August 31, 2018
Author: Brett M. Larson
Organization: Messerli & Kramer
1. Corporate Recordkeeping Requirements
a. Corporations (Minn. Stat. 302A)
i. Record Keeping Requirement
Under Minnesota law, all corporations must keep the following documents on hand at their offices:
(1) a share register not more than one year old, containing the names and addresses of the shareholders and the number, classes of shares and dates of issuance of all shares held by each shareholder. Minn. Stat. §302A.461, Subd. 1.
(2) records of all shareholder and board meetings for the last three years. Minn. Stat. §302A.461, Subd.2 (a)-(b).
(3) its articles, bylaws and all amendments currently in effect and any agreements incorporated into the articles of incorporation. Minn. Stat. §302A.461, Subd.2 (c)-(d); (j).
(4) the financial statement for the most recent interim period prepared for distribution to the shareholders or to a governmental agency and a balance sheet and a statement of income for the current fiscal year. Minn. Stat. §302A.461, Subd.2 (e); 302A.463, Subdiv. 1.
(5) Any reports made to shareholders generally within the last three years. Minn. Stat. §302A.461, Subd.2 (f).
(6) a list of the names and addresses of its directors and principal officers. Minn. Stat. §302A.461, Subd.2 (g).
(7) voting trust agreements and shareholder control agreements Minn. Stat. §302A.461, Subd.2 (h)-(i).
ii. Corporate Records Request
A shareholder of a privately held corporation may demand the above referenced documents, which the corporation must make the documents referenced above available within ten days of the request. The corporation must respond to this request and the shareholder must not state any purpose for this request. Minn. Stat. §302A.461, Subd.4. A shareholder may request any other document and the corporation must produce that document if the request is reasonably related to a proper purpose stated in the request. Id. A proper purpose is one reasonably related to the person's interest as a shareholder. Id.
A corporation may petition for a protective order permitting the corporation to withhold portions of the records of proceedings of the board for a reasonable period of time, not to exceed 12 months, in order to prevent premature disclosure of confidential information which would be likely to cause competitive injury to the corporation. The protective order can be reviewed and extended for an aggregate of time not to exceed 36 months. Minn. Stat. §302A.461, Subd.4(a).
iii. Consequences for Failing to Comply
In the event a corporation fails to produce the above required documents within the prescribed time period, the corporation and its directors or officers, depending upon who is tasked with producing the records by the corporation’s bylaws or shareholder agreement within the ten days required by statute, the corporation and those individuals may be required to pay the shareholder’s attorney fees and any other consequential damages caused by the failure or refusal to produce the requested records. Minn. Stat. §302A.461.
A failure to produce material information to a shareholder may also trigger a claim to fair value stock buyout claim under Minnesota Statute §302A.751. U.S. Bank N.A. v. Cold Spring Granite Co., 788 N.W. 2d 160 (Minn. App. Ct. 2010). A shareholder can petition the court for a forced fair value buyout if the corporation or its controlling shareholders engage in conduct that is unfairly prejudicial to that shareholder. Conduct is “unfairly prejudicial” if it frustrates the reasonable expectations of a shareholder in his capacity as a shareholder.
Generally, any conduct that would constitute a breach of fiduciary duty will also serve as the basis for a claim under Minn. Stat. §302A.751. This is especially applicable to negotiations among shareholders. Swanson v. Upper Midwest Industries, Inc., 2002 WL 857744, *11. (Minn. App. 2002). Minority shareholders have a reasonable expectation that their fellow shareholders will not withhold corporate records and other information necessary for a shareholder to evaluate his or her investment. Berreman v. West Pub. Co., 615 N.W.2d 362, 371 (Minn. App. 2000); McCallum v. Rosen’s Diversified, Inc., 153 F.3d 701, 703 (8th Cir. 1998). This does not include all corporate records. Only the withholding of “material” information will trigger a claim under §302A.751. U.S. Bank N.A. v. Cold Spring Granite Co., 788 N.W. 2d 160 (Minn. App. Ct. 2010).
If reasonable expectations are established and it is shown the expectations were frustrated, the next question is damages. Under Pedro v. Pedro and its progeny, the damages under §302A.751 and a breach of fiduciary duty claim include two separate but related components of share value; return on equity and return on labor. Pedro v. Pedro (Pedro II), 489 N.W.2d 798, 802-03 (Minn. App. 1992); Pedro v. Pedro (Pedro I), 463 N.W.2d 285, 288-89 (Minn. App. 1990).
