When Do Minority Shareholders Have a Reasonable Expectation of Continued Employment?
In some circumstances, a minority shareholder in a closely-held corporation may have a reasonable expectation of continued employment. As a result, if termination of employment is “unfairly prejudicial” to the shareholder in his or her capacity as a shareholder-employee, the termination may be grounds for a court to provide equitable relief for shareholder oppression under Minn. Stat. § 302A.751. The threshold question in this type of claim is whether the minority shareholder’s expectation of continuing employment was reasonable.
In Gunderson v. Alliance Computer Professionals, Inc., 628 N.W.2d 173 (Minn. Ct. App. 2001), the Minnesota Court of Appeals identified several factors that influence whether a minority shareholder’s expectation of continued employment is reasonable or not. Here are some of the key points from that decision:
- Shareholders who sign buyout agreements permitting termination of employment for any reason and obligating shareholders to sell their shares to the corporation upon termination of employment likely do not have a reasonable expectation of continuing employment.
- An employee who has no capital investment in the corporation but either buys a small percentage of stock through periodic company offerings or receives a small percentage of stock as part of a compensation package likely does not have a reasonable expectation of continuing employment.
- To be reasonable, an expectation of continuing employment must be known and accepted by other shareholders, as opposed to based only on the shareholder’s “subjective hopes and desires.”
- An expectation of continuing employment is likely reasonable if “continuing employment can fairly be characterized as part of the shareholder’s investment.” Factors to be considered in making this determination include, among others, whether a shareholder’s salary and benefits constitute de facto dividends and whether procuring employment with the corporation was a significant reason for investing in the business.
- Expectations of continuing employment must be balanced against the controlling shareholder’s need for flexibility to run the business in a productive manner. Accordingly, an expectation of continuing employment is not reasonable when the shareholder-employee’s own misconduct or incompetence causes the termination of employment.