How to Challenge a Board Vote in Minnesota

What makes a board vote open to a court challenge in Minnesota?

A board vote is open to challenge when it fails a requirement that chapter 302A, the articles, or the bylaws set for it. At a meeting, the board acts “by the affirmative vote of the greater of (1) a majority of directors present at a duly held meeting at the time the action is taken, or (2) a majority of the minimum proportion or number of directors that would constitute a quorum for the transaction of business at the meeting,” or by any larger number the chapter or the articles require, under Minn. Stat. § 302A.237, subd. 1. “If the articles require a larger proportion or number than is required by this chapter for a particular action, the articles shall control.”

The grounds fall into four groups:

1. Process. There was no quorum, notice was defective, the vote fell short, or a written action in place of a meeting lacked signatures. Under Minn. Stat. § 302A.235, a quorum is a majority “of the directors currently holding office” unless the articles or bylaws set another number. Section 302A.235 also provides: “If a quorum is present when a duly called or held meeting is convened, the directors present may continue to transact business until adjournment, even though the withdrawal of a number of directors originally present leaves less than the proportion or number otherwise required for a quorum.” Without a meeting, the board acts by written action “signed, or consented to by authenticated electronic communication, by all of the directors,” under Minn. Stat. § 302A.239, subd. 1. If the articles so provide, an action “other than an action requiring shareholder approval” may be taken by written action signed “by the number of directors that would be required to take the same action at a meeting of the board at which all directors were present.”
2. Authority. The board took, without shareholder approval, an action that chapter 302A says requires it. Under Minn. Stat. § 302A.661, subd. 2, a corporation, by the affirmative vote of a majority of the directors present, may sell “all or substantially all of its property and assets, including its good will, not in the usual and regular course of its business,” “when approved at a regular or special meeting of the shareholders.” That approval has an exception: “Shareholder approval is not required under paragraph (a) if, following the sale, lease, transfer, or other disposition of its property and assets, the corporation retains a significant continuing business activity.” Some mergers need no shareholder vote either. Under Minn. Stat. § 302A.613, subd. 3, “submission of a plan of merger to a vote at a meeting of shareholders of a surviving corporation is not required” when its listed conditions are met. Under Minn. Stat. § 302A.621, subd. 1, a parent “owning at least 90 percent of the outstanding shares of each class and series of a subsidiary” may merge the subsidiary into itself “without a vote of the shareholders or other owners of itself or any subsidiary.” The 90 percent test covers each class and series “other than classes or series that, absent this section, would otherwise not be entitled to vote on the merger.” Subdivision 2a then provides, “Notwithstanding subdivision 1,” that “if the parent is a domestic corporation and the conditions of section 302A.613, subdivision 3, are not met with respect to the parent, then the plan of merger is not effective unless it is also approved by the affirmative vote of the holders of a majority of the voting power of all shares of the parent entitled to vote at a regular or special meeting held in accordance with section 302A.613.”
3. Conflict. One or more directors, or an organization “in or of which one or more of its directors are directors, officers, or legal representatives or have a material financial interest,” was on the other side of the deal. None of the protective routes in Minn. Stat. § 302A.255, subd. 1 was used, such as proof that the deal was “fair and reasonable as to the corporation at the time it was authorized, approved, or ratified.” Director pay is treated differently under subdivision 2(a): “A resolution fixing the compensation of a director or fixing the compensation of another director as a director, officer, employee, or agent of the corporation, is not void or voidable or considered to be a contract or other transaction between a corporation and one or more of its directors for purposes of this section even though the director receiving the compensation fixed by the resolution is present and voting at the meeting of the board or a committee at which the resolution is authorized, approved, or ratified.”
4. Conduct. The directors acted illegally, fraudulently, or in bad faith toward the corporation or its shareholders.

Each ground is set out in full, with the statute for each, on the page about the grounds that make a resolution invalid. This page covers what a shareholder does about them.

