Court Opinion

ID: 9690862
Source: CourtListenerOpinion
Date Created: 2023-08-24 19:49:08.019763+00
Date Added: 2024-06-11T09:08:10.164117
License: Public Domain

KLAPHAKE, Judge
(concurring in part, dissenting in part).
Although I concur with the majority that appellant’s claim for fair-market valuation of his shares is barred by res judicata, I respectfully dissent from the majority’s conclusion that appellant remains a shareholder with the respondent corporation and is entitled to shareholder distributions awarded since termination of his employment.
The majority correctly identifies two competing lines of authority on this issue. Under the first line of authority, the majority notes:
[A]n employee who is subject to a mandatory buyout is divested of shareholder status immediately upon the termination of employment, even if the corporation has not yet redeemed the employee’s stock, the value of the stock has not yet been determined, and the employee has not yet surrendered his stock certificates to the corporation [citing Jenkins v. Haworth, Inc., 572 F.Supp. 591, 601-02 (W.D.Mich.1983); Gallagher v. Lambert, 74 N.Y.2d 562, 549 N.Y.S.2d 945, 947, 549 N.E.2d 136 (1989)].
Under the second line of authority, the employee’s shareholder status ends after termination only if the buyout agreement expressly provides for transfer of title on termination of employment. See, e.g., Stephenson v. Drever, 16 Cal.4th 1167, 69 Cal.Rptr.2d 764, 947 P.2d 1301, 1305 (1997). Although this is not a settled area of law in Minnesota, the majority chooses to adopt this second line of authority in deciding that appellant remains a shareholder entitled to distribution rights.
The reason for following the first line of authority is compelling, particularly when a closely-held corporation is involved: such buyout agreements permit a corporation to be controlled, by its employees and preclude interference by a disgruntled former employee. In contrast, the Stephenson court argued that a corporation’s obligation to repurchase the shares implies that the employee continues as a shareholder until the sale is concluded, and that without an express provision terminating the employee’s right as a shareholder, there is no indication in the buyout agreement that such a consequence would flow from termination of employment. Stephenson, 69 Cal.Rptr.2d 764, 947 P.2d. at 1305-06.
Here, a close reading of the employment and shareholder agreements negates this type of reasoning. Appellant’s purchase and continued ownership of the shares is conditioned on employment. Upon termination of employment, whether voluntary or involuntary, the corporation was required to purchase and appellant was required to sell the shares. The mechanism for determining the purchase price and the date for closing is clearly delineated. The agreement distinguishes between the date of purchase and the date of closing: the date of termination is referred to as an “Event of Purchase;” the date of closing, presumably the point at which payment is *789to be tendered, is 90 days after the “Event of Purchase.” This suggests that “purchase,” or the transfer of shares, occurred on the date of termination.
Although no Minnesota cases deal directly with the rights of a terminated shareholder/employee in the interim between termination and final payment, this court has previously determined that equitable ownership in a stock can occur, although legal title has not yet passed. In Miller Waste Mills, Inc. v. Mackay, 520 N.W.2d 490, 494 (Minn.App.1994), review denied (Minn. Oct. 14, 1994), a family corporation invoked a provision that required corporate consent for transfer of shares and a first right of repurchase. The heirs of two deceased shareholders contended that as representatives of the estates they had the right to vote what would be a majority of shares because legal title of the stock had not been transferred. Id. at 495. This court concluded that the corporation, by virtue of the stock redemption provision, became the equitable owner of the deceased shareholders’ stock. Id. Our decision relied on the existence of a contractual obligation created by the stock redemption among the shareholders. Id.
We have a similar situation here: a contractual agreement between shareholders that recognizes a right to own shares based on employment, a right that ceases to exist on termination of that employment. The corporation here became the equitable owner of the shares and appellant retained the right to payment for the shares as outlined in the employment and shareholder agreements, but not a continuing right to shareholder distributions.
Respondents have undoubtedly breached the agreement governing termination of appellant’s status as employee and shareholder, by failing to tender payment in a timely fashion in accordance with the agreement. But there is a remedy for this failure: interest will continue to accrue under the agreement until respondents properly tender payment.