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Minority Shareholder Rights and Stock Incentive Programs

August 1995

A recent case by the Massachusetts Supreme Judicial Court suggested to us an interesting subtlety regarding minority shareholder rights in close corporations. When a minority shareholder invests in a company and becomes an employee, there is an argument that continued employment is part of the shareholder’s “return on investment.” In this instance, in order to terminate the employee, the company must show a “legitimate business purpose” and that there was no alternative course of action less harmful to the employee’s interests.

The case in question suggests to us that a court might be receptive to the argument that minority shares obtained through a stock incentive program could also give rise to this right. The employee’s argument would be that he or she had accepted a lower salary in exchange for the stock, and thereby “invested” in the company. The best way for a company to avoid ever having to face this argument is to require all employees, even those who receive incentive stock, to agree in writing that their employment is “at-will.”