Can a Business Owner Be Fired in Minnesota?

How can a business owner be fired from a Minnesota company?

A Minnesota business owner can be removed from each role separately, and each role has its own removal rule. Under Minn. Stat. § 302A.341, subd. 2, “An officer may be removed at any time, with or without cause, by a resolution approved by the affirmative vote of a majority of the directors present.” Ending an owner’s employment is a separate act from removing the owner from an office or the board.

Here are the rules for each role:

• Employee. Under Minn. Stat. § 302A.201, subd. 1, the business and affairs of a corporation are managed by or under the direction of the board, subject to a shareholder control agreement and the articles. Ending an owner’s employment is part of that management, so the board, or someone acting under its direction, makes that decision. In Gunderson v. Alliance of Computer Professionals, discussed below, the board voted to terminate the owner as an employee.
• Officer. The board majority rule above applies, and under the same subdivision, “An officer appointed by the chief executive officer may also be removed at any time, with or without cause, by the chief executive officer.” Either way, removal “is subject to the provisions of a shareholder control agreement and is without prejudice to any contractual rights of the officer.” Removal does not cancel your contract rights, such as pay owed under a written employment agreement.
• Director. Under Minn. Stat. § 302A.223, subd. 3, “any one or all of the directors may be removed at any time, with or without cause, by the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote at an election of directors.” A director elected solely by one class or series of shares “may be removed only by the affirmative vote of the holders of a majority of the voting power of all shares of that class or series entitled to vote at an election of that director.” That majority rule applies “Except as provided in subdivision 4,” which covers cumulative voting. Under Minn. Stat. § 302A.215, subd. 2, “Unless the articles provide that there shall be no cumulative voting, and except as provided in section 302A.223, subdivision 5, each shareholder entitled to vote for directors has the right to cumulate those votes in the election of directors by giving written notice of intent to cumulate those votes to any officer of the corporation before the meeting, or to the presiding officer at the meeting at which the election is to occur at any time before the election of directors at the meeting.” Under § 302A.223, subd. 4, “In a corporation having cumulative voting, unless the entire board is removed simultaneously, a director is not removed from the board if there are cast against removal of the director the votes of a proportion of the voting power sufficient to elect the director at an election of the entire board under cumulative voting.” Under subdivision 2, a director “named by the board to fill a vacancy” can also be removed by “a majority of the remaining directors present” if the shareholders have not elected directors since that appointment. Subdivision 1 lets the articles, the bylaws, or a shareholder control agreement modify these rules.
• LLC manager or governor. Under Minn. Stat. § 322C.0407, subd. 3, “A manager may be removed at any time by the consent of a majority of the members without notice or cause,” and subdivision 4 lets a majority of the voting power remove a governor. These are default rules: under Minn. Stat. § 322C.0110, subd. 1, the operating agreement governs relations among the members.

None of these removal sections transfers shares or membership interests. In a corporation, a firing moves your shares only if an agreement, such as a buy-sell agreement, or a court order requires a sale. An LLC operating agreement can also change a member’s status, as the LLC section explains.

Why is an owner who works in the business usually an at-will employee?

An owner who works in a Minnesota business is usually an at-will employee because Minnesota presumes employment for an indefinite term is at will unless an agreement or extra consideration says otherwise. In Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d 173 (Minn. Ct. App. 2001), the court stated: “In the absence of an express or implied agreement to the contrary or sufficient consideration in addition to the services to be rendered, Minnesota law presumes that employment for an indefinite term is at will.”

Owning shares did not change that presumption in Gunderson. Gunderson was a shareholder, officer, director, and employee who had personally guaranteed the company’s credit line and left earlier work to build the company. The court still held his employment was at will and affirmed dismissal of his breach-of-contract claim. A co-owner’s assurance that he “would always be taken care of” was too vague to create a job for life, and the court noted that “General statements about job security, company policy, or an employer’s desire to retain an employee indefinitely are insufficient to overcome the presumption that employment is at will.” The court also found that his personal guaranty was not extra consideration for job security, because shareholders commonly guarantee corporate loans.

Two documents can change the analysis. A written employment agreement with a fixed term or a for-cause limit controls the job. Minnesota’s handbook doctrine also treats an employee handbook as able to create enforceable contract terms in some circumstances, so the company handbook’s discipline and termination language is worth reading as well.

What protects a fired shareholder-employee of a closely held corporation?

A fired shareholder-employee of a Minnesota closely held corporation can ask a court for relief if the firing was unfairly prejudicial. Minn. Stat. § 302A.751, subd. 1, reaches conduct by those in control that is “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.”

The employee protection applies only to a closely held corporation. Under Minn. Stat. § 302A.011, subd. 6a, “‘Closely held corporation’ means a corporation which does not have more than 35 shareholders.” A separate ground in the same subdivision covers conduct that is fraudulent or illegal toward an owner in the same capacities.