The former is generally the value of an equity stake after subtracting the value of continued employment. The latter is often defined as the value of “lifetime employment.” As indicated above, damages for an expectation of lifetime employment are available regardless of an “at-will employment agreement” and regardless of gross misconduct of a shareholder. Pooley v. Mankato Iron & Metal, 513 N.W.2d 834,836 (Minn. App. 1994). The defendant corporation can also be liable for attorney fees, costs, and interest under §302A.751.
The equity stake is defined as “fair value.” Although it can be confused with “fair market value,” it is not the same and the distinction can be the single most important variable in a case from an economic standpoint. Fair market value is defined under generally accepted accounting principles as the “price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.” Internal Revenue Service Treasury Regulations §20.2031-1(b).
It includes a discount for “lack of marketability.” That is, a discount is applied to stock in a close corporation to reflect the fact that these shares are not freely alienable like publicly traded shares. In 1994 the American Law Institute (ALI) set standards for determining fair value, which are used under Chapter 302A. The ALI recommended that fair value should equal the shareholder’s proportionate ownership interest in the corporation, not the specific shares, without a discount for lack of marketability, except in extraordinary circumstances. See 2 A.L.I., Principles of Corporate Governance: Analysis and Recommendations §7.22(a) (1994). The ALI further recommended that the “extraordinary circumstances” exception exists only where to not apply a marketability discount would result in “an unfair wealth transfer from the remaining shareholders to the dissenting shareholder.” Id. The Minnesota Supreme Court adopted the ALI standard for court-ordered buy-outs pursuant to §302A.751 and held “absent extraordinary circumstances, fair value in a courtordered buy-out pursuant to §302A.751 means a pro rata share of the value of the corporation as a going concern, without discount for lack of marketability.” Advanced Communication Design v. Follett, 615 N.W. 2d 285 (Minn. 2000).
In applying the extraordinary circumstances exception the courts have further held that “maximum flexibility can be achieved by taking into account factors relevant to fair value, including: (1) whether the buying or selling shareholder has acted in a manner that is unfairly oppressive to the other or has reduced the value of the corporation; (2) whether the oppressed shareholder has additional remedies such as those available pursuant to Minn. Stat. §302A.467; or (3) whether any condition of the buy-out, including price, would be unfair to the remaining shareholders because it would be unduly burdensome on the corporation. The overarching policy however, is to ensure fair value, and in exceptional circumstances, to ensure the buy-out is ‘fair and equitable to all parties.’” Id. at 292-293 (citing Minn. Stat. §302A.751, subd. 2).
In Follett, the court applied this analysis by remanding with instructions that the trial court determine fair value by applying a marketability discount of 35 percent to 55 percent to the appraised value. The court reasoned that rejecting the marketability discount would result in a one-third ownership interest valued at almost seven times the average operating cash flow for the company’s preceding five years and more than eight times its average net income over the same period “and in all probability strip” ACD of necessary cash flow and earnings for future growth.” Advanced Communication Design, 615 N.W.22d.at 293.
The court has wide discretion in determining the appropriate level and type of relief under §302A.751. This relief can include the value of lifetime employment and the fair value of the separate, but overlapping equity interests. Fair value is a concept that provides maximum protection for shareholders in a close corporation and will only be diminished by a marketability discount in extraordinary circumstances where such a buyout, even one paid over time, would obliterate the business out of fairness to the other shareholders of that business who did no wrong.
b. Limited Liability Companies
Minn. Stat. 322B.373
1. Record Keeping Requirement
Under Minnesota law, all limited liability companies must keep the following documents on hand at their offices:
1. a current list of the full name and last address of each member, governor, and chief manager;
2. a current list of the full name and address of each assignee of financial rights other than a secured party, and a description of the rights assigned;
3. a copy of the articles of organization and all amendments to the articles;
4. copies of any currently effective written bylaws;
5. copies of the limited liability company's federal, state, and local income tax returns and reports, if any, for the three most recent years;
6. the financial statement for the most recent interim period prepared for distribution to the shareholders or to a governmental agency and a balance sheet and a statement of income for the current fiscal year;
7. records of all meetings of members and board of governors for the last three years;
8. reports made to members generally within the last three years;
9. member control agreements;
10. a statement of all contributions accepted by the company;
11. an explanation of any restatement of value made under section 322B.41;
12. any written consents obtained from members;
13. a copy of any agreements incorporated into the articles of organization. Minn. Stat. § 322B.373, subd. 1.
2. Corporate Records Request
A member of a limited liability company has an absolute right, upon written demand, to examine and copy, in person or by a legal representative, at any reasonable time, and the limited liability company shall make available within ten days after receipt by a manager of the limited liability company of the written demand, all documents referred to in subdivision 1. Minn. Stat. § 322B.373, subd. 2.
