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Written Agreements Among Shareholders are Meaningful After All

Posted by Attorney Stephen Hance | Apr 15, 2015 | 0 Comments

Many of us practicing in the arena of shareholder disputes in Minnesota have been frustrated (or pleased, depending on which side you are on) with the fact that Minnesota courts often will ignore shareholder agreements in disputes among shareholders.

One recent Court of Appeals decision, however, reinforces the importance of agreements among shareholders where they are directly on point. Hansen v. N'compass Solutions, Inc. et al., File No. 27-CV-12-20218 (MN Ct. App. April 6, 2015).

For a brief background, Mr. Hansen was a founding shareholder in a technology services company and served as its CEO from 2009 until his fellow shareholders terminated him in 2012 for performance-related issues. Importantly, the shareholders had executed a shareholder agreement in 2009 that, among other things: (i) expressly made no commitment to continued employment among shareholders; (ii) had a one-year noncompete after a share transfer; and (iii) included a mechanism for company buy-out in the event of termination.

Many allegations were made by both sides in the trial but the thing that stood out was the fact that the written agreements among the parties pretty much dictated the outcomes.

For example, although founding shareholders in Minnesota closely-held companies typically have an expectation of continued employment, the fact that the shareholder agreement Mr. Hansen and others signed did not promise continued employment was a significant fact in the court's decision that Mr. Hansen did not have such an expectation.

In addition, since the purchase price and payment terms for Mr. Hansen's stock had been established through the mechanism shown in the shareholder agreement, the issue of whether payment terms for the buy-out had been breached was governed by the promissory note prescribed by the shareholder agreement.

The court affirmed that the noncompete set forth in the shareholders agreement was enforceable and had been breached by Mr. Hansen, but it also found that the company had failed to adequately prove damages.

Finally, Mr. Hansen alleged breach of fiduciary duty by his fellow shareholders but the court decided against Mr. Hansen since the other shareholders had “acted pursuant to the amended articles of incorporation . . . and pursuant to the shareholder agreement.”

For those of us who also draft member and shareholder agreements in Minnesota, this decision reinforces the wisdom of written agreements among co-owners.

About the Author

Attorney Stephen Hance

Steve represents and advises clients that are dealing with business and real estate disputes. Steve is an investor and business owner, and his approach is unique from other attorneys.

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