Top 10 Drafting Strategies to Avoid Shareholder Disputes

Most owner disputes do not begin with fraud, bad faith, or a dramatic falling out. More often, they happen when business owners whose interests were previously aligned develop differing expectations about ownership, control, succession, compensation, or the direction of the company.

Closely held companies are particularly vulnerable in such scenarios as they often have no trading market for their shares, no independent board, and often no clear separation between the roles of owner, employee, and manager. Owners who become unhappy cannot simply sell into the market and walk away. The same people frequently draw a salary, set strategy, and share in profits, so a single disagreement can simultaneously threaten their income, career, and investment.

Minnesota law recognizes this reality: Under the Minnesota Business Corporation Act (the "Corporations Act"), shareholders in a closely held corporation owe one another a heightened duty to act in an "honest, fair, and reasonable manner," and courts measure conduct against the "reasonable expectations" of the owners as they existed at the outset and developed over time (Minn. Stat. § 302A.751). Similarly, members of a Minnesota limited liability company ("LLC"), under Minnesota’s Revised Uniform Limited Liability Company Act (the "LLC Act"), owe one another a good-faith-and-fair-dealing obligation measured against the operating agreement, and owe the company a duty of loyalty and care (unless otherwise eliminated). (Minn. Stat. § 322C.0409, subds. 2-4.)

These standards cut both ways. They protect the minority owner who is squeezed out, while rewarding owners who take the time to write their expectations down—because written agreements in corporations are presumed to reflect those reasonable expectations (see Minn. Stat. § 302A.751) and members in LLCs are deemed to have assented to the written operating agreement.

The good news is that many of these disputes are preventable. A little planning at the beginning of a business relationship is often far less expensive than litigating that relationship years later. In this article, we share strategies related to the issues we see most often, as well as practical drafting tips to help you prevent each one from derailing your business later.

1. Carefully consider how you bring in other owners (equity is not the only option).

Business owners often treat equity as the default solution for incentivizing employees, advisors, consultants, and investors. In reality, ownership is only one option, and it is frequently the wrong one. Owners not only have the right to share in a company’s profits and losses or receive dividends or distributions, but they may also carry voting rights, fiduciary protections, statutory rights to inspect company books and records, and, in Minnesota, the ability to sue for a fair-value buyout if they later feel mistreated (See Minn. Stat. §§ 302A.751 and 322C.0701). Adding an owner is typically much easier than removing one.

Before issuing ownership interests, consider whether a cash bonus, a profit-sharing arrangement, phantom equity, or stock appreciation rights can accomplish the same objective. Phantom equity and stock appreciation rights are particularly attractive to closely held companies worried that a new minority owner could create friction at a critical moment, such as a sale, because they provide key employees with a real financial stake in the company’s success without handing over actual stock or voting or inspection rights. Phantom equity is simply a contractual promise to pay a future bonus measured by the value of a stated number of shares; a stock appreciation right pays only the increase in value over time. These arrangements do require careful attention to cash flow—since the company must be able to fund the payout when it comes due—as well as periodic valuations and compliance with deferred-compensation tax rules under Section 409A of the Internal Revenue Code. As such, they should be documented in a written plan.

For an LLC taxed as a partnership, another alternative is a profits interest—a grant that shares in future profits and appreciation but has no value if the company were liquidated the day it is issued. A profits interest can serve as a powerful incentive for a senior executive, but it carries a trap for rank-and-file employees: the recipient of partnership interest cannot also be a W-2 employee, so the grant converts salary into self-employment income, ends payroll withholding, and can cost the employee access to certain benefits. For a small grant, the administrative burden often exceeds the benefit.

The practical point is the same across all of these tools: Match the incentive to the objective, and reserve true equity for the people you actually intend to make long-term co-owners.