A member of a limited liability company has a right, upon written demand, to examine and copy, in person or by a legal representative, other limited liability company records at any reasonable time only if the member demonstrates a proper purpose for the examination. A \"proper purpose\" is one reasonably related to the person's interest as a member of the limited liability company. Minn. Stat. § 322B.373, subd. 2 (c).
A LLC may petition for a protective order permitting the LLC to withhold portions of the records of proceedings of the board for a reasonable period of time, not to exceed 12 months, in order to prevent premature disclosure of confidential information which would be likely to cause competitive injury to the corporation. The protective order can be reviewed and extended for an aggregate of time not to exceed 36 months. Minn. Stat. § 322B.373, subd. 3.
3. Consequences for Failing to Comply
In the event a LLC fails to produce the above required documents within the prescribed time period, the LLC and its governors, members, or officers, depending upon who is tasked with producing the records within the ten days required by statute, the LLC and those individuals may be required to pay the requesting member’s attorney fees and any other consequential damages caused by the failure or refusal to produce the requested records. Minn. Stat. §322B.373.
Moreover, if a member of a LLC proves a violation of chapter 322B, a district court \"may, in an action brought by a member of the LLC, grant any equitable relief it considers just and reasonable in the circumstances and award expenses, including attorneys' fees and disbursements.\" Minn. Stat. § 322B.38. Further, if a party to an action concerning a LLC \"has acted arbitrarily, vexatiously, or otherwise not in good faith,\" a district court \"may in its discretion award reasonable expenses, including attorneys' fees and disbursements, to any of the other parties.\" Minn.Stat. § 322B.833, subd. 7.
In addition to the recovery of attorney fees, a member may seek a fair value buyout claim based on the failure to produce material information to a member. Minn. Stat. §333B.833; Williams v. Heins, Mills & Olson, PLC, et al., No. A09-1757.(Minn. Ct. App. 2010)(citing case law interpreting the MBCA in suggesting that misrepresentation by omission constituted unfairly prejudicial conduct triggering a fair value buyout in the context of a LLC). The LLCA allows a member of an LLC to seek equitable relief from the courts—including a buyout—upon demonstration of fraudulent, illegal, or unfairly prejudicial conduct by the controllers of the LLC. Minn. Stat. § 322B.833.
The language of Section 322B.83 is identical to the language of Minn. Stat. §302A.751 except for the differences in terminology (ex: member versus shareholder). To the extent a chapter 322B provision resembles a chapter 302A provision in substance, the case law and Reporter’s Notes of chapter 302A should be used to interpret and apply the chapter 322B provision. Minn. Stat. §322B.01 Reporter’s Notes. “Courts therefore look to the law governing claims on behalf of corporations for guidance in LLC litigation.” 20 Minn. Prac. Business Law Deskbook §3:1 Limited Liability Company Act (2011 ed.). Accordingly, a LLC organized under Minnesota law and governed by Chapter 322B will likely be held to the same standards that a corporation is held to under Chapter 302A and a withholding of material information from a member will likely give rise to a forced fair value buyout of that member’s interest.
ii. Minn. Stat. 322C
1. Record Keeping Requirement
On April 11, 2014 Minnesota adopted the Minnesota Revised Uniform Limited Liability Company Act, Minn. Stat. 322C. Any LLC organized under Minnesota law can currently LLCs can “opt in” to be governed by the Revised Act instead of Chapter 322B. The Revised Act will apply to all LLCs formed on and after August 1, 2015. Beginning on January 1, 2018, the Revised Act will apply to all limited liability companies and the existing Minnesota Limited Liability Company Act will be repealed.
Among other significant changes, the Revised Act changed the default standards regarding the company’s and controlling persons’ obligations to produce information to members and applies a slightly different analysis depending upon the applicable governance structure.
Under the new default rule, in a member-managed LLC, on reasonable notice, a member may inspect and copy during regular business hours, at a reasonable location specified by the company, any record maintained by the company regarding the company’s activities, financial condition, and other circumstances, to the extent the information is \"material to the member’s rights and duties under the operating agreement or this chapter\" and to the extent that the request is not \"unreasonable or otherwise improper under the circumstances\". Minn. Stat. § 322C.0410, Sub. 1. The Revised Act deleted the requirement of a showing of a “proper purpose” and replaced this limiting language with the requirement that the information be material and not unreasonable or improper. It remains to be seen whether the court will rely upon findings of proper purpose to navigate this new standard.