Who can bring a court challenge to a board vote?

A shareholder can bring the challenge, and chapter 302A gives a shareholder several routes into court.

The main routes are:

1. Equitable relief for a statute violation. Section 302A.467, quoted above, reaches any violation of chapter 302A by the corporation or its officers or directors, and it lets the court award the shareholder expenses, including attorneys’ fees.
2. Judicial intervention. Under Minn. Stat. § 302A.751, subd. 1, in an action by a shareholder, a court “may grant any equitable relief it deems just and reasonable in the circumstances or may dissolve a corporation and liquidate its assets and business” when, among other grounds, “the directors or those in control of the corporation 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,” or “have acted in a manner 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.” Another listed ground is that “the corporate assets are being misapplied or wasted.”
3. A suit to stop an act beyond the corporation’s power. Under Minn. Stat. § 302A.165, a corporate act “if otherwise lawful, is not invalid because the corporation was without the power to do, continue, or perform the act, contract, conveyance, or transfer, unless the lack of power is established in a court in this state,” including “In a proceeding by a shareholder against the corporation to enjoin the doing, continuing, or performing of the act, contract, conveyance, or transfer.”
4. A derivative suit on the corporation’s behalf, covered in the next two sections.

A director who was shut out of a meeting has a separate concern: notice. Under Minn. Stat. § 302A.231, subd. 4, a director calls a meeting by giving notice “to all directors of the date, time, and place of the meeting.” The notice must come at least ten days ahead (three for an organizational meeting), unless the articles or bylaws provide for a different time period. Subdivision 6 treats attendance as a waiver, “except where the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting.” The page on board action taken without proper notice covers that defect.

When is a challenge a direct claim, and when must it be derivative?

A challenge is direct when the shareholder suffered the injury and would receive the recovery, and derivative when the corporation suffered the injury and would receive the recovery. The Minnesota Supreme Court put it this way in In re Medtronic, Inc. Shareholder Litigation, 900 N.W.2d 401 (Minn. 2017): “when shareholders are injured only indirectly, the action is derivative; when shareholders show an injury that is not shared with the corporation, the action is direct.”

The label matters because a derivative claim carries the demand and pleading requirements of Minn. R. Civ. P. 23.09, and a direct claim does not. Medtronic sorted the claims of a shareholder who challenged how a merger was structured, at the motion-to-dismiss stage, where the court took the complaint’s allegations as true:

• Derivative. The company’s reimbursement of officers’ and directors’ excise-tax liability “is at bottom an alleged waste of corporate assets,” so the recovery would go to the corporation.
• Direct. Claims that the transaction diluted shareholders’ ownership and voting power stated “an injury based on the loss of certain rightful incidents of his ownership interest, which is an injury that falls only on shareholders and not on the corporation.”

The court also said that bringing the claim under a section of chapter 302A does not change the analysis. In a footnote, the court quoted its earlier decision in Wessin: “we look not to the theory in which the claim is couched, but instead to the injury itself.” Under that test, a claim that a vote drained company money is derivative. A claim that a vote took something from your shares, such as your voting power or your proportionate ownership, can be direct.

Members of a Minnesota limited liability company follow chapter 322C instead. A member bringing a direct action “must plead and prove an actual or threatened injury that is not solely the result of an injury suffered or threatened to be suffered by the limited liability company,” under Minn. Stat. § 322C.0901, subd. 2, and Minn. Stat. § 322C.0902 lets a member bring a derivative action after a demand that the company’s decision makers do not act on “within a reasonable time,” or when a demand would be futile.

What does a derivative challenge require before the lawsuit?

A derivative challenge has to meet Minn. R. Civ. P. 23.09 before the court reaches the merits. The rule requires the complaint to show that you owned shares at the right time and to describe what you asked the board to do, or why you did not ask.

