When the owners of a closely held Minnesota company end up in a lawsuit with each other, you can usually expect one of the owners to request a fair value buyout of his or her interest.
Minnesota law is unique in that both the Minnesota Business Corporation Act and the Minnesota Revised Uniform Limited Liability Company Act expressly provide for a non-statutory buyout as a potential remedy to an aggrieved shareholder (in the case of a corporation) or member (in the case of an LLC). Minn. Stat. § 302A.751, subd. 2; Minn. Stat. § 322C.0701, subd. 3. Outside the context of a Minnesota corporation or LLC, however, it is rare to find a statute with a buyout provision. In cases where the governing statute lacks a buyout provision, is there any basis to demand a buyout?
Even without express statutory authority to order a buyout, a court can order a buyout pursuant to its equitable authority. For example, the Uniform Limited Partnership Act allows a partner to seek judicial dissolution of a partnership in certain circumstances. See Minn. Stat. § 321.0802. Although a dissolved partnership typically must wind up its activities and liquidate its assets, see Minn. Stat. § 321.0803, liquidation is not a necessary consequence of dissolution. Dissolution is an equitable remedy. While the court is sitting in equity, it has broad discretion to fashion relief in a manner that is fair and reasonable under the circumstances. As an alternative to dissolution and liquidation, the court can order a buyout of one partner’s interest. See Maras v. Stilinovich, 268 N.W.2d 541, 544 (Minn. 1978); Inv. Mgmt., Inc. v. Jordan Realty, Inc., 2002 WL 1751259, *7 (Minn. Ct. App. July 30, 2002) (affirming order requiring buyout of partner’s interest). See also Minn. Stat. § 321.1001(a) (providing that a partner may seek legal or equitable relief in a direct action against the other partners).
On this point, Minnesota law is consistent with the holdings of courts across the country. As one court explained:
Other jurisdictions have addressed the issue whether the business must be sold in order to liquidate after dissolution. Many of these jurisdictions allow the partnership to be sold to the willing partners even after dissolution. A withdrawing partner can be paid any contributions or profits due, but liquidation does not have to occur after dissolution. These jurisdictions have noted that forced sales typically end up in economic waste and the Revised Uniform Partnership Act’s reforms primarily targeted the economic waste of compelled liquidation. In these jurisdictions’ views, buyouts and other alternatives to forced sales may be utilized to wind up the partnership.
. . . Most jurisdictions have allowed the withdrawing partner to be bought out after dissolution and a forced sale is not necessary to liquidate.
In re Dissolution of Midnight Star Enterprises, L.P., 724 N.W.2d 334, 339-40 (S.D. 2006) (citing, among other cases, the Minnesota Supreme Court’s decision in Maras). See also O’Neal & Thompson, Oppression of Minority Shareholders, § 7:24; N. Air Servs., Inc. v. Link, 2012 WI App 27, ¶ 24, 339 Wis. 2d 489, 809 N.W.2d 900 (Wis. Ct. App. 2012); Scott v. Trans- System, Inc., 64 P.3d 1, 9 (Wash. 2003); G & N Aircraft, Inc. v. Boehm, 743 N.E.2d 227, 244 (Ind. 2001); Landstrom, 561 N.W.2d 1, 9 (S.D. 1997); Brenner v. Berkowitz, 634 A.2d 1019, 1031 (N.J. 1993) v. Southside Press, Ltd., 435 N.W.2d 377, 382 (Iowa Ct. App. 1989); Balvik-Lerner v. Lerner, 511 A.2d 501, 510 (Md. 1986); Mc- Cauley v. Tom McCauley & Son, Inc., 724 P.2d 232, 236 (N.M. Ct. App. 1986); Gimpel v. Bolstein, 477 N.Y.2d 1014, 1021 n.21 (N.Y. Sup. Ct. 1984); Maddox v. Norman, 669 P.2d 230, 238 (Mont. 1983); Alaska Plastics v. Coppock, 621 P.2d 270, 274 (Alaska 1980); Masinter-Callier v. Callier, 378 N.E.2d 405, 408 (Ill. Ct. App. 1978); Barnett v. Int’l Tennis Corp., 263 N.W.2d 908, 918 (Mich. Ct. App. 1978); Baker v. Commercial Body Builders, Inc., 507 P.2d 387, 393 (Or. 1973); White v. Perkins, 189 S.E.2d 315 (Va. 1972); Kirtz v. Grossman.
In short, if your client wants a buyout of his or her ownership interest in a company, but there is no buyout provision in the governing statute, you may still be able to get a buyout by making a claim under the dissolution statute and pleading to the court’s equitable authority. Forcing an unnecessary and potentially wasteful liquidation is not your only option. (Link to article on AAL Magazine)