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Justice Versus Windfall: When is Value "Fair" Among Private Corporation Shareholders?

March 1, 1998
Business Law News
Author: Richard Ostlund

Good business people understand their markets, their products, their people.

Unfortunately, few business owners fully appreciate what can happen when their most important business relationship goes sour. Specifically, when the shareholders of a private Minnesota business corporation sue each other, many commonly accepted “truths” of corporate business life no longer apply with predictable certainty.

The private (e.g., non-public) and “closely held” (fewer than 35 shareholders) corporation is our most common species of business enterprise. Stated simply, over the past 15 years, the legal landscape governing the relationship among private corporation shareholders has increasingly changed from “majority rules” in virtually all cases, to the need to more greatly satisfy all shareholders’ “reasonable expectations” in the variety of occurrences in the typical business. Under the Minnesota Business Corporation Act, Chapter 302A, et seq, Minnesota courts are given (and have increasingly used) broad “equitable” powers to grant relief to a shareholder who has been harmed as a “shareholder, officer, director or employee” by the “illegal, fraudulent or unfairly prejudicial” conduct of the directors or controlling shareholders in a closely held corporation [Minn. Stat. § 02A.751(1)(b)(2)(3); § 302A.467]. In evaluating the claims in such lawsuits, Minnesota courts are instructed to consider all shareholders’ “reasonable expectations” at the inception of the relationship and as they develop overtime [Minn. Stat. § 302A.751(3)(a)]. This standard, combined with the relatively vague “unfairly prejudicial” threshold of conduct necessary to trigger equitable relief, makes shareholder/corporate governance disputes in these corporations precarious for the ill-advised corporate board of directors or shareholder(s). Indeed, these “reasonable expectation” principles are bilateral, such that overreaching minority shareholders can likewise be subject to equitable relief in favor of the corporation or the other shareholders.  Read more