Absent any demand at all the company and all members (to the extent the members have knowledge of the following information) have a duty to furnish to each member \"any information concerning the company’s activities, financial condition, and other circumstances which the company knows and is material to the proper exercise of the member’s rights and duties under the operating agreement or this chapter, except to the extent the company can establish that it reasonably believes the member already knows the information.\" Minn. Stat. § 322C.0410, Sub. 1.
(b) Manager-Managed and Board-Managed
During regular business hours and at a reasonable location specified by the company, a member may obtain from the company and inspect and copy full information regarding the activities, financial condition, and other circumstances of the company as is just and reasonable if:
1. the member seeks the information for a purpose material to the member’s interest as a member;
2. the member makes a demand in a record received by the company, describing with reasonable particularity the information sought and the purpose for seeking the information; and
3. the information sought is directly connected to the member’s purpose. Minn. Stat. § 322C.0410, Sub. 2.
2. Corporate Records Request
Within 10 days after receiving a demand pursuant the company must inform the member that made the demand:
1. of the information that the company will provide in response to the demand and when and where the company will provide the information; and
2. if the company declines to provide any demanded information, the company’s reasons for declining. Id.
In a manager-managed or board-managed LLC, the managers or board members have personal duties to turn over any information to the member to the extent that they have knowledge of the information. Minn. Stat. § 322C.0410, Sub. 2(1).
Moreover, even absent a demand, whenever a member is required to give or withhold their consent to some proposed action, the company must \"the member with all information that is known to the company and is material to the member’s decision.\" Id.
The Operating agreement may clarify or limit the duty of the company or the individual member, governor, or manager (depending on the governance structure) so long as the operating agreement term does not “unreasonably restrict” the duties of the company to make available and the rights of governors, managers, and members to obtain, documents and information under Minn. Stat. § 322C.0410.
3. Consequences for Failing to Comply
In the event that the company does not alter the duty of the company or responsible individuals to produce information under Minn. Stat. § 322C.0410, the individual and company may be liable to the requesting member for attorney fees and damages caused by the failure. The Operating Agreement may, however, eliminate a cause of action against the individual person who is liable for this claim; however it may not eliminate the duty owed by the company. To the extent that the duty is breached, whether altered by agreement or the default duty under the statute, that breach can give rise to a claim for a fair value buyout under Minn. Stat. § 322C.701 (replaced 322B.833). The company can also define the reasonable expectations that will be protected by Minn. Stat. § 322C.701 and it can eliminate the right to a fair value buyout as a remedy in the operating agreement. Minn. Stat. § 322C.0110.
2. Employment Record Keeping Requirements
a. Employee Recruitment Documents
i. Must be kept for 1 year from the date of personnel action.
(a) Job orders submitted to placement agencies or labor organizations. 29 U.S.C. §626; 29 C.F.R. §1627.3 (Age Discrimination in Employment Act).
(b) Job advertisements and notices (internal and external) regarding job openings, training programs, promotions, and opportunities for overtime. 29 U.S.C. §626; 29 C.F.R. §1627.3 (Age Discrimination in Employment Act).
(c) Any additional record made solely for the purpose of completing the EEO-2 Apprenticeship Information Report. 42 U.S.C. §2000e-8(c); 29 C.F.R. §1602.20 & .21 (Title VII of the Civil Rights Act of 1964).
ii. Must be kept for 2 years from the date of personnel action. Criteria for selection for apprenticeship programs in recognized trade or craft; chronological list of all applicants’ names, addresses, dates of application, sex, minority group class (race or national original); and any test papers or interview records on which hiring decisions were made. 42 U.S.C. §2000e-8(c); 29 C.F.R. §1602.20 & .21 (Title VII of the Civil Rights Act of 1964).
b. Documents related to hiring
i. Must be kept for 1 year
(a) Job applications, resumes, job inquiries, and records of refusals to hire. 29 U.S.C. §62; 29 C.F.R. §1627.3 (Age Discrimination in Employment Act).
(b) Promotion, demotion, transfer, selection for training, layoff, recall or discharge. 29 U.S.C. §626;29 C.F.R. §1627.3 (Age Discrimination in Employment Act).
(c) Results in physical examinations. 29 U.S.C. §626; 29 C.F.R. §1627.3 (Age Discrimination in Employment Act).
