A Minnesota closely held corporation that fires, demotes, or sidelines a shareholder who works in the business can be ordered to give that shareholder relief, even when the job was at will. The claim arises under Minn. Stat. § 302A.751, which lets a court act when those in control behave “in a manner unfairly prejudicial” toward a shareholder in the capacity of an employee or officer. Whether the firing qualifies usually turns on one question: was your expectation of continued employment reasonable?

The statute supplies the ground and the remedies. The meaning of “unfairly prejudicial,” and the test for an expectation of continued employment, come from Minnesota appellate decisions. This page explains both, for the shareholder who has lost a job or a role in a company the shareholder partly owns. It is part of my work on Minnesota employment law.

What does § 302A.751 protect a shareholder-employee against?

Section 302A.751 lets a shareholder ask a court for relief when “the directors or those in control of the corporation have acted in a manner unfairly prejudicial toward one or more shareholders.” The protection covers shareholders in their capacities as shareholders or directors, “or as officers or employees of a closely held corporation.” The employee and officer protection applies only in a closely held corporation.

That limit matters. A “closely held corporation” is one “which does not have more than 35 shareholders” under Minn. Stat. § 302A.011, subd. 6a. The shareholder and director protection reaches more companies: any “corporation that is not a publicly held corporation.” A publicly held corporation is “a corporation that has a class of equity securities registered pursuant to section 12, or is subject to section 15(d), of the Securities Exchange Act of 1934” (subd. 40). Under subd. 8, a “corporation” in chapter 302A means “a corporation, other than a foreign corporation, organized for profit and incorporated under or governed by this chapter.”

Three more features of § 302A.751, subd. 1, shape the claim:

  1. A separate fraud ground. Relief is also available when those in control “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.”
  2. A shareholder brings it. The statute speaks of “an action by a shareholder,” and a shareholder is “a person registered on the books or records of a corporation” as an owner of shares (§ 302A.011, subd. 29).
  3. The court’s power is broad. A court “may grant any equitable relief it deems just and reasonable in the circumstances or may dissolve a corporation.”

A firing is the usual trigger, but removal from an office or a cut in role can matter too. The company’s side of that decision is covered in demoting an executive.

How do Minnesota courts decide whether conduct is unfairly prejudicial?

Minnesota courts treat conduct as unfairly prejudicial when it frustrates a shareholder’s reasonable expectations. The statute does not define the phrase. The Court of Appeals defined it in Berreman v. West Publishing Co., 615 N.W.2d 362, 374 (Minn. Ct. App. 2000), as “conduct that frustrates the reasonable expectations of 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 Minnesota Supreme Court took up the phrase in U.S. Bank N.A. v. Cold Spring Granite Co., 802 N.W.2d 363, 379 (Minn. 2011). Deciding a case about a reverse stock split, and limiting its holding to that setting, the Court held that “unfairly prejudicial conduct under Minn.Stat. § 302A.751 includes conduct that violates the reasonable expectations of the shareholder.” The Court added that its opinion “leaves open the possibility that conduct other than conduct violating the reasonable expectations of the shareholder may also be” unfairly prejudicial. The reasonable-expectations test is the working standard, and the Supreme Court left room for other kinds of unfairly prejudicial conduct.

In a closely held corporation, the court also weighs a statutory duty. Section 302A.751, subd. 3a, directs the court to consider “the duty which 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,” along with the reasonable expectations of all shareholders. For the broader claim outside the employment setting, see shareholder oppression claims in Minnesota.

Why does at-will employment not end a shareholder-employee’s claim?

At-will status defeats a breach-of-contract claim, but it does not defeat the statutory claim. In Gunderson v. Alliance of Computer Professionals, Inc., 628 N.W.2d 173 (Minn. Ct. App. 2001), the court held that a shareholder’s at-will firing still “triggers a separate inquiry” into whether the company unfairly prejudiced him as a shareholder-employee.

The court explained that “The doctrine of employment-based shareholder oppression is distinct from the wrongful-termination doctrine.” Because Gunderson was at will, the court said he was “not wrongfully discharged in the breach-of-contract or tort sense.” The oppression claim asks a different threshold question: “whether a minority shareholder’s expectation of continuing employment is reasonable.” Gunderson’s own case shows the split. The court affirmed dismissal of his contract claim because his employment was at will as a matter of law, and it affirmed dismissal of his claim as a shareholder. It reversed only on his claim as a shareholder-employee, “as it relates solely to his reasonable expectations as a shareholder-employee,” and remanded “for further proceedings on that claim.”

