Business Owners: Think Twice Before Gifting Stock to Employees

September 24, 2021  |  Carole Clark Isakson

I receive regular calls from small business owners that want to show appreciation to their hardworking employees by gifting shares in the company.  Sometimes, the goal is to incentivize an employee to work harder and in other cases, the employer hopes to keep the employee long-term and feels the gift will help with this. I generally dissuade these owners from share transfers and suggest other ways to bonus employees based on profits. Why? Because an owner of shares, no matter how small, has rights in the company that can cause issues for the well-meaning employer.

Minority shareholders in Minnesota have a variety of rights. For instance, minority shareholders in privately held corporations have the right to request and examine the share register, the records of all shareholders, and board proceedings over the past three years. This includes all articles, amendments, bylaws currently in effect, certain financial statements, reports made to shareholders within the last three years, names and business addresses of all directors and principal officers, voting trust agreements, shareholder control agreements, and other types of agreements. While providing these documents may not be difficult, many employers would rather not share this information. When an employee comes to their employer, and owns a share in the company, this information must be provided.

In some cases, that shared gift can make it hard to fire the employee later. These cases generally apply to original shareholders only. Courts have found, in some circumstances, that an employee shareholder in a small company may have an expectation of continuing employment with the company.

A share has value, and ultimately the employee shareholder is entitled to the value of the shares.  Rights can be triggered that will force a company evaluation and buyout, along with other issues.

For more information about these rights, contact the author of this blog, Carole Clark Isakson, or one of the other BGS corporate attorneys.