In previous posts, I reviewed the statutory standard of conduct of corporate directors and corporate officers. In this third of a four-part series, I will review the statutory and common law duties owed from one shareholder to another.
In Minnesota, shareholders of closely-held corporations and members of closely-held LLCs owe one another a fiduciary duty. Since in most closely-held corporations, directors, and officers are likely shareholders of the company as well, these fiduciary duties add another layer of duties that require attention.
The statutory basis of shareholder duties is found in § 302A.751, subd. 3a. of the Minnesota Business Corporation Act, and, for LLCs, § 322B.833 subd. 4 of the Minnesota Limited Liability Company Act. In determining equitable relief, dissolution, or a buy-out in a dispute between shareholders of a closely-held corporation,
the court shall take into consideration 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 and the reasonable expectations of the shareholders as they exist at the inception and develop during the course of the shareholders’ relationship with the corporation and with each other.
In its seminal 1992 decision in Pedro v. Pedro (489 N.W.2d 798), the Minnesota Court of Appeals reviewed and expanded on this statutory duty. The Court found that:
The relationship among shareholders in closely held corporations is analogous to that of partners…
Shareholders in closely held corporations owe one another a fiduciary duty…
In a fiduciary relationship ‘the law imposes upon them highest standards of integrity and good faith in their dealings with each other…’
Owing a fiduciary duty includes dealing ‘openly, honestly and fairly with other shareholders.’
One example of violating a shareholder violating this fiduciary duty is to take an action that depletes the corporation’s value, but, as stated by the Court in Pedro, this is not the only way. For example, the in a closely-held corporation, “the nature of the employment of a shareholder may create a reasonable expectation by the employee-owner that his employment is not terminable at will.”
When determining the shareholders’ “reasonable expectations,” there is a statutory presumption that any written agreements between shareholders or between shareholders and the company, such as employment agreements and buy-sell or shareholder agreements, reflect the parties’ reasonable expectations about the matters in the agreement.
In the fourth and final part of this series, I will review some best practices for shareholders, directors, and officers of closely-held corporations in discharging their overlapping duties.
Related Posts:
Standard of Conduct of Corporate Directors
Standard of Conduct of Corporate Officers
Company Signatures to Member Control and Buy-Sell Agreements
Corporate Governance Best Practices
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