Two practical points follow. First, a company that answers a demand letter by pointing to at-will status has answered only the contract claim. Second, the contract claim is not dead in every case: in Pine River State Bank v. Mettille, 333 N.W.2d 622 (Minn. 1983), the Minnesota Supreme Court concluded “that personnel handbook provisions, if they meet the requirements for formation of a unilateral contract, may become enforceable as part of the original employment contract.” The paths are compared in Minnesota’s narrow exceptions to at-will employment and in fired as a minority shareholder.

What makes an expectation of continued employment reasonable?

An expectation of continued employment is reasonable when the job can fairly be treated as part of what you invested in. Gunderson lists factors that include “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.”

The court added two limits that do most of the work in practice:

  • The others must have known. “Additionally, to be reasonable, an expectation of continuing employment must be known and accepted by other shareholders.” Gunderson’s business plan, which he drafted for a graduate-school assignment, did not help him because the other shareholders never adopted or learned of it.
  • The company needs room 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.”

The size and source of your stake matter as well. The court said an employee “who has no capital investment in the corporation” but buys a small percentage through periodic company offerings, or receives a small percentage as part of a compensation package, “most likely lacks a reasonable expectation of continuing employment.” If your shares came as a recruiting promise, the terms of that promise matter; see equity promises made while recruiting.

Haley v. Forcelle, 669 N.W.2d 48 (Minn. Ct. App. 2003), shows the factors working for the employee. A co-founder holding about 13% had, with the other shareholders, personally guaranteed about $4.3 million of company debt. The court reasoned: “It is unlikely that Jack would have agreed to personally guarantee company debt if he did not expect to have a continued role in the operations and management of the company.” Evidence that he and the majority owner’s husband were to earn equal salaries also pointed toward a de facto dividend. The appeal was from a temporary injunction, and the court concluded only that “the district court did not abuse its discretion in holding that there was a likelihood that the Haleys would prevail on their claim that they are entitled to relief” under § 302A.751.

How do buy-sell and employment agreements change the analysis?

A written employment or buy-sell agreement is presumed to reflect the parties’ reasonable expectations on the matters it deals with. Under § 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.”

Gunderson applied the presumption in both directions. The buy-sell agreement there allowed involuntary removal of a shareholder, and Gunderson had proposed that clause himself, so his shareholder claim failed. But the agreement did not address employment, which is why his employee claim survived. The court also warned 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.”

An employment agreement can cut the same way. In Bolander v. Bolander, 703 N.W.2d 529 (Minn. Ct. App. 2005), the president’s written agreement let the company terminate him with or without due cause. The district court denied § 302A.751 relief on two grounds: the agreement reflected the parties’ expectations, and his own cash withdrawals undercut his claim. The Court of Appeals affirmed on the withdrawal ground, although a jury had awarded him $1,368,000 for breach of the same agreement.

The presumption is not absolute. Gunderson said “written agreements are not dispositive of shareholder expectations in all circumstances,” and Haley added that “written agreements are not always dispositive of shareholder expectations.” In Berreman, the court said, “We disagree that the repurchase terms are dispositive of reasonable expectations in all circumstances,” because Berreman claimed he would not have retired, the event that triggered the buy-back, had he known of the directors’ early sale discussions. He still lost: as an at-will employee who bought stock subject to a buy-back-on-termination agreement, he had no reasonable expectation of being told about speculative discussions.

What relief can a court order for a fired shareholder-employee?

A court can order “any equitable relief it deems just and reasonable in the circumstances,” including a buyout of your shares, payment for lost wages, or interim reinstatement, and it can dissolve the corporation after considering whether lesser relief “would be adequate to permanently relieve the circumstances” (subd. 3b). Relief is discretionary: in Bolander, the court said “The decision to grant equitable relief is discretionary.”

