A Minnesota Appeals Court recently ruled that a father could not terminate his son as the president of the family-owned business because the father did not have authority to do so under the company’s by-laws.  Call v. Call, No. A19-0074 (Minn. Ct. App. Sept. 3, 2019).  This case involved a dispute between the owners of a manufacturing company, Winco, Inc., that had been in existence since 1927.  Ralph Call had been Winco’s sole shareholder for decades.  In 2009, Ralph’s son Daniel joined the company with the understanding that Daniel “would eventually own a significant share of Winco.”  By 2017, Daniel owned 65% of Winco’s shares as a result of a series of transfers from Ralph.  Winco’s board of directors also had appointed Daniel president of the company in 2014, while Ralph remained its CEO.

The Appeals Court noted that at some point in 2017, “the parties’ relationship became dysfunctional.”  At a special meeting of the shareholders, Daniel attempted to appoint his wife to the board.  Ralph attempted to adjourn that meeting but, since there was no formal vote to adjourn, Daniel and his wife continued the meeting and voted to remove Ralph as CEO.  After the meeting, Ralph, still claiming authority as CEO, attempted to terminate Daniel’s employment as Winco’s president.

Litigation immediately followed, with Daniel and Ralph each disputing the validity of the other’s actions.  After trial, the Court found that each of the shareholders breached duties to the other.  The Court held that Daniel’s attempt to install his wife as a director unfairly prejudiced Ralph as a minority owner.  The Court also found Ralph’s attempt to fire Daniel as president to be invalid.  The trial court then issued an order restoring the pre-existing management structure, with Daniel as president and Ralph as CEO, and appointed a special master to “assist the parties with restructuring the management of Winco.” The trial court also enjoined both parties from taking any independent actions to change the governance or financial structure of Winco.

Ralph appealed the trial court order, arguing that, as CEO, he had the right to fire Daniel as president.  The Appeals Court disagreed, citing to the company’s by-laws.  The by-laws provided that a company officer, including the president, could be removed only “by the affirmative vote of a majority of the directors.”  The by-laws also did not provide that the CEO had the authority to terminate another officer without board approval.  Instead, since Daniel had been appointed by the board, only the board could remove him.  The Appeals Court then upheld the trial court’s ruling that Ralph, as CEO, was not authorized to fire Daniel.

The Call case reinforces the importance of understanding and following the terms of a company’s by-laws.

Such by-laws are treated as contracts between and among a company and its shareholders and a by-law provision will typically be enforced “according to its plain and ordinary meaning, even if the result is harsh.”  Thus, as in the Call case, a company’s by-laws may prevent a company’s officer from taking unilateral action even in the face of perceived misconduct by another officer.  This may result in management deadlock and otherwise interfere with the company’s operations.  In such a case, the company’s shareholders or directors may be best served by enlisting one or more independent third parties to work through the management, ownership and perhaps even familial dynamics and conflicts as appropriate, so the enterprise can move forward more effectively.  If parties are unwilling or unable to do so voluntarily and instead opt to litigate their various disputes, a court may decide to appoint a special master, receiver or similar independent third party in order to manage or restructure the company’s operations, subject to court oversight, in a manner consistent with the company’s by-laws and other agreements.