Drafting tips. If you do grant equity, never do it on a handshake or a casual line in an offer letter. Document the grant in a written agreement that addresses vesting, what happens to the equity if the relationship ends, and, critically, a mandatory repurchase right so the company or the other owners can buy the interest back when the employee leaves. Tie that repurchase to the buy-sell mechanics discussed in Strategy 5. The most common problematic scenario is the departed employee who is no longer contributing but still owns a piece of the company and retains a statutory right to demand its records.

2. Draft written governance documents and require that changes be agreed upon in writing.

Minnesota corporations and LLCs have substantial flexibility in structuring governance arrangements. (See Minn. Stat. §§ 302A.181 and 302A.457 (corporations) and Minn. Stat. § 322C.0110 (LLCs).) That flexibility is one of the chief advantages of the closely held form, but it can also create uncertainty if important agreements are never documented. The statute will fill the gaps with default rules—and as Strategy 3 explains, those defaults are frequently not what the owners assumed.

This issue is particularly important for LLCs. The LLC Act expressly provides that the operating agreement governs the relations among members, the rights and duties of managers and governors, the conduct of the company’s activities, and the means and conditions for amending the agreement itself (Minn. Stat. § 322C.0110). In other words, the statute supplies rules wherever the operating agreement does not. Although Minnesota’s LLC statute allows an operating agreement to be oral or implied (see Minn. Stat. § 322C.0110, subd. 17), the surest way to avoid litigation is to have an express written operating agreement that states that it is the sole such agreement of the company and can only be amended in writing signed by the parties.

The most common gaps we see are often basic questions the documents simply never answer: Who has authority to bind the company, and up to what dollar threshold? What vote is required for a major decision, and what counts as "major?" How is the agreement amended? What happens when an owner dies, divorces, or quits? When the documents are silent on these points, the disagreement becomes about the rules, not the business, and there is no referee in the room.

Drafting tips. Adopt comprehensive written governance documents (e.g., a shareholder control agreement and bylaws for a corporation, or an operating agreement for an LLC) and make sure they include these two clauses, which can be easy to overlook yet potentially costly when missing:

• An integration clause stating that the written documents constitute the parties’ entire agreement and supersede all prior oral or written understandings, so a partner cannot later claim that a lunchtime conversation modified the deal.
• An amendment clause requiring that any change to the document be made only by a signed writing approved by a specified vote of the owners (and/or, if required, board members), and that the document may not be amended or modified by oral agreements or course of conduct. Both corporations and LLCs are able to authorize such amendment without having a formal meeting via a written action of its managing parties (See 302A.239, 322C.0407).

A few extra pages on the front end can save significant time and expense later.

3. Limit voting rights for passive investors and clearly define who makes major decisions.

Many owners assume voting power automatically follows ownership percentage, but that is not always true, and the default rules may surprise you. A Minnesota company may establish different classes or series of equity with full, partial, or no voting rights, so long as the terms are set out in—or authorized by—the articles and terms provided in the governance documents to alter from the default assumption of voting and financial rights. (See Minn. Stat. §§ 302A.401, 322C.0110, and 322C.0407.) If the articles are silent, however, all equity is deemed to be a single class of voting common equity with equal rights in accordance with their ownership percentages (pro rata). (See id.)

By default, shares are the unit of ownership in a corporation, and economic and voting rights are allocated pro rata according to the number of shares owned. By contrast, LLC members’ rights are shared equally per capita, meaning that a member who contributed 90% of the capital and a member who contributed 10% would, by default, each have one equal vote, and the 10% member could veto many corporate actions.

However, the Corporations Act and the LLC Act both allow the articles and governance documents to deviate from the default rules. So LLCs that want voting power to track ownership, and corporations that do not, must say so in the applicable governance documents. In an LLC, one clean way to achieve distribution-weighted voting is to designate the company as board-managed: In a board-managed LLC, the statute provides by default that each member possesses voting power in proportion to the member’s distribution interest. (Minn. Stat. § 322C.0407, subd. 4, cl. (17).) By contrast, the member-managed and manager-managed defaults give each member equal (per capita) rights, so an LLC using either of those structures that wants voting to track ownership must instead provide for it directly in the operating agreement.

