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February 6, 2020
Nine Questions to Ask at the Beginning of a Shareholder Dispute

You are a shareholder, member, or partner in a closely-held business, but you and your fellow owners seem headed for a break-up. Here are nine things you should think about as you begin your dispute resolution.

1. What do your agreements say?

Minnesota courts look to written agreements, such as operating agreements, member control agreements, buy-sell agreements, partnership agreements, employment agreements, and bylaws to determine what owners should expect from one another. What do your agreements say about the duties you and your fellow owners owe one another? Do the agreements describe a buy-out structure, valuation, or payment terms? Is there a provision requiring notice before certain actions are taken? What do the agreements say about how the parties should resolve a dispute (i.e., mediation, arbitration, or litigation)? Do the agreements say anything about awarding attorneys’ fees to one party or another? 

2. Who do the attorneys represent?

If you’ve already been working with attorneys, think about whether they represent the company or the individual owners. If the attorneys represent the company, the attorney-client privilege may not prevent the disclosure of the attorney’s advice or communications to the individual owners. 

3. How will your words and actions look to a judge or jury making decisions about your dispute?

Set yourself up to look like the most reasonable party in front of the judge or jury. When emotions run high, it can be dangerous to move quickly. Taking more measured action may go a long way to showing the judge or jury that you treated your fellow owners fairly and reasonably. Additionally, shareholders, members, and partners in closely-held businesses owe each other fiduciary duties, and must act in an honest, fair, and reasonable manner when dealing with each other—even, and maybe even especially, during a conflict.

4. What information or documents are you required to share or entitled to receive?

Owners typically have the statutory right to look at certain business records for the purpose of evaluating the value of the business or its operations. Even if you’re not obligated to share or entitled to get other information, consider whether it would benefit you. If everyone has all of the relevant information, you might be more likely to resolve your fight without litigation.

5. Is there an employment relationship between the company and the owners?

Keep in mind that the law and any agreements you have with respect to an owner’s employment relationship may create rights and obligations that are different than those attributable to the ownership relationship.  Do any of the shareholders or members have a reasonable expectation of continued employment at the business? Minnesota courts sometimes find that shareholders and members have an expectation of continued employment that gives them additional rights.  Are there any disputes or obligations related to compensation, non-competition, non-solicitation, or employment claims such as discrimination?  These can be significant elements of the global picture.

6. Would it be worth it to try pre-litigation mediation?

If you and your fellow owners can reach a business solution to your conflict before you step into the courtroom, everyone is likely to be more satisfied with the outcome.

7. Would an early appraisal of the business help the parties resolve their dispute and break up amicably?

Does the agreement set out a process for this? Keep in mind that valuing a business can be expensive, so consider the cost involved and who will pay for it.

8. If litigation becomes unavoidable, are the potential claims direct or derivative?

A claim is derivative if the damages apply to all of the shareholders, members, or partners. A claim is direct if the damages apply only to the shareholder, member, or partner making the claim. If the claims are derivative, there is a process that must be followed, which could include the appointment of a Special Litigation Committee to determine whether it’s in the company’s best interests to pursue the claims.

9. Is anyone involved in the dispute obligated to indemnify anyone else involved in the dispute?

This obligation may require one of the parties to pay for the other parties’ attorneys’ fees and other litigation costs, and may be controlled by agreement or Minnesota statute. Knowing indemnification obligations can help you decide which claims to include in a potential lawsuit.

As with any break-up, a business break-up is a stressful and emotional time. Slowing down and giving some thought to each of these issues will help you make better business decisions, and may even help you resolve your fight in a way that satisfies everyone involved. The Best & Flanagan team is available to help you think through these issues so you can take steps that help you achieve your goals.

Libby Davydov, Dan Grimsrud, Jen Olson, and Joel Schroeder represent closely-held businesses and their owners.
 

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