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William Z. Pentelovitch is the chair of the litigation practice at Maslon Edelman Borman & Brand, LLP. He practices general business, commercial, and employment litigation with a focus on shareholder rights and securities fraud. A certified civil trial specialist, he received his J.D. from the University of Chicago Law School.

Some of the most thorny problems in corporation law arise from conflicts between controlling and minority shareholders of closely held corporations. The protections of corporate democracy often provide no relief for minority shareholders oppressed by the majority. Economic remedies such as selling stock in the corporation are seldom available and, even where available, are rarely an attractive alternative. These conflicts are governed by the Minnesota Business Corporations Act ("MBCA"), Minn. Stat. c. 302A (2000), which passes its 20th anniversary this year. When passed in 1981, the MBCA was considered an innovative and progressive statute, in large part because of the extensive rights and protections it provided for minority shareholders. In the 20-year history of the act, many changes have occurred in this area, some favoring minority shareholders, and others making it more difficult for them to obtain relief.

An early and remarkable example of the power the MBCA put in the hands of the courts was Frenzel v. Logistiks, Inc., also known as the "Space Center" case.1 In that case, the district court found that the conduct of those in control of the corporation justified the dissolution of a profitable going concern, which was found to have a net asset value in excess of $100 million. Since that decision in 1985, the statute has been amended to encourage courts to examine less drastic remedies, such as compelled buyouts or other equitable remedies.2

Cynthia F. Gilbertson is a member of the litigation practice at Maslon Edelman Borman & Brand, LLP, serving clients in the areas of general commercial, business, employment and appellate litigation. She is a graduate of the University of Michigan Law School.

One option open to an aggrieved minority shareholder is a derivative lawsuit. But the Legislature and courts have conspired to place some substantial hurdles in the path of shareholders pursuing this option. Because of the requirement of Rule 23.06 of the Minnesota Rules of Civil Procedure, a shareholder contemplating a derivative action must either attempt to persuade the corporation to pursue the claims on its own behalf, or be prepared to explain why such a demand was not made. The Minnesota Supreme Court in 1999 clarified that this rule applies with respect to any derivative claims, even if the lawsuit includes both derivative and direct claims.3

As originally enacted, the MBCA contained a provision that permitted a corporation's board to establish a special committee to determine whether it was in the corporation's best interest to pursue the rights asserted in a derivative suit.4 In the view of many practitioners, this section rendered derivative actions in Minnesota all but inviable as to corporations that were willing to appoint these committees, commonly called "special litigation committees". Not only did the availability of this process make futility difficult to prove for purposes of Rule 23.06, but once appointed the committees tended to deal with the issues in a pragmatic, business-like manner that eliminated the need for litigation.
The situation for shareholders contemplating a derivative action became even bleaker in the wake of Black v. NuAire, Inc., which held that the merits of a special litigation committee's recommendation to dismiss a derivative suit are not subject to judicial review, as long as the committee conducts its investigation in good faith and is truly "disinterested."5 Judicial review of such decisions was therefore limited to the procedural issues of the committee's good faith and independence. This decision was based on the "business judgment rule," which generally provides that corporations' internal management decisions are committed to the directors' discretion, and will not be second-guessed by the courts.

In reaction to Black, the 1989 Legislature repealed the detailed MBCA provision about special litigation committees and simultaneously added language to another section that authorized the committees but did not specify rules for their operation, as the original provision had.6 In a bizarre twist, the Legislature stated that its actions do "not imply that the legislature has accepted or rejected the substance of the repealed section but must be interpreted in the same manner as if [the repealed section] had not been enacted." Given this strange but explicit direction, one might have predicted that courts formulating such rules would start from a clean slate. But, in fact, the spirit of Black was not that easily extinguished.

Six years after the repeal, the Court of Appeals concluded in Skoglund v. Brady that Black's limited review of special litigation committee recommendations was still good law.7 The court focused on the Legislature's statement that the repeal "was not intended to convey any legislative intent with regard to the substance" of the section. The Court of Appeals later adopted a four-factor test for courts to consider when evaluating a special litigation committee's decision. In Drilling v. Berman the court held that factors relevant to the adequacy of an investigation include "(1) the length and scope of the investigation; (2) the committee's use of independent counsel or experts; (3) the corporation's or the defendant's involvement, if any, in the investigation; and (4) the adequacy and reliability of the information supplied to the committee."8 Although petitions were filed, the Minnesota Supreme Court declined to review either Skoglund or Drilling.

