Whetstone v. Hossfeld Manufacturing Co.

Citations: 448 N.W.2d 536; 1989 Minn. App. LEXIS 1265; 1989 WL 145450Docket: No. C9-89-1188

Court: Court of Appeals of Minnesota; December 4, 1989; Minnesota; State Appellate Court

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Hossfeld Manufacturing Company was ordered to compensate shareholder Whetstone for the value of his shares after amendments to the corporate bylaws and articles eliminated a 30% veto power, which Whetstone opposed as a director and shareholder. The court reversed this decision, concluding that the amendments did not grant Whetstone the rights of a dissenting shareholder under Minn.Stat. 302A.471, subd. 1. The analysis highlighted that the amendments did not alter or abolish any preferential rights, as all shares in Hossfeld are classified as common without any preferential rights. Therefore, since the articles specify that only one class of stock exists, Whetstone's claim to dissent based on the elimination of the veto power was unsupported, as no preferential rights were impacted.

The amendment does not limit or exclude a shareholder's voting rights or the ability to cumulate votes, as noted in subsection (4). The respondent incorrectly equates veto power with voting rights, a view unsupported by legal precedent. Research indicates that the right to veto is not recognized in discussions of shareholder rights, with multiple legal sources failing to mention veto power in a corporate context. The respondent, holding 36% of shares, retains the right to vote accordingly and to cumulate votes with others, but has lost the ability to veto others' votes, which does not grant him dissenting shareholder rights. The claim that veto power is a property right conflicts with the Model Business Corporations Act's commentary, which asserts that shareholders do not possess vested property rights in articles of incorporation provisions. This perspective allows for corporate governance adjustments through majority vote, countering minority tyranny where a 30% veto could override a 70% majority. The amendments made to Hossfeld corporation's articles and bylaws were necessary to align with Minnesota law, which stipulates that all shares should be of one class with equal rights unless specified otherwise. Hossfeld's articles establish a single class of non-assessable common stock, ensuring uniform voting rights per share, consistent with state statutes.

Hossfeld Corporation, like all Minnesota corporations, has been governed by Chapter 302A since January 1, 1984. Corporations that existed prior to this date automatically fell under this chapter unless they opted out. Provisions in the corporation's articles and bylaws that do not align with Chapter 302A became ineffective on that date. Specifically, since Chapter 302A mandates equal rights for shares of the same class, any provision granting veto power to shareholders owning at least 30% of shares is inconsistent and void. Consequently, amendments made to eliminate this veto power were merely formal adjustments to comply with the law.

The trial court incorrectly ruled that a respondent could claim rights as a dissenting shareholder based on these amendments, as the amendments did not grant such rights under the statute, and the veto power itself was a violation. The decision was reversed, with Judge Kalitowski dissenting, noting that no Minnesota case law supports expanding the statute’s explicit provisions. The dissent emphasizes that the statute's intent is to protect investors' rights related to their investment, not to grant veto powers concerning corporate management decisions, which are not considered voting rights.