The tools a court has used, or the statute names, include:

  • A buyout. In a corporation that is not publicly held when the action is commenced, once one or more of the statutory grounds is established, the court may order the sale of a plaintiff’s or a defendant’s shares (§ 302A.751, subd. 2). It acts “upon motion of a corporation or a shareholder or beneficial owner of shares of the corporation.” It may order the sale only “if the court determines in its discretion that an order would be fair and equitable to all parties under all of the circumstances of the case.” The buyer is the corporation or the moving shareholders, whichever the motion specifies, and the price rules below apply.
  • Lost wages. In Pedro v. Pedro, 489 N.W.2d 798 (Minn. Ct. App. 1992), the court affirmed $256,740 in lost wages to an equal owner fired after 45 years, on a finding that he had a contract for lifetime employment. The court called it “the unique facts in this case.” Because he held “two separate interests, as owner and employee,” recovery for each “will not be considered a double recovery.”
  • Interim reinstatement. Haley affirmed a temporary injunction requiring the company to employ the fired co-founder and pay him a set salary until trial (see the FAQ below).
  • Dissolution. In deciding whether to dissolve, the court “shall consider whether lesser relief suggested by one or more parties, such as any form of equitable relief, a buy-out, or a partial liquidation, would be adequate” (subd. 3b).

Profit is no defense by itself: the court “shall not refuse to order equitable relief, dissolution, or a buy-out solely on the ground that the corporation has accumulated or current operating profits” (subd. 3). The case belongs “in a court within the county in which the registered office of the corporation is located” (subd. 5). A shareholder-employee with a written employment agreement can also sue on the contract, as Bolander did, and the two claims rise or fall separately.

How is the share price set when a court orders a buyout?

The price is “the fair value of the shares as of the date of the commencement of the action or as of another date found equitable by the court,” unless the shares are already subject to an agreed price. Under § 302A.751, subd. 2, an agreed price in the bylaws, a shareholder control agreement, or otherwise controls: “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.”

When the parties cannot agree on fair value within the period subd. 2 sets, the court decides it under Minn. Stat. § 302A.473, subd. 7. The court “may appoint appraisers” to receive evidence and recommend a value, and the value may be “computed by any method or combination of methods that the court, in its discretion, sees fit to use, whether or not used by the corporation or by a dissenter.”

Two Minnesota decisions set the boundaries:

  1. The marketability discount. In Advanced Communication Design, Inc. v. Follett, 615 N.W.2d 285 (Minn. 2000), a case involving a shareholder and former employee, the Minnesota Supreme Court took up the marketability discount. It held 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.” The Court then found extraordinary circumstances on that record and sent the case back to set a discount, so the exception is real.
  2. The agreed formula. In Gunderson, the board offered $2,300 under a formula Gunderson had proposed, against his appraiser’s $1,133,000 value. The court held the contractual price reasonable, noting that “Minnesota courts are required to honor shareholder agreements setting the purchase price of shares, unless the court determines that the price is unreasonable under all the circumstances.” On his claim as a shareholder-employee, though, the court held that “The denial of the fair-value buyout motion was premature.”

Once a buyout is ordered and the buyer posts adequate security, “the selling shareholders shall no longer have any rights or status as shareholders, officers, or directors, except the right to receive the fair value of their shares plus such other amounts as might be awarded.” The mechanics are covered in forced buyouts under § 302A.751.

How can a shareholder-employee’s own conduct defeat the claim?

Your own conduct can end the claim. Gunderson held that “an expectation of continuing employment is not reasonable and oppression liability does not arise when the shareholder-employee’s own misconduct or incompetence causes the termination of employment.” In Gunderson itself, one question left for remand was whether any expectation of employment “was altered by the parties’ subsequent dealings or by Gunderson’s alleged misconduct.”

Bolander shows the point even where the employee won on the contract. Bolander took about $353,000 in cash withdrawals while the company was in financial difficulty. The Court of Appeals affirmed the denial of statutory relief, explaining that “the district court did not err by concluding that he ‘undercut’ his claim under Minn.Stat. § 302A.751 when he took withdrawals from CB&S that were not in the company’s best interests.”

Fees can move in either direction. Under § 302A.751, subd. 4, if the court finds that “a party” acted “arbitrarily, vexatiously, or otherwise not in good faith,” it “may in its discretion award reasonable expenses, including attorneys’ fees and disbursements, to any of the other parties.” In Pedro, the trial court awarded the fired brother $200,000 in fees and expenses after finding the other owners had acted not in good faith, and the Court of Appeals affirmed. A separate statute, Minn. Stat. § 302A.467, applies when “a corporation or an officer or director of the corporation violates a provision of this chapter.” In “an action brought by a shareholder of the corporation,” the court may “grant any equitable relief it deems just and reasonable in the circumstances” and award expenses “to the shareholder.” It can also be used against a shareholder-officer: in Bolander, the Court of Appeals held “that the district court abused its discretion by not granting David and Dorothy equitable relief” under § 302A.467 after the president’s withdrawals.