The use of special litigation committees has been widely criticized. This criticism stems primarily from the actual or perceived bias of committee members arising from their relationship with the directors who appointed them who are defendants in the derivative suit. At this point counsel for minority shareholders are well-advised to avoid commencing derivative actions unless they are willing not only to lose control of the case, but also to risk the possibility that the business judgment made by a special litigation committee will effectively end the lawsuit.

The defining characteristics of a close corporation are significant because, among other things, shareholders in close corporations owe one another a fiduciary duty. Under common law, close corporations are generally those in which there is a small number of shareholders, no ready market for stock, and active shareholder participation in the business.9 According to the MBCA, however, a "closely held corporation" is simply one with 35 or fewer shareholders.10 In Berreman v. West Publishing Company, the Minnesota Court of Appeals considered whether this statutory definition abrogates the common law definition, and limits shareholders' mutual fiduciary duty to corporations with 35 or fewer shareholders. Discerning no clear legislative intent to abrogate common law, the court held that the common law definition continues to apply, at least for purposes of determining the presence of a fiduciary relationship. The evidence in that case persuaded the court to conclude that the shareholders in a corporation with over 200 shareholders might owe one another a fiduciary duty.

The MBCA appears to give shareholders in closely held corporations the right to seek relief directly when a corporation's assets are being misapplied or wasted, rather than requiring that they file a derivative claim, which would be subject to the procedures discussed above.11 Originally, many assumed that the Rule 23.06 demand requirement did not apply to shareholders bringing suits under this statutory provision. But this section became significantly less useful to minority shareholders after Skoglund v. Brady, in which the Court of Appeals dismissed a shareholder's direct action on the grounds that it did not allege any injury to the shareholder that was "separate and distinct" from any injury to the corporation.12 Before Skoglund, this requirement had not been applied to claims involving closely held corporations.

The Minnesota Supreme Court affirmed this aspect of Skoglund in Wessin v. Archives Corp., in which the Court dismissed a minority shareholder's lawsuit for failure to comply with Rule 23.06.13 The plaintiffs in Wessin sought recovery on their own behalf based on allegations that the majority shareholder misappropriated and wasted corporate assets. In determining whether the claims were direct or derivative, the Court focused not on "the theory in which the claim is couched, but instead [on] the injury itself." The Court analyzed "whether the complained-of injury was an injury to the shareholder directly, or to the corporation." The shareholders alleged that the majority shareholder's alleged misappropriation and waste of corporate assets diminished the corporation's net income, and "directly" injured them as shareholders. The Court concluded, however, that the shareholders' injury was indirect because it arose "only from their status as existing shareholders." For this reason, the Court reinstated the trial court's dismissal of the case for failure to comply with Rule 23.06, holding unequivocally that "despite the smaller number of shareholders in a closely held corporation, such shareholders are still subject to the derivative pleading requirements of [Rule 23.06]." Although many might disagree, the Court justified its decision in part by stating that the demand requirement of the rule "is not onerous." The resulting barriers for minority shareholders in closely held corporations arguably conflict with the progressive intent of the MBCA.

In its current form, the MBCA grants courts broad remedial power where the shareholders of a corporation that is not publicly held demonstrate that those in control of the corporation have acted "in a manner unfairly prejudicial" to the shareholders "in their capacities as shareholders or directors."14 Shareholders of closely held corporations are additionally protected in their capacities as "officers or employees." A single instance of unfairly prejudicial conduct may be sufficient to justify relief.15 This protection against shareholder oppression, which was not present in the original statute, has arguably become the most important remedial provision from the point of view of a minority shareholder.

Conduct is unfairly prejudicial if it "frustrates the reasonable expectations of shareholders" in whatever capacity they seek protection.16 The statute itself specifies that when considering relief involving closely held corporations, the court shall consider the shareholders' reasonable expectations.17 In a significant amendment in 1994, the Legislature clarified that the reasonable expectations of "all shareholders" should be considered.18 While not universally acknowledged,19 this amendment was influential in Gunderson v. Alliance of Computer Professionals, Inc., in which the Minnesota Court of Appeals considered whether the shareholder-employee of a closely held corporation had a claim for unfairly prejudicial conduct based on his termination.20 In addition to considering whether the plaintiff had a reasonable expectation of continued employment, the court considered the controlling shareholders' knowledge and acceptance of this expectation, as well as their need for flexibility in making business decisions.

The same 1994 amendment also provides that written agreements are presumed to reflect the parties' reasonable expectations.21 The Gunderson decision demonstrates that at the very least plaintiffs who actively participate in preparing an agreement will have a difficult time convincing a court that it does not reflect the parties' reasonable expectations. The court held that the buy-sell agreement in that case reflected the plaintiff's reasonable expectations as a shareholder, even though it provided for a purchase price that was substantially below fair market value.