In Gunderson, the court explained why this claim survives the at-will rule. Even though Gunderson was an at-will employee, “his employment termination triggers a separate inquiry into whether ACP unfairly prejudiced” him “in his capacity as a shareholder-employee.” The court reversed summary judgment on that claim and remanded “for further proceedings on that claim.”

The Minnesota Supreme Court has read the statute the same way for shareholders. In U.S. Bank N.A. v. Cold Spring Granite Co., 802 N.W.2d 363 (Minn. 2011), a case about minority shareholders cashed out in a reverse stock split, the court said subdivision 3a “indicates that “unfairly prejudicial” conduct includes conduct that violates the reasonable expectations of the minority shareholder.” That company was not a statutory closely held corporation, and the court found the shareholders’ expectations were not violated. If your firing has already happened, the details of the claim a fired minority shareholder can bring are the next thing to read.

When is an owner’s expectation of keeping the job reasonable?

An owner’s expectation of keeping a job is reasonable when the job is part of what the owner invested for and the other owners knew and accepted that. Under Minn. Stat. § 302A.751, subd. 3a, a court weighs “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.”

Gunderson describes the factors a court weighs:

1. The job as a return on investment. The court named “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.”
2. Shared understanding. “Additionally, to be reasonable, an expectation of continuing employment must be known and accepted by other shareholders.” A private business plan the other owners never saw did not count.
3. The company’s need to operate. “Expectations of continuing employment must also be balanced against the controlling shareholder’s need for flexibility to run the business in a productive manner.”
4. The owner’s own conduct. An expectation “is not reasonable and oppression liability does not arise when the shareholder-employee’s own misconduct or incompetence causes the termination of employment.”
5. Size and source of the stake. An employee who has no capital investment and receives “a small percentage of stock as part of a compensation package most likely lacks a reasonable expectation of continuing employment.”

The family case Pedro v. Pedro, 489 N.W.2d 798 (Minn. Ct. App. 1992) shows the strong end of the range. Three brothers each owned one-third and had worked in the business most of their lives. The court quoted the view that “[t]he reasonable expectations of such a shareholder are a job, salary, a significant place in management, and economic security for his family.” It affirmed the trial court’s award of damages for lost wages “Based upon the unique facts in this case.” These factors also drive the broader shareholder oppression claims that can accompany a firing.

How do written agreements decide whether an owner can be fired?

Written agreements carry the most weight, because Minnesota presumes they reflect what the owners expected. Under Minn. Stat. § 302A.751, subd. 3a, “any written agreements, including employment agreements and 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 concerning matters dealt with in the agreements.”

Owners can settle job security directly. Minn. Stat. § 302A.457, subd. 2, makes a written shareholder control agreement covering “the employment of shareholders and others by the corporation” valid and specifically enforceable “if the agreement is signed by all persons who, on the date the agreement first becomes effective, are then the shareholders of the corporation.” Because officer removal under § 302A.341 is subject to a shareholder control agreement, that document can protect an owner’s office as well as the job.

A buy-sell agreement can cut the other way. Gunderson observed that “shareholders who sign buyout agreements permitting termination of employment for any reason and obligating shareholders to sell their shares to the corporation upon termination of employment would not likely have a reasonable expectation of continuing employment.” If your buy-sell agreement ties your shares to your job, a firing can also start a forced sale at the agreement’s price.

The agreement only governs what it covers. In Gunderson, the buy-sell agreement did not address employment, which is part of why the shareholder-employee claim was remanded for further proceedings. When I start a company with more than one owner, I ask the owners whether an owner can be fired and put the answer in the documents, so nobody has to argue later about what everyone expected. In those conversations the owners usually settle on one of two answers: an owner can be fired and the documents say how, or an owner can be fired only for significant wrongdoing.

What can a Minnesota court order after an owner is fired?

A Minnesota court that finds a ground for relief under Minn. Stat. § 302A.751, subd. 1, “may grant any equitable relief it deems just and reasonable in the circumstances or may dissolve a corporation and liquidate its assets and business.”

The remedies and rules work together:

• Buyout. Under subdivision 2, on motion, the court may “order the sale by a plaintiff or a defendant of all shares of the corporation held by the plaintiff or defendant to either the corporation or the moving shareholders.” The price is fair value, but where the shares are subject to a price in the bylaws, a shareholder control agreement, or another agreement, “the court shall order the sale for the price and on the terms set forth in them, unless the court determines that the price or terms are unreasonable under all the circumstances of the case.” The mechanics of a court-ordered buyout are their own subject.
• Lesser relief considered before dissolution. Under subdivision 3b, before dissolving the company the court must consider whether lesser relief, such as a buyout, would be adequate to permanently relieve the problem.
• Fees in either direction. Under subdivision 4, if a party “has acted arbitrarily, vexatiously, or otherwise not in good faith,” the court may award reasonable expenses, including attorneys’ fees, to the other parties. That rule applies to the fired owner as well as the controlling owners.
• Where to file. Under subdivision 5, “Proceedings under this section shall be brought in a court within the county in which the registered office of the corporation is located.”

