 362, 373 (Minn. Ct. App. 2000), review denied (Minn. Sept. 26, 2000).

In the absence of specific agreements, reasonable expectations may be determined by reference to the understandings “that would normally be expected to result from associative bargaining.” Berreman, 615 N.W.2d at 374 (quoting Advisory Task Force Report, supra) (referring to goal of providing rules that would result from associative bargaining

in absence of actual associative bargain). These imputed understandings or “hypothetical investment bargains” envision or make assumptions about the understandings objectively reasonable close corporation shareholders would have reached if, at the venture’s inception, they had bargained over how their investments should be protected. Douglas K. Moll, Shareholder Oppression in Close Corporations: The Unanswered Question of Perspective, 53 Vand. L.Rev. 749, 798 (2000).

Typical close-corporation shareholders commonly have an expectation of continuing employment with the corporation. Pedro v. Pedro, 489 N.W.2d 798, 802 (Minn.App.1992) (Pedro II) (stating that the reasonable expectations of close corporation shareholders include a job, a salary, and a significant place in management), review denied (Minn. Oct. 20, 1992); Pedro v. Pedro, 463 N.W.2d 285, 289 (Minn.App.1990) (Pedro I ) (stating that “the primary expectations of minority shareholders include an active voice in [the] management of the corporation and input as an employee”), review denied (Minn. Jan. 24, 1991).  In fact, because of the unique characteristics of close corporations, employment is often a vital component of a close-corporation shareholder’s return on investment and a principal source of income. See Daniel S. Kleinberger, Why Not Good Faith?  The Foibles of Fairness in the Law of Close Corporation, 16 Wm. Mitchell L.Rev. 1143, 1148 (1990) (describing the unique characteristics of close corporations). The discharge of a shareholder-employee may thus be grounds for equitable relief.  See Minn. Stat. Ann. § 302A.751 reporter’s notes 1982–84 (West 1985) (noting that the statute includes “the discharge of a shareholder employee as a ground [for relief], if that discharge was ‘unfairly prejudicial’ ”).

The oppression doctrine affords closely-held-corporation shareholders relief when the controlling shareholders frustrate their reasonable expectations as shareholder-employees.  See Berreman, 615 N.W.2d at 374. Accordingly, the threshold question in the context of a claim of shareholder oppression based on the termination of employment is whether a minority shareholder’s expectation of continuing employment is reasonable.

An expectation of continuing employment is reasonable in the first instance if “continu[ing] employment can fairly be characterized as part of the shareholder’s investment.” Douglas K. Moll, Shareholder Oppression v. Employment at Will in the Close Corporation: The Investment Model Solution, 1999 U. Ill. L.Rev. 517, 551–52 (1999) (proposing an “investment model of oppression” under which “oppression liability arises when the value of a shareholder’s investment is harmed” and stating that the proper inquiry in loss-of employment oppression cases is “whether the shareholder reasonably expected that her investment in the venture entitled her to continued employment with the close corporation”) (footnote omitted).  Factors to be considered in determining whether shareholders reasonably expected that their investment would entitle them to continuing employment include, among others, whether a shareholder’s salary and benefits constitute de facto dividends and whether procuring employment with the corporation was a significant reason for investing in the business. See id. at 547–51 (noting that “in the close corporation setting, a job can be part of an investment in a de facto dividend sense and in a procurement of employment sense”)

Additionally, to be reasonable, an expectation of continuing employment must be known and accepted by other shareholders. See Minn. Stat. § 302A.751, subd. 3a (directing courts to consider the expectations of all shareholders in awarding relief).  Instead, “oppression should be deemed to arise only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and central to the [minority shareholder’s] decision to join the venture.” Gunderson, 628 N.W.2d at 191.

So what does all this mean?  If you are a shareholder and part of your reasonable expectations when you bought your stock of the corporation was continued employment, a say in the direction of the corporation, etc., and now you find yourself on the outside looking in, you may have a viable shareholder oppression claim.  This is a complex and fascinating area of the law.  I hope that this detailed look provides some insight.  If you need more, call.

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