The rule sets four conditions:

1. Ownership at the time. The complaint “shall allege that the plaintiff was a shareholder or member at the time of the transaction of which the plaintiff complains or that the plaintiff’s share or membership thereafter devolved on the plaintiff by operation of law.”
2. The demand, or the reason for none. The complaint “shall also allege with particularity the efforts, if any, made by the plaintiff to obtain the desired action from the directors or comparable authority and, if necessary, from the shareholders or members, and the reasons for the plaintiff’s failure to obtain the action or for not making the effort.”
3. Adequate representation. The action “may not be maintained if it appears that the plaintiff does not fairly and adequately represent the interest of the shareholders or members similarly situated in enforcing the right of the corporation or association.”
4. Court control of the outcome. “The action shall not be dismissed or compromised without the approval of the court.”

On the demand, the Minnesota Supreme Court noted in In re UnitedHealth Group Inc. Shareholder Derivative Litigation, 754 N.W.2d 544 (Minn. 2008), that “The demand requirement may be excused, however, when the board suffers from a conflict of interest regarding the subject matter of the derivative suit.” That note sits in a footnote, and the complaint still has to plead the reasons with particularity. I suggest putting a demand in writing, because it becomes the record of “the efforts, if any” that Rule 23.09 asks the complaint to describe. The demand can name the vote, the defect, and the action you want the board to take. More on the steps is in how derivative lawsuits work in Minnesota.

How can a special litigation committee end a derivative challenge?

A board facing a derivative suit may appoint a special litigation committee, and a court may defer to that committee’s decision. Under Minn. Stat. § 302A.241, subd. 1, “Committees may include a special litigation committee consisting of one or more independent directors or other independent persons to consider legal rights or remedies of the corporation and whether those rights and remedies should be pursued.”

UnitedHealth answered a federal court’s question about a committee’s decision to settle a derivative suit. The Minnesota Supreme Court held that “a court should defer to an SLC’s decision to settle a shareholder derivative action if (1) the members of the SLC possessed a disinterested independence and (2) the SLC’s investigative procedures and methodologies were adequate, appropriate, and pursued in good faith.” Three further points from the decision shape a challenge:

• Burden. The court concluded “that the corporation, as well as any other proponent of the SLC recommendation, should bear the burden to show that the elements of our standard have been met.”
• One chance. Reaffirming Janssen, the court said that if the committee’s first investigation and recommendation fail that standard, “the derivative suit proceeds on its merits” with no opportunity to fix it.
• Independence factors. The court treated a board’s open-ended power to add committee members as “one factor in a court’s totality-of-the-circumstances evaluation of an SLC’s independence.”

I suggest testing the committee’s makeup and methods, not only its conclusion, because UnitedHealth puts the burden on the corporation to prove those elements. The special litigation committee page covers how committees are formed.

How does the business judgment rule limit a challenge to a board vote?

A court generally will not replace the board’s business decision with its own when the directors were independent, informed, and acting in good faith. The Minnesota Supreme Court, quoting its earlier decision in Janssen v. Best & Flanagan, 662 N.W.2d 876 (Minn. 2003), has said that “courts are ill-equipped to judge the wisdom of business ventures and have been reticent to replace a well-meaning decision by a corporate board with their own.” UnitedHealth, 754 N.W.2d 544.

The statute sets the standard for each director. Under Minn. Stat. § 302A.251, subd. 1, “A director shall discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances,” and “A person who so performs those duties is not liable by reason of being or having been a director of the corporation.”

The articles can narrow a money-damages claim further. Under § 302A.251, subd. 4, “A director’s personal liability to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director may be eliminated or limited in the articles.” The articles cannot do that, among other exceptions, “for any breach of the director’s duty of loyalty to the corporation or its shareholders,” “for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law,” or “for any transaction from which the director derived an improper personal benefit.” I suggest reading the articles before deciding what to ask a court for, because a liability limit there can turn a damages claim into a request for equitable relief only. The doctrine is covered in more depth on the Minnesota business judgment rule page.