The MBCA's protection of a shareholder's reasonable expectations creates remedies beyond those traditionally available under common law. In Berreman v. West Publishing Co.22, for example, the court held that conduct insufficient to constitute a breach of fiduciary duty may nevertheless be unfairly prejudicial. The plaintiff was an employee-shareholder of West who retired and sold his shares a short time before West's board of directors publicly announced it was considering selling the company. Had the plaintiff known about and waited for the eventual sale, he would have received about four times as much for his stock. The court found no breach of fiduciary duty because the undisclosed information was sufficiently preliminary to be immaterial, but it held that the MBCA provision regarding unfairly prejudicial conduct should be liberally construed and was not coterminous with fiduciary duty under common law. The court did note, however, that only under "rare" circumstances -- not present in Berreman -- would the failure to disclose immaterial facts constitute unfairly prejudicial conduct.

Similarly, the MBCA has provided entirely new and independent remedies for terminated employees, because courts have repeatedly held that shareholder-employees of closely held corporations have a reasonable expectation of continued involvement in corporate management.23 In Gunderson, for example, the court affirmed summary judgment against the plaintiff on his breach of contract claim, finding no genuine dispute that he was an at will employee, but remanded the plaintiff's claim that his reasonable expectations as an employee had been frustrated.24 The court reasoned that the lack of evidence of a contractual obligation does not in and of itself mean that an expectation is unreasonable. It clarified, however, that not all expectations of employment are reasonable, such as where the termination results from the shareholder's own misconduct or incompetence.

In Berreman, the Court of Appeals squarely considered the meaning of the term "unfairly prejudicial" in the MBCA. In the course of its analysis, the court quoted at length from a South Carolina decision holding that

[O]ppressive or unfairly prejudicial conduct is:
1) A visible departure from the standards of fair dealing and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely; or
2) A breach of fiduciary duty of good faith and fair dealing; or
3) Whether the reasonable expectations of the minority shareholders have been frustrated by the actions of the majority; or
4) A lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members; or
5) A deprivation by majority shareholders of participation in management by minority shareholders.25

In adopting the reasonable expectations approach, the Berreman court did not indicate whether it accepted or rejected the four alternative definitions set forth in the South Carolina case. If future plaintiffs push for the application of one of these alternatives, they may find that Berreman has created additional avenues to relief.

If a minority shareholder of a corporation that is not publicly held can establish one or more of the circumstances supporting dissolution, an alternative remedy is a court-ordered buyout for "the fair value" of his or her shares.26 The Minnesota Supreme Court interpreted the term "fair value" within the last year, and its decision should generally be beneficial to minority shareholders. After reviewing the law in other jurisdictions the Court in Advanced Communication Design v. Follett concluded "that fair value, in ordering a buy-out under the Minnesota Business Corporations Act, means the pro rata share of the value of the corporation as a going concern."27 The Court instructed lower courts that they "may rely on proof of value by any technique that is generally accepted in the relevant financial community and should consider all relevant factors, but the value must be fair and equitable to all parties." Before Follett, trial courts faced with the "fair value" question commonly looked to the Supreme Court's 1987 decision in Nardini v. Nardini, a divorce case, which adopted Internal Revenue Service guidelines setting forth numerous factors to consider in determining fair value, and also counseled use of "common sense, sound and informed judgment, and reasonableness."28 The Nardini factors will no doubt continue to be significant.

The MBCA also provides that if the shares in question are subject to a shareholders' agreement, the buyout should be on those terms, "unless the court determines that the price or terms are unreasonable under all the circumstances of the case."29 Notwithstanding the bias of the statute in favor of written agreements, in Jakobe v. Jakobe the Court of Appeals upheld a trial court's refusal to enforce an agreement among shareholders governing disposition of corporate assets upon liquidation due to "the altered positions of the parties, absolutely inevitable through the passage of time, combined with the bad faith of the parties" in failing to satisfy the agreement.30 This opinion may have some application in mandatory buyouts, where the court is required to consider whether a shareholders' agreement establishing a value for corporate shares is "unreasonable under all the circumstances," since almost always the parties' positions have altered through the passage of time, and bad faith can frequently be found.

