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Frozen-Out Minority Shareholder Wrongfully Terminated by Trusted Partners

MKT Law recently represented a frozen-out minority shareholder-employee in a successful road construction related business. In early 2008, the three soon-to-be business partners left their current jobs and started the business. Two partners were a married couple and the third, Attorney Mark K. Thompson’s client, all held equal one-third interests in the Minnesota closely held corporation. Since they first talked about the idea, the business partners wanted to leave the business to their respective sons after they retired and planned on working for their business until that time.

MKT Law’s client had never seen any financial reports and simply trusted his business partners. He went to work every day and worked hard. He was being paid a low salary and received no distributions, other than to pay income taxes every year, in the ten years since the business started operating. All profits were to be reinvested in the business so it would be able to grow. Every single year it grew and was more and more profitable year after year.

In 2015, MKT Law’s client planned on cashing out in a few more years, retiring, and having his son take over for him. He had signed various documents over the years that his partners gave him without much thought. A few years back, all three shareholders met at the company’s lawyer’s office in downtown Minneapolis to sign some of those documents. Those document were intended to “make future transitions easier.” Since MKT Law’s client worked out-of-state most of the time, he did not see his partners too often and usually their interaction was via telephone for much of the working season. After being written up once for seemingly petty reasons, some which were not even true, he became suspicious and hired MKT Law.

An Unfair Ploy to Oust Our Client

After leaving for a week-long vacation that had been planned and known to his partners, he was sent a letter stating he had five days to justify in writing the reasons he had been written up for or he would be fired. The timing was obviously a ploy to deprive him of any chance to respond.

MKT Law learned of the letter after our firm answered a call from the company’s attorney after-hours on a Friday, who was planning (read: hoping) to just leave a message. Although it didn’t stop his partners from following through with the plan they began laying out years before, MKT Law timely responded to the letter and provided justifications, corrections, and explained why no part of the letter provided grounds for termination. Nonetheless, the majority shareholders fired MKT Law’s client “for cause” shortly after his return from vacation.

The documents MKT Law’s client had signed a few years earlier at the company’s lawyer’s office revised and restated the corporation’s bylaws and put in place a shareholder control agreement. Even if he would have had a chance to read the documents before signing them, not many people would have understood the impact of the complex and elaborate changes hidden in the documents. MKT Law’s client was not given the option to have his own attorney review the documents before signing and he signed because of the trust he had in his business partners.

As it turned out, the shareholder control agreement the majority shareholders forced on him laid out the framework that would strip the minority owner of his ability to pass his shares down to his kin and required he engage in an expensive and time-consuming buyout procedure that was designed to pressure the minority shareholder into selling his shares at a low price. The shareholder control agreement and restated bylaws allowed the majority owners to terminate the powerless minority partner with fabricated cause so that there would be a newly enacted 25% discount on the buyout price of his shares. It also ended his salary which, by design, would hinder his ability to engage in an expensive battle to protect his rights. Other discounts were also authorized that would only apply to MKT Law’s client for a non-controlling interest and, due to a lack of marketability, would wind up deducting between 70-90% off the price of the shares if applied as written. Income taxes came due and for the first time the company said it would not pay his share.

MKT Law Enters Litigation to Protect Our Client

After ten months of negotiating a buyout under the procedures in the newly enacted shareholder control agreement and restated bylaws, the founder, frozen-out, minority shareholder, who was also an officer and director and most recently a wrongfully fired employee, engaged in a pre-litigation mediation with the controlling shareholders. Despite being armed with a valuation that set a real and reasonable price for his shares, the best offer he received at the mediation was about one-half of what he was entitled to and it consisted in large part of used equipment and required payments over about 5 years with a small down payment. With no options left and the unsatisfactory “final” offer rejected, MKT Law initiated litigation to protect the rights of its non-controlling shareholder client.

Minnesota Takes Care of the Underdogs of Small Business

In Minnesota, a state with a long history of protecting the rights of the less powerful, there are strong laws that provide protections for those owning less than 50% of a small business. Be they minority shareholders, junior members in a limited liability company, or other business partners who lack a controlling interest in their small business, these laws are designed to protect their rights.

Due to the fact that most small business owners start up their businesses with the intent to work there for the rest of their careers until retirement, it can be reasonable for the shareholder to expect to have lifetime employment with their own business. Part of the benefits expected by such owners is the right to have a vote and voice in how their business is ran. That means the shareholder-employee may be protected from the whims of the majority controlling shareholders if they are terminated from their job and are removed as officers, directors, or managers, and not allowed a say in how the business is operated.

Likewise, because owning less than 50% of the business makes that owner vulnerable to domination and unfair practices by the controlling shareholders, Minnesota law provides protections to guard against such practices. If the majority owners frustrate the minority owners’ reasonable expectations, like putting in place a procedure to fire him for a bogus reason, or treat the member holding less than 50% in a manner that is unfairly prejudicial to his rights, such as enacting shareholder control agreements that are designed to unreasonably force a buyout of the shares at a deflated price through deceit and by not disclosing all of the terms or reasons for it, MKT Law may be able to help by using tools put into law to fight these types of wrongs.

Other similar — and unfortunately common — conduct that may be unlawful includes:

  • Not sharing financial information with the minority partner
  • Majority members taking more than their fair share of profits
  • Spending company funds on personal expenses
  • Taking work the company should do and keeping it for themselves
  • Enacting rules that only benefit the controlling owners
  • Holding secret meetings
  • Enacting overly burdensome measures that only impact a segment of the owners
  • Not disclosing important information that affects the person owning less than half the business
  • Numerous other unfair actions that generally do not provide equally for those not in control

This list is only limited by the greed of those in control. Minnesota’s laws can force a buyout at a fair price of the minority member’s interest in the business or force a redemption of the less than controlling stock held by a shareholder or group of shareholders. It can also provide other ways to balance out the wrongs that have been perpetrated over years of abusive behavior by those in control and hold the cheating partners accountable to the partners they thought they could walk all over.

Back to the Scandal & Lawsuit, Though

MKT Law was able to get forensic accountants put in place, with the business required to pay for the forensic audit, so that the books could be scoured for inappropriate accounting, improper spending, and unauthorized pay outs. MKT Law was also able to force the disclosure of documents and drafts of documents that showed how there were secret meetings between the company’s lawyer and the controlling shareholders that excluded the minority owner and exposed the plan to oust him. MKT Law obtained more information that showed how the frozen-out shareholder’s business partners had planned his departure and schemed to strip him of his rights in a complex and sophisticated plan over a significant period of time.

The information showed the firing was unjustified, the share discounts on his buyout were inappropriate, and that he was being treated in an unfair and illegal manner. MKT Law was able to stop the trampling of the minority owner’s rights, end the unfair procedure being forced on him to devalue his shares, and provide the strength needed to fight back against the bullying tactics.

Second Mediation to Set Things Right

Another mediation was held after the litigation had been going on for a few months and eventually the offers from the majority owners were more in line with what was reasonably expected. MKT Law was able to secure a satisfactory buyout for its client. The client was able to fund a new startup company he alone owns and, although retirement may be postponed by a few years, he is doing very well running his own business without any partners this time around. He also is able to pass the new business onto his son if he wants.

If you think your business partners are cheating you and you feel powerless to do anything about it, call MKT Law at (612) 260-5109 and come on in for a free and confidential consultation. Our Minneapolis business litigation attorney would be happy to see if we can help! You may have more strength in your corner than you know.