Not every investor needs the same level of control. Governing documents should clearly identify which decisions require owner approval and which may be delegated to management. Many disputes arise over disagreement about who the decision-makers are, and not necessarily the decision itself.

Drafting tips. Build a deliberate allocation of control rather than accepting the defaults:

• Use share classes or membership classes to separate economic rights from control. A passive investor can hold non-voting or limited voting interests that still carry full economic participation and, if appropriate, a preferred return. However, if the company is taxed as an S corporation, you can have only one class of equity (voting and non-voting classes are okay).
• Define "major decisions" by an enumerated list—such as issuing new equity, incurring debt above a threshold, selling the company, approving related-party transactions, amending the governing documents, etc.—and specify the vote each requires (majority (50%), supermajority (higher percentage such as 75%), or unanimous (100%)). Delegate everything else to the management team so the business can run.
• Calibrate supermajority and protective provisions carefully. A supermajority or unanimity requirement protects a minority owner from being steamrolled, but it also gives minority owners a veto right, and a veto in the wrong hands is how deadlocks are born. (See Strategy 4.) A common compromise is to give a minority investor a narrow set of "protective provisions"—veto rights over a short list of fundamental actions that could harm their investment (e.g., dilution, a change in the business, or a sale below a floor)—while leaving ordinary operations to majority or management control. However, these protective provisions still limit the operation of the company and decision-making abilities of the majority owners and the management team, so these rights should be narrowly tailored (and avoided if possible).

4. Avoid even numbers and, if deadlocks cannot be avoided, establish procedures in the governing documents to break them without expensive litigation.

Deadlocks are among the most common and potentially damaging governance problems in closely held businesses, because the structures owners adopt for fairness (equal ownership, unanimity requirements, or mirror-image boards) are the very structures that produce operational paralysis. Although Minnesota law provides remedies in certain situations, including judicial remedies under Minnesota Statutes Section 302A.751 (corporations) and Minnesota Statutes Sections 322C.0701 and 322C.0702 (LLCs), litigation is rarely anyone’s preferred solution.

A court can dissolve the company, order one owner to buy out the other(s) at a judicially determined fair value, or fashion other equitable relief—but only after an expensive (and often long) lawsuit on terms the owners no longer control, and decided by a judge unlikely to have business experience. For a corporation, a court may even order a buyout on motion, and it will use the price and terms set in the company’s own buy-sell or shareholder control agreement unless it finds them unreasonable. (Minn. Stat. § 302A.751.) That is a powerful reason to set those terms yourselves, in advance.

If possible, you should avoid equal ownership and voting structures in the first place: A 51%/49% ownership split, an odd number of directors, or a tie-breaking director can prevent the problem entirely. If a 50/50 or veto structure is unavoidable, the governing documents should contain a pre-agreed mechanism to break the tie before it reaches a courtroom. Common tools include:

• Escalation and mediation. Require that a disputed major decision first go to the owners’ senior representatives (or a neutral mediator) for a defined period before any more drastic remedy is available. This is the lowest-cost mechanism and often resolves the matter without anyone exiting.
• A neutral tie-breaker. Provide for a casting of votes, an independent director, or a pre-named third party (e.g., an industry expert or the company’s accountant) to decide a defined category of deadlocked issues.
• Buy-sell/"shotgun" provisions. A buy-sell triggered by deadlock removes one owner from the business. In the classic "Russian roulette" or "Texas shoot-out" structure, one owner names a single price; the other owner then chooses whether to buy at that price or sell at that price. Because the initiator does not know which side of the deal they will end up on, the mechanism is designed to discipline them into naming a fair price. Variations include sealed-bid auctions and appraisal-driven floors.

