A common adage tells us that in the absence of information, people tell themselves a story. In the corporate version, add in frayed business relations, and the plotline quickly thickens with suspicion and distrust. Minority shareholders, because they lack control over a company’s operations and financial information, will at times find themselves in this very position—suspicious and distrustful—leading them to ask a very logical question: When and how can I access information about the business?
Those representing minority shareholders, officers, or majority shareholders are familiar with the tensions between an aggrieved minority shareholder’s expectation that they should get to see everything, and officers and majority shareholders who may be inclined to be overly protective of the confidential and proprietary interests of the company. The actual entitlement to information generally falls somewhere in the middle of these two positions: While majority shareholders and corporate officers hold considerable power and control, minority shareholders have rights, including the right to access financial information under certain circumstances.
Under Minnesota law, minority shareholders’ rights can be found in a combination of statutory provisions and common law principles. The primary legal sources governing these rights include primarily:
- Minnesota Business Corporation Act (MBCA) – The MBCA provides various rights to shareholders, including access to corporate records and financial statements.
- Common Law Fiduciary Duties – Corporate directors and officers owe fiduciary duties to shareholders, including duties of care, loyalty, and good faith.
- Judicial Remedies for Minority Shareholders – Minnesota courts recognize equitable remedies to protect minority shareholders from oppressive conduct by majority shareholders.
Under the MBCA (Minn. Stat. §302A), shareholders have a statutory right to inspect and copy certain corporate records, including financial statements, minutes of board meetings, and shareholder lists. Specifically, the statute provides that:
- A shareholder who has been a holder of record for at least six months or holds at least 5% of the corporation’s shares may demand access to financial records.
- The corporation must provide an annual financial statement upon request.
- The shareholder must make the request in good faith and for a proper purpose.
While the MBCA provides a general right to financial information, it does not explicitly grant minority shareholders an automatic right to an accounting. That said, when evidence suggests the existence of mismanagement or misconduct, a minority shareholder may seek an accounting through legal action.
Under Minn. Stat. §302A.751, courts may order an accounting as part of an equitable judicial remedy if:
- The directors or those in control have acted in an illegal, fraudulent, or unfairly prejudicial manner toward shareholders.
- Corporate assets are being mismanaged or diverted for personal gain.
When there is evidence that corporate funds are being misused, minority shareholders may request an accounting to uncover fraudulent activity. Mismanagement may include unauthorized loans, excessive executive compensation, or siphoning corporate assets for personal use. Where directors and/or majority shareholders engage in self-dealing or conflicts of interest, minority shareholders can seek an accounting to assess the extent of the breach and seek legal remedies.
Another circumstance that may warrant an accounting is where there is evidence of shareholder oppression. Oppression occurs when majority shareholders engage in conduct that unfairly prejudices minority shareholders. This can take the form of denying access to financial records, withholding dividends, or diluting minority ownership through stock issuance. In addition, when a minority shareholder seeks to sell their shares or is subject to a buyout, an accounting may be necessary to determine the fair value of the corporation. In such instances, Minnesota courts may order an accounting in the context of an effort to calculate the fair value of the shareholder’s interest.
Apart from the MBCA, Minnesota’s common law separately recognizes the equitable right to an accounting in cases where a fiduciary duty exists and there are allegations that would justify an accounting as a remedy. Directors and majority shareholders owe fiduciary duties to minority shareholders, including the duty of loyalty and the duty to act in good faith. In some circumstances, denying a minority shareholder access to certain information may represent a breach—a breach for which the remedy is then access to the relevant information. If minority shareholders can demonstrate that the corporate officers or majority shareholders have failed to act in good faith or treat them fairly, the court may compel an accounting to ensure transparency and protect minority shareholders’ interests.
At the end of the day, under certain circumstances, minority shareholders in Minnesota have legal avenues to demand financial transparency and accountability from corporate officers and majority shareholders, including an accounting. Corporate officers, majority, and minority shareholders all need to appreciate the balancing act involved in determining what information should be made available and under what circumstances. For officers and majority shareholders, an overly conservative approach often increases suspicion and escalates tensions. For minority shareholders, unrealistic expectations can lead to both disappointment and excessive legal expenses. Courts generally recognize the importance of financial accountability and may order an accounting to protect minority shareholders’ interests, but unfettered access should not be expected. Corporate officers, majority shareholders, and minority shareholders should all consider seeking professional guidance in navigating the balancing act that disclosing sensitive corporate information requires.
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