How does the rule differ for a member-employee of a Minnesota LLC?

A Minnesota LLC member uses a different statute with a different test. Under Minn. Stat. § 322C.0701, subd. 1(5), 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.”

The LLC section does not use the corporate phrase “unfairly prejudicial” and does not mention a member’s capacity as an employee or officer. It also adds the requirement that the conduct be “directly harmful to the applicant.” As with a corporation, the court “may order a remedy other than dissolution, which may include the sale for fair value of all membership interests a member owns” to the company or other members (subd. 2). The proceeding “must be brought in a court within the county in which the registered office of the limited liability company is located” (subd. 3).

Can I bring an employee-capacity claim if the company has more than 35 shareholders?

No, not on the employee or officer ground. Minn. Stat. § 302A.751 reaches conduct toward a shareholder in the capacity of an officer or employee only in a closely held corporation. Minn. Stat. § 302A.011 defines a closely held corporation as one with no more than 35 shareholders. In a larger corporation that is not publicly held, you can still claim unfairly prejudicial conduct toward you in your capacity as a shareholder or director, and facts about the job loss may still bear on that claim. In U.S. Bank N.A. v. Cold Spring Granite Co. (Minn. 2011), the Minnesota Supreme Court also held: “Because the Legislature has not expressed an intention to abrogate the common law definition or fiduciary duties of a close corporation, we conclude that the common law of closely held corporations is still in effect.”

Does a demotion or pay cut count, or only a firing?

It can count. Minn. Stat. § 302A.751 covers conduct unfairly prejudicial toward a shareholder in the capacity of an officer or employee, and its words are not limited to discharge. In Haley v. Forcelle (Minn. Ct. App. 2003), the majority owner removed a co-founder from the board, eliminated his president position, and changed his title before firing him. Whether a demotion or pay cut is unfairly prejudicial turns on the same reasonable-expectations test that applies to a firing.

Can a court order the company to give me my job back while the case is pending?

It can, but the bar is high. In Haley v. Forcelle (Minn. Ct. App. 2003), the Court of Appeals affirmed a temporary injunction ordering a closely held corporation to employ a fired co-founder and pay him a set salary until trial. The court said lost income alone is generally not irreparable harm; the loss of a voice in management and exposure on guaranteed company debt made the difference there, and one judge dissented.

Is a buyout formula price binding if it is far below what an appraiser says my shares are worth?

It can be. When shares are subject to a purchase price in the bylaws, a shareholder control agreement, or otherwise, Minn. Stat. § 302A.751 directs the court to order the sale at that price unless the price or terms are unreasonable under all the circumstances. In Gunderson (Minn. Ct. App. 2001), the court held a $2,300 formula price reasonable against a $1,133,000 appraisal on the shareholder claim, because the shareholder had proposed the formula himself in an arm’s-length agreement. On his claim as a shareholder-employee, the court held that “The denial of the fair-value buyout motion was premature.”

Do I have to sue the majority owner personally?

No. Minn. Stat. § 302A.751 says it is not necessary to make shareholders parties to the action unless relief is sought against them personally. Naming the majority owner matters when you want relief against that person, not only against the company. The case must be brought in a court in the county where the corporation’s registered office is located.

Should I sign a buy-sell agreement that requires me to sell my shares if I am fired?

Sign it knowing what it may cost you. The Minnesota Court of Appeals said in Gunderson that shareholders who sign buyout agreements permitting termination of employment for any reason, and obligating them to sell on termination, would not likely have a reasonable expectation of continuing employment. Minn. Stat. § 302A.751 presumes written agreements reflect the parties’ reasonable expectations on the matters they cover. If the job is part of your investment, the agreement should say so.

When does the statute treat the job as part of the investment?

A shareholder who works in a Minnesota closely held corporation holds two interests, and § 302A.751 can protect the job as part of the investment when the expectation of keeping it was reasonable, known to the other owners, and not undone by your own conduct or a written agreement. If you would like me to analyze the agreements and facts behind a firing or demotion in a company you partly own, email aaron@aaronhall.com with a short description of the situation. More on Minnesota employment matters is on my employment page.