Drafting tips. A shotgun buy-sell is elegant but dangerous when the owners are not evenly matched. If one owner has far deeper pockets or a much larger stake, that owner can name an artificially low price knowing the other cannot afford to buy (or sell at a steep discount), forcing a cheap exit. Where resources are unequal, a put/call structure priced by an independent appraiser is usually more fair. Whatever mechanism you choose, add guardrails so the deadlock provision is not abused as a back-door exit:

• Limit the trigger to a short list of genuinely fundamental decisions, not every disagreement.
• Require a cooling-off or escalation period (and ideally mediation) before the buyout right can be invoked.
• Consider a lockup so the mechanism cannot be triggered in the company’s fragile early years.

5. Plan for shareholder exits and ownership transfers before they occur (including buy-sell rights, rights of first refusal, and permitted transfers).

Ownership in a company is a personal property right, and the property is freely transferable unless there are restrictions on transfers in the governing documents. Owners of closely held businesses generally want to know (and control) the parties with whom they are doing business and will include extensive transfer restrictions in their governance documents. Minnesota law generally permits transfer restrictions and buy-sell arrangements when properly drafted. (See Minn. Stat. § 302A.429 (corporations) and Minn. Stat. §§ 322C.0502–.0503 (LLCs).)

For corporations, a written restriction that is "not manifestly unreasonable" and is conspicuously noted or referenced on the stock certificate is considered valid and enforceable against the holder and any transferee. However, such restriction is ineffective against someone who buys without knowledge of it, so the mechanics of notice matter. (Minn. Stat. § 302A.429.) For LLCs, a transfer that violates a restriction in the operating agreement is ineffective as to anyone with notice of the restriction, and in any event a "bare" transferee receives only the right to distributions, not management rights or access to information. (Minn. Stat. § 322C.0502.) These statutes give owners the tools to control who joins the ownership group; the job is to use them.

A well-designed exit framework answers three questions in advance: when an owner can or must transfer, to whom, and at what price:

• Triggering events. A buy-sell typically fixes purchase-and-sale terms on events such as death, divorce, disability, termination of employment, bankruptcy, or an unresolved deadlock. Each trigger deserves thought—the price and terms appropriate for a "good leaver" who retires may differ from those for a "bad leaver" terminated for cause.
• Transfer controls. A right of first refusal requires a selling owner who has a bona fide third-party offer to first offer the interest to the company or the other owners on the same terms. A right of first offer requires the seller to offer to the insiders first, before shopping the interest, and does not require a third-party offer at all. Use one or the other, not both—the procedures overlap and stacking them only adds delay. But be aware that a right of first refusal can have a chilling effect: A serious buyer may be unwilling to spend time and diligence dollars knowing the insiders can swoop in and match. Pair these with permitted-transfer carve-outs (for example, transfers to a family trust for estate planning) so ordinary, non-threatening transfers are not bogged down.
• Valuation. Among the most important concepts in any buy-sell is how "price" will be determined. Fix the purchase price methodology at the outset in the governing documents or buy-sell agreement, when the parties are getting along and no one knows who will be buying or selling, and interests are therefore aligned. Common approaches include: (1) a fixed price updated periodically by agreement, (2) a formula (such as a multiple of trailing-12-month EBITDA), or (3) an appraisal. If using an appraisal, specify how the appraiser is chosen, the timeframe, who pays, and whether minority or lack-of-marketability discounts apply. Leaving valuation to be negotiated at the moment of exit guarantees a fight, because by then the parties’ interests are directly opposed.

Drafting tips. In addition to the drafting concepts noted above, companies typically include a purchase option, first for the company (as a redemption where the company buys the departing owner’s interest), and if the company does not elect to purchase the equity, then for the other owners, who would have a right to a cross-purchase. Generally the company should not be obligated to redeem the interests, unless the owners agree that the situation would support a mandatory buyout (e.g., in the event of death or disability). Buy-sells funded by life insurance are common, but the funding structure now requires extra care: In Connelly v. United States, 602 U.S. 257 (2024), the U.S. Supreme Court held that a corporation’s obligation to use life-insurance proceeds to redeem a deceased shareholder’s stock does not reduce the company’s value for federal estate-tax purposes—which can inflate the estate-tax value of the very shares being redeemed. Owners relying on company-owned life insurance to fund a redemption should revisit the structure with tax counsel and consider a cross-purchase alternative. Finally, set the buy-sell price and terms with care, because under Minnesota law a court will generally honor them in a later buyout dispute. (Minn. Stat. § 302A.751.)

