Shareholder Termination | Shareholder Rights | Reasonable Expectations
Can a company fire a shareholder?
Nothing starts a shareholder dispute as often as terminating a shareholder from their own company. The terminated shareholder is often disgruntled and confused. “Can they do this?” and “What are my rights?” are questions that often arise. For the company, often there is confusion about what duties remain to the terminated shareholder.
On the question of whether a shareholder can be terminated, the answer is: it depends on the circumstances. Obviously, the controlling shareholder of a company probably cannot be easily terminated because that shareholder could simply use their majority of shares to decide the issue. For a non-controlling shareholder though, it really depends on whether in the circumstances, the shareholder had a reasonable expectation of continued employment.
What rights exist for shareholder termination in MN and other states?
Minnesota, North Dakota, and other states allow shareholders to pursue “equitable relief” against a company if controlling shareholders act contrary to shareholder “reasonable expectations.” What this means is that if shareholders (or the terminated shareholder specifically) have a reasonable expectation of continued employment, they may bring a lawsuit against the controlling shareholders and the company upon being terminated, and a Court would have discretion to order appropriate relief. While the Court could reinstate the shareholder or enjoin the termination, often Courts simply award money damages to the disgruntled shareholder, or order the company to buy-out the disgruntled shareholder’s stock.
What constitutes ‘reasonable expectation’?
Whether there is a reasonable expectation of continued employment, however, will usually be a question for trial. To decide this issue, Courts will look at such things as: (i) the circumstances under which the shareholder acquired their shares; (ii) any relevant contracts such as employment or shareholder agreements; and (iii) course of dealing among the parties. So for example, if a shareholder founded the company, worked full time for the company from day one and there were no agreements written or verbal by which shareholders acknowledged they might be terminated, there may be a reasonable expectation of continued employment. If, on the other hand, the shareholder acquired their shares while working as an “at-will” employee as a performance-based incentive and signed a shareholder agreement acknowledging that they could be terminated, probably a Court would not find a reasonable expectation of continued employment.
Most cases are more subjective than these examples. If you are facing a decision to terminate a shareholder or a shareholder who has been terminated, it is always a good idea to take a careful look at your rights and duties moving forward. This is a good situation to take advantage of the free initial consult we provide at Hance Law Firm.
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