Recent District Court Ruling – A Minority Shareholder’s Rights Trump the Squeeze-Out Merger that the Majority Shareholders Had Sought
By: JAMES E. DORSEY & S. JAMAL FALEEL
Two majority shareholders sought to resolve their differences with the third shareholder by conducting a squeeze-out merger. Had they done so, the only remedy available to the minority shareholder would have been a dissenter’s rights proceeding for fair value of his shares. Therefore the minority shareholder brought suit and asked the court for a temporary injunction.
In Kroll v. Kroll, Court File No. 27-CV-09-3538 (Henn. Co. Dist. Ct. Order filed July 24, 2009), District Court Judge Mel Dickstein addressed the five Dahlberg factors to be considered in deciding whether to grant a motion for a temporary injunction. He analyzed two of the factors at some length.
On the comparative harm factor, Judge Dickstein noted that, if the injunction did not issue, the minority shareholder would “lose his role as a director, manager, and employee … and his ability to continue to enjoy the benefits of a successful business whose development he participated in for over 30 years.” By contrast, if he granted the injunction, the defendant majority shareholders would simply have to put up with an uncomfortable working environment for a matter of weeks or months until the litigation is resolved. Therefore he found that the balancing harms factor favored granting the injunction sought by the minority shareholder.
On the factor of which party is likely to prevail on the merits, Judge Dickstein observed that, if a plaintiff makes even a doubtful showing as to the likelihood of prevailing, a district court may issue a temporary injunction to preserve the status quo.
Then the court got into the substantive issue before it -- whether the majority shareholders in a closely held corporation may overcome a minority’s request for equitable relief under Minn. Stat. § 302A.751 by invoking the provisions of Minn. Stat. § 302A.471 to effect a squeeze-out merger. Even though the merger statute provides that a corporation may conduct a squeeze-out merger for any reason or no reason, Judge Dickstein ruled that such a broad provision must yield to the specific provisions of Section 302A.751, which protect minority shareholders from oppression.
The judge found that, in enacting Section 302A.751, the legislature intended to protect minority shareholders. To permit a majority to proceed with a squeeze-out merger would reduce a minority’s only relief to a fair value proceeding. Such a result would render all the other remedies available under section 302A.751 a nullity.
In making his decision, Judge Dickstein distinguished Sifferle v. Micom Corp., 384 N.W. 2d 503 (Minn. App. Ct. 1986), in which the court had held it is not a breach of fiduciary duty for a majority to use a squeeze-out merger simply to eliminate minority shareholders in a public corporation. Judge Dickstein found that the difference between public and closely-held corporations is important, and that the statutory protection given to shareholders in closely-held corporations (including the right of shareholders in such corporations to a job, a salary, and a significant place in management) distinguished the ruling in Sifferle.
The minority shareholder in Kroll is also seeking a court-supervised auction whereby each shareholder will have the opportunity to acquire the other shares. The court, however, did not rule on that issue, instead noting that any equitable relief to which both sides assert they are entitled will be determined in the future.
Citing Minn. R. Civ. P. 65.03, which requires the posting of a bond before a temporary injunction shall be granted, and Rule 135 of the Minnesota Rules of General Practice, which requires at least $2,000 for the bond, Judge Dickstein ordered the minority shareholder to post a $2,000 bond to cover any incidental costs that may occur as a result of the issuance of the temporary injunction.