Pedro shows that the job and the shares can be valued separately. On findings that included a contract for lifetime employment, the court affirmed lost-wage damages alongside the share price, reasoning that the owner held “two separate interests, as owner and employee.” The court also affirmed damages for breach of fiduciary duty that represented the difference between the fair market value of the owner’s stock, as the trial court determined it, and the value provided by the shareholders’ stock retirement agreement.

How does the answer change for a Minnesota LLC member?

A Minnesota LLC member who works in the company can also be removed from a role by majority, and the protection comes from a differently worded statute. Under Minn. Stat. § 322C.0701, subd. 1, a member may apply for dissolution when those in control “have acted or are acting in a manner that is oppressive and was, is, or will be directly harmful to the applicant.”

Section 322C.0701 does not use the corporate statute’s phrase “officers or employees of a closely held corporation.” A member arguing that a firing was oppressive works from the “oppressive” and “directly harmful” language instead, and the operating agreement does much of the work. Under § 322C.0110, subd. 1, “the operating agreement governs” relations among the members, subject to listed limits. Subdivision 3 bars an operating agreement from varying the power of a court to decree dissolution under the oppression ground. Under Minn. Stat. § 322C.0602, a person is dissociated as a member when “an event stated in the operating agreement as causing the person’s dissociation occurs” or when “the person is expelled as a member pursuant to the operating agreement,” and under Minn. Stat. § 322C.0603, subd. 1, the person’s “right to participate as a member in the management and conduct of the company’s activities terminates” while any transferable interest the person owned “immediately before dissociation in the person’s capacity as a member” is then held “solely as a transferee.”

Dissolution is not the only result. Under § 322C.0701, subd. 2, “the court may order a remedy other than dissolution, which may include the sale for fair value of all membership interests a member owns in a limited liability company to the limited liability company or one or more of the other members.” Every member must also act consistently with the contractual obligation of good faith and fair dealing, which Minn. Stat. § 322C.0409, subd. 4, describes as “acting in a manner, in light of the operating agreement, that is honest, fair, and reasonable.” A Minnesota operating agreement that addresses member employment and exit terms can answer these questions before a dispute starts.

What employment laws still protect an owner who is fired?

An owner who is also an employee keeps the same Minnesota employment protections as any other employee. Under Minn. Stat. § 181.932, subd. 1, an employer may not discharge an employee because “the employee, or a person acting on behalf of an employee, in good faith, reports a violation, suspected violation, or planned violation of any federal or state law or common law or rule adopted pursuant to law to an employer or to any governmental body or law enforcement official.”

If an employer fires an employee because of a good-faith report of a violation of law, Minn. Stat. § 181.935 lets “an employee injured by a violation of section 181.932” sue for damages, costs, and reasonable attorney’s fees, and “the court may order any appropriate relief, including but not limited to reinstatement, back pay, restoration of lost service credit, if appropriate, compensatory damages.”

The Minnesota Human Rights Act (MHRA) also applies. Under Minn. Stat. § 363A.08, subd. 2, except when based on a bona fide occupational qualification, it is an unfair employment practice to discharge an employee because of race, color, creed, religion, national origin, sex, gender identity, marital status, public-assistance status, familial status, local-commission activity, disability, sexual orientation, or age. The MHRA reaches an employer with one or more employees and an employee who resides or works in Minnesota, under Minn. Stat. § 363A.03, subds. 15 and 16.

A departure is often settled with a separation agreement and a release. Under Minn. Stat. § 363A.31, subd. 2, a release of MHRA claims “may be rescinded within 15 calendar days of its execution,” and the releasing party “shall be informed in writing of the right to rescind.” The rescission right applies except to a release “given in settlement of a claim filed with the department or with another administrative agency or judicial body,” which is final when signed. Under the same subdivision, “To be effective, the rescission must be in writing and delivered to the waived or released party by hand, electronically with the receiving party’s consent, or by mail within the 15-day period,” and a mailed rescission must also be postmarked within that period, properly addressed, and sent by certified mail, return receipt requested. For an employer covered by the federal Age Discrimination in Employment Act, generally one with 20 or more employees, a release of federal age claims must also meet the waiver rules in 29 U.S.C. § 626(f), including “a period of at least 21 days within which to consider the agreement” and 7 days to revoke it after signing. A release that settles an age charge or lawsuit already filed instead requires “a reasonable period of time within which to consider the settlement agreement.”

How can you protect your place in the company?

A Minnesota business owner can usually lose a job and an office by majority vote and without cause, and can lose a board seat the same way unless cumulative voting or the company’s documents protect it. What the owner keeps, and what a court can do about the firing, depends on whether the company is a closely held corporation or an LLC, what the owners’ written agreements say, and whether the job was part of what the owner invested for. The best time to answer the question is when the company is formed, and the Minnesota business formation documents are where that answer belongs. If you are an owner facing removal, or you are planning how owners can leave, email aaron@aaronhall.com with a brief description of your situation, and I can tell you whether the other owners can remove you from each role and whether you would have to sell your shares.