6. Establish clear information-sharing practices and follow them consistently.

Many owner disputes begin when expectations about access to information are unclear. Some owners expect detailed financial statements every month; others expect updates only when major events occur. Problems arise when those expectations do not align, and an owner kept in the dark is an owner who starts to suspect the worst.

Minnesota law does not leave information rights entirely to the owners’ goodwill. In a corporation that is not publicly held, a shareholder has an absolute right, within 10 days of a written demand, to inspect and copy the share register and core company records—including up to three years of board and shareholder proceedings, articles and bylaws, financial statements, and any shareholder control agreement. Other records are made available on a showing of a "proper purpose" reasonably related to the person’s interest as a shareholder. (See Minn. Stat. § 302A.461.)

For LLCs, timing requirements are less rigid and the rules more vague as to the type of information that can be requested—and they differ by management structure. In a member-managed company, members may inspect records material to their rights, and the company must even furnish material information without a demand. In a manager- or board-managed company, a member must make a particularized written demand stating a proper purpose, to which the company must respond within 10 days. (See Minn. Stat. § 322C.0410.) These rights cannot be drafted away entirely. An operating agreement may not "unreasonably restrict" them, though reasonable confidentiality conditions are permitted. (Minn. Stat. §§ 322C.0110 and 322C.0410.) The lesson is that fulfilling information requests is not an optional courtesy, and refusing a legitimate one can itself become the basis for a claim. Alternatively, in an LLC, members who want more fulsome information rights (more similar to those under 302A) may negotiate them in the operating agreement.

Drafting tips. Rather than deciding information requests on an ad hoc basis, build a predictable process into the governing documents that reduces misunderstandings and prevents owners from claiming they were intentionally kept in the dark. Suggested steps include:

• Specifying what owners receive and how often—for example, annual audited or reviewed financials, quarterly management reports, and timely notice of defined "material events" (e.g., a financing, a major contract, litigation, or a sale discussion).
• Setting a standard procedure for additional requests, including a reasonable response window and a confidentiality undertaking for sensitive information.
• Applying the policy consistently to all owners. Selective disclosure, such as giving the insiders information that a minority owner is denied, is the kind of conduct that supports a claim for oppression or unfairly-prejudicial conduct.

7. Address issues regarding capital raises up front.

Decide now how future capital needs will be met and what happens to an owner who cannot or will not participate. Ask: Will additional capital come as mandatory contributions, optional contributions, or loans? If a round dilutes a non-participating owner, say so explicitly, and consider whether owners get preemptive rights (i.e., the right to buy enough of any new issuance to maintain their percentage) and investors get anti-dilution protections. Owners are far more accepting of dilution they agreed to in writing than dilution that arrives as a surprise.

Drafting tip. Build the financing and preemptive-right provisions into the governing documents at formation, not when a deal is on the table.

8. Discuss owner’s rights in a sale transaction before they become the subject of a dispute.

As noted above, the decision on when to sell a company is usually a major decision requiring a higher threshold of owner approval. Thus, disagreement about whether and when to sell is a classic deadlock in disguise. There are two drafting tools to include in the governing documents that will align the owners in advance:

• A drag-along right lets the controlling owners require the others to join a third-party sale on the same terms. This prevents a holdout from blocking a deal and, by delivering 100% of the company, eliminates the minority discount a buyer would otherwise demand.
• A tag-along (co-sale) right is the minority’s counterpart: If the controlling owners sell, the minority may participate pro rata on the same terms.

These are typically negotiated together, with a minority owner accepting the drag-along in exchange for the tag-along, so that no one is forced into a deal they cannot exit or left stranded when others cash out.

Drafting tip. Build the drag-along and tag-along provisions into the governing documents ahead of time, when the parties are in agreement.