Similarly, in Pedro v. Pedro, the Court of Appeals recognized that where a shareholder is forced out of a corporation due to the inequitable conduct of his or her fellow shareholders, it is fundamentally unfair to require that he sell to his oppressors at a bargain price, even if the contract between the parties requires it. The Pedro court held that where a shareholder is entitled to be bought out because he has been treated in an unfairly prejudicial manner, and where a shareholders' agreement sets forth the price at which he is to be bought out, he can be awarded damages for breach of fiduciary duty for the difference between the fair value of his shares and the purchase price specified in the shareholders' agreement.31

Majority shareholders often argue that the price for a compelled buyout should be subject to various "discounts," including a minority discount, which is based on the fact that a minority shareholder lacks the voting power to control decisions, and a marketability discount, which adjusts for lack of liquidity of a party's interest. After much debate, the courts have begun to weigh in on the propriety of these discounts.

Courts tend to view minority discounts as conflicting with the legislative intent behind dissenter's rights and court-ordered buyout statutes, which is to protect minority shareholders.32 In cases reaching appellate courts so far, the courts have held that minority discounts are prohibited in determining fair value in statutory dissenter's rights cases,33 and that it is not an abuse of discretion to refuse to apply a minority discount in a buyout case based on alleged unfairly prejudicial conduct.34

Most recently, in Powell v. Anderson, the Court of Appeals reversed a valuation that applied minority and marketability discounts in a case involving a claim of usurpation of corporate opportunity.35 The court reasoned that "protecting shareholders whose rights are profoundly affected by others in control of a corporation (and preserving their right to share in the value of the company) will be best vindicated if minority or marketability discounts … are disallowed."

In Advanced Communication Design, Inc. v. Follett, the Minnesota Supreme Court was asked to decide whether it was appropriate to apply a marketability discount in a court-ordered buyout case.36 After first noting general agreement among other jurisdictions prohibiting such a discount in dissenter's rights cases, the Court reviewed other courts' approaches in the buyout context. Ultimately, the Court concluded that a bright line test prohibiting the discount in all cases would be inconsistent with Minnesota's policy of providing courts maximum flexibility in fashioning remedies, and with the statutory directive that remedies be "fair and equitable to all parties." The Court was concerned that lower courts be permitted to apply marketability discounts if necessary to preserve fairness for the remaining shareholders. Therefore, the rule announced in Follett is that discounts for lack of marketability should not be applied "absent extraordinary circumstances."

The Court instructed further that the circumstances be evaluated with an eye toward avoiding an unfair transfer of wealth to the dissenters from the remaining shareholders and articulated a number of factors to be considered in that determination:

(1) whether the buying or selling shareholder acted in a manner unfairly oppressive to the other or has reduced the value of the corporation,
(2) whether the oppressed shareholder had any additional remedies available, and
(3) whether any condition of the buy-out, including price, would be unfair to the remaining shareholders because it would unduly burden the corporation.

In analyzing these factors, the Court instructed that "[t]he overarching policy ... is to ensure the buy-out is 'fair and equitable to all parties.'"37

In one remarkable case, Pooley v. Mankato Iron & Metal, Inc., the Court of Appeals affirmed a decision in which the trial court ordered the buyout of a minority shareholder based on a finding of unfairly prejudicial conduct, and required that the corporation purchase the shares for a fair value of $630,000, plus interest from the date of entry of judgment.38 Although both parties' experts applied a minority discount when valuing the shares, the court rejected this discount on the grounds that it conflicted with the statutory intent of protecting minority shareholders. What makes this outcome most remarkable is that the plaintiff shareholder was awarded this seemingly generous remedy despite having previously pleaded guilty to assaulting someone in the course of his employment with the corporation, and despite having been convicted of assaulting one of the other shareholders and damaging a customer's truck. Although the plaintiff could not establish any oral or implied contract for lifetime employment, the trial court found that by terminating the plaintiff's employment and removing him as an officer and director, the majority shareholders committed unfairly prejudicial conduct under the MBCA because the plaintiff had reasonably expected to participate in the business. Once that determination was made -- and was not challenged on appeal -- the Court of Appeals held that the lower court did not abuse its discretion by refusing to consider the plaintiff's conduct when valuing his shares. Later decisions such as Follett, emphasizing that the value should be fair and equitable to all the parties, may prevent cases similar to Pooley in the future.

In addition to the potential for a derivative action, a liquidation, or a forced buyout, the MBCA contains two broad provisions for equitable remedies, one for any violation of the MBCA by a corporation, officer, or director and one specific to the dissenting shareholder provisions.39 Until there are additional judicial determinations interpreting these provisions, it remains to be seen to what extent a trial court may go in granting equitable relief. In Westgor v. Grimm, a minority shareholder attempted to justify as equitable relief the hefty penalty and generous attorneys fees the trial court ordered when the majority shareholder refused to provide an accounting.40 The Court of Appeals declined to affirm the award on those grounds, however, noting that the plaintiff should not receive damages where his damage claims were all derivative, and that the equitable relief available for any statutory violation should not encompass a buyout if that remedy could not be obtained under the "dissenting shareholders" provisions. The Westgor decision, however, does not preclude other creative remedies that may be available to minority shareholders wishing to redress their injuries against an oppressive majority.