(d) All personnel or employment records including application forms, resumes, other hiring records; records regarding promotion, demotion, transfer, layoff, discharge, pay rates, or other compensation terms. 42 U.S.C. §2000e-8(c); 29 C.F.R. §1602.14 (Title VII of the Civil Rights Act of 1964).
ii. Must be kept for 3 years or more
(a) INS Form I-9 Employment Eligibility Verification Form (Must be kept the later of 3 years from the of date of hire or one year after the date of termination). 8 U.S.C. §1324a(b)(3) (Immigration and Nationality Act).
c. Documents related to Compensation
i. Must be kept for 2 years. Basic employment and earnings records; wage rate tables, records of wages, salary, or overtime pay; work-time schedules; order, shipping and billing records, records of additions to or deductions from wages paid; records used for determining costs. 29 U.S.C. §211(c); 29 C.F.R. §§516.6 and 1620.32 (Fair Labor Standards Act and National Labor Relations Act).
ii. Must be kept for 3 years.
(a) Payroll or other records containing name, address, birth date, occupation, pay rate and weekly compensation. 29 U.S.C. §626; 29 C.F.R. §1627.3 (Age Discrimination in Employment Act); 40 U.S.C. §276a; 29 C.F.R. §5.5(a)(3) (Davis-Bacon Act)(applicable to government job – 3 years start to run when job is completed).
(b) Payroll records, collective bargaining agreements, individual contracts, written agreements under the FLSA, sales and purchase records, and certificates and notices of the Wage and Hour Administrator. 29 U.S.C. §211(c); 29 C.F.R. §516.5 (Fair Labor Standards Act and National Labor Relations Act).
iii. Must be kept for some other duration of time
(a) Certificates of Age (Until termination of employment). 29 U.S.C. §211(c); 29 C.F.R. §570.6(b)(1) (Fair Labor Standards Act and National Labor Relations Act).
(b) Records and documents required by retirement and welfare plan Form 5500 annual reporting (Six years after the Form 5500 filing date, or would have been filed but for an exemption). 29 U.S.C. §1027 (Employee Retirement Income Security Act of 1974); ERISA Opinion Letter 82 40A (Aug. 10, 1982).
(c) Records and documents related to benefits due or which may become due to individual participants including information sufficient to determine quarterly or annual benefit statements. (suggested retention time is six years).
(d) Documents relating to HIPAA privacy records. (Six years from the date the document was created or last in effect, whichever is later). 45 CFR §164.530(j)(2) (Health Insurance Portability and Accountability Act of 1996).
(e) COBRA Notices (suggested retention time is six years).
d. Documents related to a discrimination charge
i. Must be kept until final disposition
(a) Personnel records concerning any discrimination charge brought by any agency or individual. This can include any information that may be relevant including records about charging party and all other employees holding similar positions, application forms, and any other papers that may make the allegations in the charge more or less likely. 42 U.S.C. §2000e-8(c); 29 C.F.R. §1602.14 (Title
VII of the Civil Rights Act of 1964).
(b) In action brought against employer, any personnel records concerning employee or applicant. 29 U.S.C.§626; 29 C.F.R. §1627.3 (Age Discrimination in Employment Act).
ii. Must be kept for some other duration of time
(a) Records concerning complaints of handicap discrimination, (in programs and activities receiving or benefiting from federal financial assistance) and relevant employment records of charging party and employees in similar positions (3 years). 29 U.S.C. §793; 29 C.F.R. § 32.49 (Rehabilitation Act of 1973).
(b) Any personnel or employment record made or kept by an employer concerning an individual with a disability (e.g., request for reasonable accommodation, application forms, and other records having to do with hiring, promotion, demotion, transfer, layoff or termination, rates of pay or compensation, and selection for training or apprenticeship) (1 year from the date the record is made or the personnel action involved is taken, whichever occurs later). 29 C.F.R. §1602.14 (Americans with Disabilities Act).
(c) Personnel records of an individual whose employment has been involuntarily terminated. 1 year from the date of the termination. 29 C.F.R. §1602.14 (Americans with Disabilities Act).
e. Documents related to leave of absence (3 years)
i. Basic payroll and identifying employee data, including name, address, occupation, rate of pay and terms of compensation, daily and weekly hours worked per pay period and additions or deductions from wages. 29 U.S.C. §2616; 29 C.F.R. §825.500. (Family and Medical Leave Act of 1993).
ii. All records pertaining to compliance with FMLA’s leave requirements, including dates and hours (if less than a full day) of FMLA leave; copies of employer notices, documents describing premium payments and employee benefits and records of disputes with employees over FMLA benefits. 29 U.S.C. §2616; 29 C.F.R. §825.500. (FMLA).
iii. Documents describing FMLA notices and copies of employer’s FMLA policy. 29 U.S.C. §2616; 29 C.F.R. §825.500. (FMLA).