Introduction
The Minnesota Court of Appeals weighed in on the closely-followed Lund family litigation involving the efforts of Respondent Kim Lund to divest herself of ownership, held through trusts, of three privately held Lund family business entities forming the Lunds & Byerlys grocery store empire in a decision issued on January 14, 2019, Kim A. Lund, et al v. Russell T. Lund III, et al, No. A18-0120. This decision provides important guidance for litigating claims by business owners for an equitable buy-out of their shares under the Minnesota Business Corporation Act, Minn. Stat. Ch. 302A (“MBCA”) as well as similar claims involving membership units under the re-codified Minnesota Revised Uniform Limited Liability Company Act, Minn. Stat. Ch. 322C (“MLLCA”), formerly 322B. (The MLLCA was repealed and replaced by the Minnesota Revised Uniform Limited Liability Company Act during the pendency of the appeals).

Background
The case stems from the decades-long friction between the four Lund siblings who are beneficiaries of trusts that own the Lunds grocery chain. When the founder of the business, Russel Lund Sr., passed away in 1992, he left behind ownership of the Lunds entities in trust to his grandchildren.

On December 14, 2014, after years of requests to be able to sell her interests, and being led to believe she would be provided an exit strategy to gain liquidity and thus financial independence, Respondent Kim Lund filed suit against Appellants (the Lunds entities, its chairman, president and CEO, a trustee and two directors) alleging breach of fiduciary duty, unfairly prejudicial conduct under Minn. Stat. §§ 302A.751, 322B.833, and civil conspiracy. In the lawsuit, she specifically sought, among other things, a forced buy-out of her interests in the Lunds entities.
In July 2016, prior to trial, Kim Lund filed a motion with the district court requesting a buy-out of her interests under Minn. Stat. § 302A.751 and § 322B.833. Cross-motions were heard, and the district court granted Kim Lund’s motion October 4, 2016, ordering the Appellants to buy Kim Lund’s shares at a fair value to be determined. The court later set the valuation date for the buy-out of her interests of October 2, 2016, the close of the 2016 fiscal year of the Lunds entities.

Once a court determines that a buy-out is appropriate, the MBCA provides parties 40 days to determine a purchase price and terms of sale. In this case, the parties were unable to agree on fair value and terms of the buy-out within the 40-day timeframe established by the MBCA, so the court held a week-long trial to determine the price. Both sides to the litigation provided expert testimony as to the value of the ownership interest. Appellants argued the fair value of Kim Lund’s interest was $21.275 million and Kim argued the fair value was $80.4 million. The court ultimately determined the fair value of Kim Lund’s interest to be $45.2 million. The Lunds entities then appealed the judgment to the Minnesota Court of Appeals.

The Court of Appeals was asked, among other things, whether the district court abused its discretion in granting a buy-out pursuant to a motion under Minn. Stat. § 302A.751 and § 322B.833; and if the district court abused its discretion in setting the valuation date or in determining the fair value.

The Procedure for Buy-Outs of Minority Interests Under Minnesota Law
Both the MBCA and the MLLCA allows a district court to grant a buy-out under the court’s equitable powers. A court “may grant any equitable relief it [finds] just and reasonable in the circumstances” if those in control of the company have acted “in a manner unfairly prejudicial” toward another shareholder or member. Equitable relief can include ordering a buy-out of a shareholder or member’s interest in the entity.
The district court concluded that it was appropriate to grant a buy-out motion if the record reflected at least one uncontroverted instance of unfairly prejudicial conduct. The Minnesota Court of Appeals upheld the district court’s decision stating that “in the absence of a genuine issue of material fact as to whether unfairly prejudicial conduct occurred, a district court may, without conducting an evidentiary hearing, exercise its broad equitable authority to grant a buy-out under Minn. Stat. §§ 302A.751, 322B.833.”

In reviewing the district court’s finding, the Court of Appeals considered whether the district court (1) erred by concluding it was appropriate to decide Kim Lund’s buy-out request on motion and (2) abused its discretion by granting the buy-out remedy.

In this case, the district court found that Kim Lund had a reasonable expectation of “liquidity and independence,” and for “her assets be separated from the family business” which had been frustrated in an unfairly prejudicial manner. The court also identified that although “[A]ny written agreements, including…buy-sell agreements . . . are presumed to reflect the parties’ reasonable expectations concerning matters dealt with in the agreement” (Minn. Stat. § 302A.751, subd. 3a),” written agreements are not dispositive of expectations in all circumstances.”