9. Be aware of how Minnesota statutes handle conflicted transactions.

Transactions involving an owner, family member, or affiliated business are inevitable in closely held companies, but can constitute a conflict of interest and violation under Minnesota law if not properly handled. They are also a frequent precursor to disputes. However, Minnesota law provides a statutory process to insulate the impacted parties from potential claims from the other owners.

For corporations, a director’s conflicting-interest transaction is not void or voidable if any one of three conditions is met: (1) the transaction was fair and reasonable to the corporation; (2) the material facts and the director’s interest were fully disclosed and the transaction was approved in good faith by disinterested shareholders (two-thirds of the disinterested voting power) or unanimously; or (3) those facts were disclosed and a majority of the disinterested directors approved it in good faith, with the interested director neither counted toward the quorum nor voting. (See Minn. Stat. § 302A.255.) The statute also imputes to a director the financial interests of close family members, so a "spouse’s company" transaction is treated as the director’s own. (Id.)

LLCs have a parallel framework. Members or managers owe duties of loyalty and care and a contractual obligation of good faith. A conflicting transaction can be defended as fair to the company and, most usefully, it can be authorized or ratified after full disclosure of all material facts to the disinterested decision-makers. (See Minn. Stat. §§ 322C.0409 and 322C.04091.)

The LLC Act expressly authorizes modification, elimination, and/or exculpation of fiduciary duties in the LLC’s operating agreement (see Minn. Stat. § 322C.0110), while corporations are not able to redefine or eliminate fiduciary duties—only exculpate and reallocate governance authority. (See Minn. Stat. §§ 302A.251 and 302A.457.)

Drafting tips. Translate those statutory safe harbors into a standing conflict-of-interest protocol so the company does not have to improvise under pressure. This protocol should require advance written disclosure of any interested transaction, approval by disinterested owners or directors, recusal of the interested party from the vote, and documentation of the disclosure and approval in the minutes. Additionally, as discussed above, both LLCs and corporations may consider limiting fiduciary duties to the extent possible under the Corporations Act and LLC Act in their respective governance documents to permit governors and directors, respectively, to take certain actions, such as competing against the business or partaking in related-party transactions, if the disinterested board, managers, officers, or equity holders are made aware and vote to allow it.

10. Family owned businesses need formal governance documents, too.

Familial relationships do not eliminate the potential for disagreement; indeed, the overlap between personal, ownership, and management roles can make disputes more likely and more complicated, especially as additional generations become involved in the business. Clear, formal, written governance documents help set expectations, define decision-making authority, and provide an agreed-upon framework for resolving issues early.

Conclusion

Businesses that draft their most important documents with an eye towards the preventable issues above minimize their risk of becoming embroiled in costly disputes later. Minnesota courts have repeatedly stepped in where a majority owner frustrated a minority owner’s reasonable expectations—ordering buyouts and other equitable relief under Minnesota Statutes Section 302A.751. (Lund as trustee of Revocable Tr. of Kim A. Lund v. Lund, 924 N.W.2d 274 (Minn. Ct. App. 2019); Gunderson v. All. of Computer Pros., Inc., 628 N.W.2d 173 (Minn. Ct. App. 2001); Pedro v. Pedro, 489 N.W.2d 798 (Minn. Ct. App. 1992).) But by the time a court is involved, relationships, and often the value of the business, have suffered.

Finally, avoid "setting and forgetting" governing documents. Ownership changes, financing rounds, management transitions, and acquisitions are all good opportunities to review these documents and confirm they still reflect the parties’ expectations. This matters under Minnesota law specifically: Because written agreements are presumed to reflect the owners’ reasonable expectations (Minn. Stat. § 302A.751, subd. 3a.), outdated documents can be worse than no documents at all.

Thoughtful governance planning, clear documentation, consistent communication, and a periodic review of the documents you already have can go a long way in preserving important relationships and enterprise value.

This article is for general informational purposes and does not constitute legal advice. Governance, transfer, and tax provisions should be tailored to the specific company and reviewed with counsel.