The past 20 years have seen a number of developments involving shareholders' remedies, some facilitating relief, and others making relief more difficult to come by. The MBCA's limits will undoubtedly continue to be pushed by contentious parties and defined by creative courts.

1 Ramsey County District Court File No. 457733.
2 Minn. Stat. ¤ 302A.751, subd. 3b (2000).
3 Wessin v. Archives Corp., 592 N.W.2d 460, 467 (Minn. 1999).
4 Minn. Stat. ¤ 302A.243 (1988).
5 426 N.W.2d 203, 209-10 (Minn. App. 1988), pet. for rev. denied (Minn. 8/24/1988).
6 Minn. Laws 1989, c. 172, ¤ 12.
7 541 N.W.2d 17 (Minn. App. 1995), pet. for rev. denied (Minn. 2/27/1996).
8 589 N.W.2d 503, 509 (Minn. App. 1999), pet. for rev. denied (Minn. 5/18/1999).
9 Berreman v. West Pub'g Co., 615 N.W.2d 362, 367 (Minn. App. 2000).
10 Minn. Stat. ¤ 302A.011, subd. 6a.
11 Minn. Stat. ¤ 302A.751, subd. 1(b)(5) (2000).
12 541 N.W.2d 17, 22 (Minn. App. 1995), pet. for rev. denied (Minn. 2/27/1996).
13 592 N.W.2d 460 (Minn. 1999).
14 Minn. Stat. ¤ 302A.751, subd. 1(b)(3) (2000).
15 Sawyer v. Curt & Co., Nos. C7-90-2040, C9-90-2041, 1991 WL 65320 (Minn. App. 2/12/1991) (unpublished), pet. for rev. denied (Minn. 4/18/1991).
16 Berreman, 615 N.W.2d at 374.
17 Minn. Stat. ¤ 302A.751, subd. 3a (2000).
18 Minn. Stat. ¤ 302A.751, subd. 3a (1994) (emphasis added).
19 E.g., McCallum v. Rosen's Diversified, Inc., 153 F.3d 701 (8th Cir. 1998).
20 Gunderson v. Alliance of Computer Professionals, Inc., __ N.W.2d __, No. C1-00-1484, 2001 WL 536981 (Minn. App. 5/22/2001).
21 Minn. Stat. ¤ 302A.751, subd. 3a.
22 615 N.W.2d 362 (Minn. App. 2000).
23 E.g., Sawyer, 1991 WL 65320; <P>McCallum<I>, 153 F.3d 701.
24 Gunderson, __ N.W.2d __, 2001 WL 536981.
25 Berreman, 615 N.W.2d at 374 (quoting Kiriakides v. Atlas Food Sys. & Servs., 527 S.E.2d 371, 387-88 (S.C. Ct. App. 2000)).
26 Minn. Stat. ¤ 302A.751, subd. 2 (2000).
27 615 N.W.2d 285, 290 (Minn. 2000).
28 414 N.W.2d 184, 190 (Minn. 1987).
29 Minn. Stat. ¤ 302A.751, subd. 2 (2000).
30 1992 WL 145304, No. C4-91-2233 (Minn. App. 6/30/ 1992) (unpublished).
31 489 N.W.2d 798, 802 (Minn. App. 1998), pet. for rev. denied (Minn. 10/20/1992).
32 See e.g. MT Props., Inc. v. CMC Real Estate Corp., 481 N.W.2d 383, 388 (Minn. App. 1992).
33 Id.
34 Pooley v. Mankato Iron & Metal, Inc., 513 N.W.2d 834 (Minn. App. 1994), pet. for rev. denied (Minn. 5/17/1994).
35 No. C5-99-1755, 2000 WL 943842 (Minn. App. 7/11/2000) (unpublished).
36 615 N.W.2d 285 (Minn. 2000).
37 Id. at 293 (quoting Minn. Stat. ¤ 302A.751, subd. 2).
38 513 N.W.2d 834 (Minn. App. 1994).
39 See Minn. Stat. ¤¤ 302A.467, 302A.751, subd. 1.
40 381 N.W.2d 877, 881 (Minn. App. 1986).