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So . . . When Is A Shareholder A Shareholder . . . And When Does It Matter?

March 10, 2013
Attorney at Law Magazine - Twin Cities Edition
Author: Rich Ostlund

Trying to define the beginning of life, and later, its end has spawned intense philosophical and legal debates across the landscape of American law for decades.

So too have our courts been called upon to define the moment of termination of a shareholder’s rights in privately held Minnesota businesses. Recently, our Minnesota appellate courts have once again examined the question of when a shareholder’s financial rights end in one of Minnesota’s most common business forms, the privately held corporation as governed by Chapter 302A, The Minnesota Business Corporation Act.

A set of common facts are found repeatedly in these typical Minnesota businesses. The essential story goes as follows: the company has owners (often shareholders in a private corporation or members in a limited liability company setting) who are also employees of the company. These owner-employees enter into one or more written contracts with the company and/or each other concerning how key aspects of their business relationship will be governed. These agreements commonly address a variety of core business governance issues, including the company’s right to purchase an owner-employee’s shares upon either the end of his/her employment or when that shareholder dies. These agreements also establish a timeframe for the corporation to give notice of its exercise of an option to purchase the departing owner-employee’s shares and also set a time period for the company and the shareholder to close on the share redemption (e.g., exchange the shares for payment). Read More