When does a shareholder lose the right to undo a merger or asset sale?

A shareholder who has dissenters’ rights over a corporate action generally cannot have that action set aside, unless it is fraudulent. Under Minn. Stat. § 302A.471, subd. 4, shareholders “who have a right under this section to obtain payment for their shares, or who would have the right to obtain payment for their shares absent the exception set forth in paragraph (c) of subdivision 3, do not have a right at law or in equity to have a corporate action described in subdivision 1 set aside or rescinded, except when the corporate action is fraudulent with regard to the complaining shareholder or the corporation.”

Subdivision 1 lists the actions that carry these rights. A shareholder “may dissent from, and obtain payment for the fair value of the shareholder’s shares in the event of,” among others:

• certain amendments of the articles that materially and adversely affect the shareholder’s shares;
• “a sale, lease, transfer, or other disposition of property and assets of the corporation that requires shareholder approval under section 302A.661, subdivision 2,” with listed exceptions;
• “a plan of merger, whether under this chapter or under chapter 322C, to which the corporation is a constituent organization, except as provided in subdivision 3,” and certain plans of exchange and conversion.

When the board’s vote leads to one of these actions, the statute points the objecting shareholder toward payment of fair value, and a suit to undo the action needs a claim of fraud. Dissenters’ rights have their own notice and timing steps in the statute. I suggest reading the current text of § 302A.471 and the procedure it cross-references as soon as the action is proposed, because those steps decide whether payment stays available.

How can a shareholder stop a board decision before it takes effect?

A shareholder can ask the court for a temporary restraining order or a temporary injunction that keeps the board’s decision from being carried out while the case proceeds. The statutes supply the claim, such as § 302A.467 equitable relief or a § 302A.165(a) suit to enjoin an unauthorized act (both quoted above), and Minn. R. Civ. P. 65 supplies the procedure.

Three parts of Rule 65 shape the request:

1. Notice. Under Rule 65.02(a), “No temporary injunction shall be granted without notice of motion or an order to show cause to the adverse party.”
2. Order without notice. A temporary restraining order without notice requires, under Rule 65.01, that “it clearly appears from specific facts shown by affidavit or by the verified complaint that immediate and irreparable injury, loss, or damage will result to the applicant before the adverse party or that party’s attorney can be heard in opposition,” plus the attorney’s written statement about efforts to give notice.
3. Security. Under Rule 65.03(a), “No temporary restraining order or temporary injunction shall be granted except upon the giving of security by the applicant, in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party who is found to have been wrongfully enjoined or restrained.”

Section 302A.165(a) is a suit to enjoin “the doing, continuing, or performing” of the act. I suggest raising the objection while the act is still ahead or under way, because a completed transaction may leave only damages or other relief. The security requirement also means the shareholder should be ready to post a bond. The page on temporary injunctions in Minnesota commercial cases covers the standard courts apply.

What can a court order when a board vote is successfully challenged?

A court can order the equitable relief § 302A.467 and § 302A.751, subd. 1 allow (quoted above). Under § 302A.751 it may also order a buy-out or, in the listed cases, dissolution. Equitable relief can include an order setting aside the action, an injunction, or an accounting.

Section 302A.751 adds several rules for an action under that section:

• Buy-out. Subdivision 2 applies to a corporation that is not publicly held when the action begins, once one or more of the clause (b) grounds is established. On motion, the court may then order a plaintiff or defendant to sell all its shares to the corporation or the moving shareholders “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.”
• Reasonable expectations. Under subdivision 3a, the court considers the shareholders’ duty to one another in a closely held corporation, and “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.”
• Lesser relief first. Under subdivision 3b, “In deciding whether to order dissolution, 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 to permanently relieve the circumstances established under subdivision 1, clause (b) or (c).”
• Fees for bad faith. Under subdivision 4, a court that finds a party “has acted arbitrarily, vexatiously, or otherwise not in good faith” may award reasonable expenses, including attorneys’ fees, to the other parties.
• Venue. 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.”

