William B. McCallum v. Rosen's Diversified
1998 WL 484675, 153 F.3d 701 (1998)
Rule of Law:
Under Minnesota law, a court may order a buy-out of a minority shareholder's interest in a closely held corporation if the controlling shareholders engage in "unfairly prejudicial" conduct, particularly when such conduct defeats the minority shareholder's reasonable expectations of an active management role and continued employment, especially if shares were granted as an inducement to remain.
Facts:
- Elmer and Ludwig Rosen founded Rosen's Diversified, Inc. (RDI) as a livestock trading business in the late 1940s.
- In January 1984, RDI hired William B. McCallum, who had previously provided legal services, as Executive Vice President and Chief Executive Officer (CEO).
- In 1986, RDI named McCallum a director of the company.
- RDI rewarded McCallum, along with three other key employees, with a bonus of $186,815 in cash and 12,000 shares of common stock, acknowledging his responsibility for the company's financial success and to maintain his loyalty.
- By 1991, the relationship between McCallum and RDI's controlling shareholders deteriorated.
- McCallum's employment as CEO was terminated, and he was subsequently removed from the board of directors.
- McCallum proposed that RDI redeem his shares for $5 million, but RDI countered with an offer of $600,000, which was a small premium over the value determined by the annual valuation for RDI's Employee Stock Ownership Program (ESOP).
Procedural Posture:
- William B. McCallum filed a lawsuit against Rosen's Diversified, Inc. and other defendants in the United States District Court for the District of Minnesota.
- The district court dismissed many of McCallum's allegations, deeming them improperly pleaded derivative claims.
- The district court subsequently granted summary judgment against McCallum's request for a court-ordered buy-out of his stock.
- McCallum appealed the district court's two adverse grants of summary judgment to the United States Court of Appeals for the Eighth Circuit, as the plaintiff-appellant.
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Issue:
Does the termination of a minority shareholder's employment as CEO in a closely held Minnesota corporation, coupled with an offer to redeem his shares at an allegedly low price, constitute "unfairly prejudicial" conduct entitling the shareholder to a court-ordered buy-out under Minnesota Statute § 302A.751?
Opinions:
Majority - Beam, Circuit Judge
Yes, the termination of a minority shareholder's employment as CEO in a closely held Minnesota corporation, especially when the stock was issued partially as an inducement to remain, constitutes "unfairly prejudicial" conduct entitling the shareholder to a court-ordered buy-out. The court cited Minnesota Statute § 302A.751, which grants courts broad equitable authority to protect minority shareholders in closely held corporations from "unfairly prejudicial" conduct. It emphasized that this phrase should be interpreted liberally, guided by the "reasonable expectations of the shareholders" with respect to each other and the corporation, particularly at the inception of the relationship. McCallum, as CEO, had a reasonable expectation of an active management role and continued employment. His termination, especially given the context of receiving shares as an inducement to remain, defeated these fundamental expectations as a minority shareholder. The court concluded that these uncontested facts were sufficient to trigger the requirements of the Minnesota Act, warranting a remand to determine the fair value of McCallum's shares.
Analysis:
This decision reinforces the protective stance Minnesota law takes towards minority shareholders in closely held corporations, particularly when they are also key employees or officers. By focusing on the 'reasonable expectations' at the outset of the shareholder relationship, the court establishes a significant standard for identifying 'unfairly prejudicial' conduct beyond mere technical breaches of corporate governance. This ruling has broad implications, signaling to controlling shareholders that the removal of a minority owner from a key management position, especially when tied to stock ownership, can trigger a mandatory buy-out. It underscores the importance of clear shareholder agreements in closely held companies to define employment terms, buy-out provisions, and expectations to prevent such disputes.
