Minnesota has a unique statute that allows minority shareholders in a closely held corporation to initiate an action for a buy-out of their interests. Minn. Stat. § 302A.751, subdivision 2. Under the Minnesota Business Corporation Act, a closely held corporation is a corporation with 35 or fewer shareholders. Minn. Stat. § 302A.001, subdivision 6a. To bring a motion, first an action must be brought under Minnesota Statute 302A.751, subdivision 1. This provision allows courts to grant equitable relief in certain situations, including in an action by a shareholder when the directors or majority shareholders of the corporation have acted fraudulently or illegally towards a shareholder or unfairly prejudicial toward a shareholder. Once such an action has been instituted, then a shareholder or beneficial owner of the corporation may bring a motion for the court to order a sale of their shares if it is fair and equitable to all parties under the circumstances of the case. Minn. Stat. § 302A.751, subdivision 2. While a shareholder or beneficial owner may bring a motion under subdivision 2 of the statute, the text of subdivision 1 only states that shareholders have the right to initiate the action that serves as a basis for the motion. 

What You Need to Know:

• Minnesota Supreme Court unanimously holds Minnesota remains a notice-pleading state.
• Minnesota Supreme Court split decision leaves the question unsettled of whether minority beneficial owners have standing under Minnesota Statute 302A.751, subdiv. 1 to bring an action for unduly prejudicial conduct by majority shareholders.
• The issue will likely be back to the appellate courts in the near future to clarify the law. In the meantime, minority beneficial owners may continue to bring oppression actions under the statute against majority shareholders but should be wary of majority shareholders moving to dismiss for lack of standing. Majority shareholders should be cognizant of the strategy to dismiss actions brought by beneficial owners under the statute.

The Minnesota Supreme Court recently analyzed this statute in Demskie v. U.S. Bank National Association. In that case, the Demskies held minority beneficial interests in a closely held corporation with the record shares held in trust with U.S. Bank. The Demskies brought a claim against U.S. Bank under the Minnesota Business Corporation Act that U.S. Bank, as majority shareholder of the corporation, breached its fiduciary duties and acted in an unfairly prejudicial manner to the Demskies. The Demskies asserted that they were entitled to, amongst other things, a fair value buy-out of their interest pursuant to Minnesota Statute 302A.751, subdivision 2. U.S. Bank moved for judgment on the pleadings on the grounds that the Demskies failed to plead sufficient facts that U.S. Bank was a shareholder and that the Demskies were not “shareholders” as defined in the statute and thus did not have standing to bring the claim in the first place. The district court granted U.S. Bank’s motion for judgment on the pleadings and determined that the Demskies failed to plead sufficient facts to show that U.S. Bank was a shareholder and that because the Demskies were beneficial owners rather than shareholders they were not entitled to bring an action pursuant to 302A.751, subdivision 1 and thus could not move for a buy-out under subdivision 2.

The Minnesota Court of Appeals affirmed the district court’s rulings, and the Minnesota Supreme Court granted review. With one justice taking no part in the decision, the Minnesota Supreme Court unanimously reversed the district court’s ruling that the Demskies failed to plead sufficient facts that U.S. bank was a shareholder. This part of the opinion strongly holds that Minnesota remains a notice-pleading state. Obtaining dismissal on the pleadings in Minnesota courts will remain a rare occurrence. 

The Court was evenly divided 4-4 on the buy-out issue, leaving the court of appeals decision in place on the buy-out issue. The court of appeals decision was nonprecedential, however, meaning that the holding in that instance that the Demskies did not have standing to bring an action is largely limited to the specific case, and given the open issue, beneficial owners are not likely to be deterred from initiating a suit. This beneficial owner issue is likely to arise again in the near future through a precedential opinion by one of the Minnesota appellate courts. 

Demskie v. U.S. Bank National Association leaves important questions unsettled about who has a right to bring an action alleging unfairly prejudicial conduct by directors or majority shareholders. This impacts beneficial owners that are considering such litigation with a buy-out remedy because the case leaves uncertain if and how a beneficial owner may initiate an action. It also has implications for Minnesota corporations because it impacts the rights of their minority shareholders. The issue will likely be back to the Minnesota Supreme Court in the future, but until then clients that are Minnesota corporations, are considering forming a Minnesota corporation, or have an interest in a Minnesota corporation should consult with an attorney about the potential ramifications of this case and any related future cases along with the risk analysis of buy-out litigation.