A closely held corporation is “a corporation which does not have more than 35 shareholders,” under Minn. Stat. § 302A.011, subd. 6a.

The Minnesota Court of Appeals applied the 1988 version of § 302A.751, subd. 1(b)(2), and subdivision 3a in Warthan v. Midwest Consolidated Insurance Agencies, Inc., 450 N.W.2d 145 (Minn. Ct. App. 1990). The trial court had found that the agency was not a corporation. The court of appeals rejected that finding first: “Articles of incorporation were filed and the required fee paid on behalf of MCIA; as a matter of law, MCIA is a corporation and the trial court erred in concluding otherwise.” Two groups each owned half of a closely held insurance agency. One group moved the agency’s book of business to its own new corporation without the other group’s consent and without the shareholder approval the statute required. That group also denied the other group access to the books. The court held: “The Minnetonka group therefore acted illegally and prejudicially toward the St. Cloud group, the co-owners of MCIA,” and it reversed and remanded “for an accounting and such other equitable relief the trial court deems just and reasonable.” The page on a court-ordered buyout under § 302A.751 covers valuation and the buy-out process.

Neither § 302A.467 nor § 302A.751 states a deadline of its own, so the deadline depends on the claim. The page on board resolution validity covers the deadlines that can apply. I suggest identifying the deadline for each claim early, because a late claim can be lost.

Why should a challenge start with the corporate records?

The records show how the vote was actually taken, and a shareholder of a corporation that is not publicly held has a statutory right to see the key ones on written demand. Under Minn. Stat. § 302A.461, subd. 4, such a shareholder “has an absolute right, upon written demand, to examine and copy, in person or by a legal representative, at any reasonable time,” the share register and the documents in subdivision 2. The corporation must make them available within ten days after an officer receives the demand.

What the demand reaches, and its limits:

• Board minutes. Subdivision 2 includes “records of all proceedings of the board for the last three years,” along with the articles, the bylaws, and any shareholder control agreement.
• Other records. A shareholder may see other corporate records “at any reasonable time only if the shareholder, beneficial owner, or holder of a voting trust certificate demonstrates a proper purpose for the examination.”
• Protective orders. Under subdivision 4a, on the corporation’s application, a court may let it “withhold portions of the records of proceedings of the board for a reasonable period of time, not to exceed 12 months, in order to prevent premature disclosure of confidential information which would be likely to cause competitive injury to the corporation,” renewable for good cause within a total cap.
• Enforcement. A court may “specifically enforce this section and award expenses, including attorney fees and disbursements” to the shareholder.

The records also show whether a court is the right forum. Under Minn. Stat. § 302A.457, subd. 2, a shareholder control agreement signed by all shareholders may cover matters including “the election of directors or officers, the employment of shareholders and others by the corporation, or the arbitration of disputes.” Such an agreement is “valid and specifically enforceable.” I suggest reading any such agreement before filing, because an arbitration clause in it can send the dispute out of court. The page on shareholder records rights covers the demand letter.

What Should a Shareholder Do First?

A challenge to a board vote turns on facts that the corporation’s own records hold. I suggest this sequence, because each step answers a question a court would ask:

1. A written records demand for the board minutes, written actions, articles, bylaws, and any shareholder control agreement.
2. The defect identified: process, authority, conflict, or conduct.
3. A decision on whether the injury is yours or the corporation’s, which decides whether Rule 23.09 applies.
4. A check for dissenters’ rights, which limit a request to undo the action.
5. If the decision has not been carried out, a decision on whether to seek a temporary injunction, with security ready to post.
6. The deadline for each claim (see the deadline section of the board resolution page).

If you would like me to analyze a board vote you believe was improper and tell you which of these routes fits your facts, email aaron@aaronhall.com with a short description. I will start an intake and conflict check before you send any confidential documents. More on governance disputes is in my company control material.