The appellate court noted that there were over two decades of documentation showing Kim Lund’s reasonable expectation of being able to separate herself from the Lund entities to achieve liquidity and financial independence and of Appellants’ representations that they would fulfill those requests. In viewing the parties conduct over twenty plus years, the Court of Appeals concluded that Kim Lund had a reasonable expectation of “financial liquidity and independence” and Appellants’ failure over two decades to “propose a divestiture plan or explain their failure to do so” frustrated her reasonable expectations. Because no genuine issues of material facts existed as to Kim’s expectation of liquidity, the court granted the buy-out request on motion without an evidentiary hearing.

The Court of Appeals further held that the district court did not abuse its discretion in granting Kim Lund’s buy-out stating that she was in a particularly vulnerable position as a minority shareholder who lacked management rights and did not have any part in creating the trust documents or corporate governing documents. They weighed that against the Appellants’ risk of an undue burden on them in performing on the buy-out terms and determined it was equitable and fair for all parties.

The Appellate Court’s ruling clarifies that a district court can order a buy-out under Minnesota law in response to a motion, without holding a trial or evidentiary hearing, although a subsequent hearing may be necessary to determine valuation. The Court of Appeals appears to have applied a summary judgment standard in reaching this determination, although a review of the district court file shows that the motion at the lower court was not captioned as a motion for summary judgment. This suggests that in some cases a trial or hearing may be necessary to determine whether equitable relief is appropriate, but not always.

Valuations and Valuation Dates Under Minnesota Law
The Court of Appeals was also asked whether the district court abused its discretion in setting the valuation date or in determining the fair value of Kim Lund’s interests.

Minn. Stat. § 302A.751, subd. 2 states that when a buy-out motion is granted, the fair value of the shares shall be “as of the date of commencement of the action or as of another date found equitable by the court.”  In Lund, the trial court determined the proper date of valuation was October 2, 2016, the end of fiscal year for the Lunds entities. The court noted the availability of regular, audited financial statements and that the commencement date of the litigation in 2014 had no particular bearing on the proper valuation date other than as a statutory default. The appellate court’s affirmance in this regard is potentially relevant to parties who have been in litigation for over a year if the value of the business has changed significantly over that time.

Next, the Court of Appeals determined that the district court did not abuse its discretion in determining the fair value of Kim Lund’s interest. Minnesota statutes identify that a buy-out shall be “the fair value of the shares.” Fair value generally means an undiscounted value of the shares, specifically without a discount for lack of marketability, unless extraordinary circumstances are presented. Although the appellate court did not delve into the district court’s reasoning for determining the fair value at $45.2 million, it noted that the number was squarely between that which Appellants argued ($21.275 million) and which Kim Lund sought ($80.4 million). In upholding the district court’s Solomonic valuation approach, the Court of Appeals commended the district court for its painstaking efforts and concluded it acted within its discretion.

Takeaways
The Lund decision provides clarity as to whether a party may seek a buy-out under Minnesota law pursuant to a motion and without a hearing or trial. So long as no issue of material fact exists as to whether a party has acted in a manner which unfairly prejudicial towards another shareholder or member, according to Lund, the district court is not required to hold an evidentiary hearing and may grant the buy-out in response to a motion. The district court is further empowered to determine the valuation date, fair value, and terms of the buy-out and will not be overturned unless it abuses its discretion.

For more information about the Lund decision or if you need assistance in drafting, enforcing, or resolving disputes involving a shareholder agreement, contact the business attorneys at Trepanier MacGillis Battina P.A.
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About the Author: 
Minnesota shareholder dispute attorney Bryan R. Battina represents businesses and individuals in commercial litigation, real estate litigation, business law matters, and shareholder disputes. Bryan may be reached at 612.455.0500 or bbattina@trepanierlaw.com.  Trepanier MacGillis Battina P.A. is a Minnesota shareholder dispute law firm located in Minneapolis, Minnesota.
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Written Agreements Reflect Reasonable Expectations of Shareholders
Breaking the Bank for a Minority Shareholder Buyout
Which Corporate Documents are Shareholders Entitled to Examine?