CORPORATE GOVERNANCE; STUDY GUIDE #1 SOURCES OF CORPORATE GOVERNANCE RULES

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  1. CORPORATE GOVERNANCE FOUND ONLINE: http://www.aoblr.com/PDFs/CorpGovernance.pdf Randy G. Gullickson, Esq. Larina A. Brown, Esq. Anthony Ostlund Baer Louwagie & Ross P.A. 3600 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402 Telephone: 612‐349‐6969 www.aoblaw.com
SOURCES OF CORPORATE GOVERNANCE RULES
1. The most common sources of rules that govern the existence and operations of a corporation are the Articles, the Bylaws, or other agreements such as Shareholder Control Agreements, Buy-Sell Agreements, or Employment Contracts.
  1. CONTRACT IS LAW
    1. In addition, the Minnesota Business Corporations Act (“MBCA”), Minn. Stat. Ch. 302A contains many procedural and substantive provisions relating to corporate governance, including many “default” provisions that apply to Minnesota corporations unless the Articles or Bylaws modify the statutory requirements.
      1. CORPORATIONS; MINNESOTA STATUTES
      2. CHAPTER 302A BUSINESS CORPORATIONS.pdf
      3. https://www.revisor.mn.gov/statutes/?id=302A
PROCEDURAL v. SUBSTANTIVE
unless the Articles or Bylaws modify the statutory requirements
A. THE ARTICLES
1. The corporate existence begins with the filing of the Articles of Incorporation. Minn. Stat. § 302A.153.
  1. 302A.153 EFFECTIVE DATE OF ARTICLES. Articles of incorporation are effective and corporate existence begins when the articles of incorporation are filed with the secretary of state accompanied by a payment of $135, which includes a $100 incorporation fee in addition to the $35 filing fee required by section 302A.011, subdivision 11. Articles of amendment are effective when filed with the secretary of state or at another time within 30 days after filing if the articles of amendment so provide. Articles of merger must be accompanied by a fee of $60, which includes a $25 merger fee in addition to the $35 filing fee required by section 302A.011, subdivision 11. https://www.revisor.mn.gov/statutes/?id=302A.153&format=pdf
    1. In the absence of a corporate existence, persons working together to earn a profit are presumed to be engaged in a partnership, and to share profits and losses in accordance with the rules that apply to partnerships. Minn. Stat. § 323A.0202; Brcka v. Falcon Elec. Corp., 2001 WL 641524, at *6-7 (Minn. Ct. App. June 12, 2001) (“The supreme court has . . . recognized, without adopting, the rule that when a business is operated following a failure to perfect a contemplated incorporation, the business becomes a partnership. The supreme court [has also] applied the rule that when a business successfully incorporates but later fails to operate as a corporation, the business becomes a partnership.”)
      1. Minn. Stat. § 302A.153, Reporter’s Notes, which state that “the effective date should coincide with filing so that there can be no doubt that all subsequent corporate acts are the acts of a de jure corporation. This is important because the doctrine of de facto corporations is inapplicable in this state after the enactment of this act.”)
it is important that if any decisions or actions have been taken on behalf of the corporation before the Articles have been filed that the Company ratify them upon coming into existence
MUST v. MAY
1. THE ARTICLES MUST INCLUDE
  1. name of the corporation
    1. address of the registered office of the corporation
      1. name of registered agent
      2. aggregate number of shares that the orporation has authority to issue
      3. name and address of each incorporator
      4. Minn. Stat. § 302A.111, subd. 1
2. provisions that “may” be included in the Articles
  1. other provisions that may be included in either the Articles or the Bylaws
Articles can be amended or modified only in accordance with Sections 302A.133 to 302A.139. Minn. Stat. § 302A.131. Only Shareholders can amend the Articles. Minn. Stat. § 302A.135, subds. 2, 4.
1. LLC’s have rules that are similar to those that apply to corporations with regard to their Articles of Organization. See Minn. Stat. § 322.B.115.
B. BYLAWS
1. BYLAWS ARE OPTIONAL
  1. After the filing of Articles of Incorporation, the incorporators or the directors named in the Articles can either hold an organizational meeting or take written action to complete the organization of the business, including adoption of Bylaws. Minn. Stat. § 302A.171. The purpose of Bylaws is to establish rules for the internal government of the corporation. Little Canada Charity Bingo Hall Ass’n v. Movers Warehouse, Inc., 498 N.W.2d 22, 24 (Minn. Ct. App. 1993).
    1. Minn. Stat. § 302A.181, subd. 1 (corporations “may, but need not, have bylaws”). However, once adopted, Bylaws “must be obeyed” by the corporation, its directors, officers, and stockholders. Little Canada Charity Bingo Hall Ass’n, 498 N.W.2d at 24 (quoting Diedrick v. Helm, 14 N.W.2d 913, 921 (Minn. 1944)); see also Isaacs v. Am. Iron & Steel Co., 690 N.W.2d 373, 376 (Minn. Ct. App. 2004).
      1. In contrast to the Articles, the shareholders and board of directors both have power to amend or modify the Bylaws. Minn. Stat. § 302A.181, subds. 2-3. Bylaws are to be fair and reasonable. Bosch v. Meeker Co-op. Light & Power Ass'n, 91 N.W.2d 148, 152 (Minn. 1958). At least one Minnesota court has likened Bylaws to contracts. Miller Waste Mills v. Mackay, 520 N.W.2d 490, 495 (Minn. Ct. App. 1994)
      2. Generally, a director or member can challenge a corporation’s failure to adhere to its Bylaws, but a third party has no power to challenge a corporation based upon such a violation. Little Canada Charity Bingo Hall Ass’n, 498 N.W.2d at 24.
      3. LLCs have rules similar to those applicable to a corporation’s Bylaws. Minn. Stat. §§ 322B.60, 322B.603.
C. CONTRACTS
1. types of contracts that commonly serve as a source for rules that govern the management or operations of a corporation
  1. Shareholder Control Agreements
    1. specifically enforceable as long as it is signed by all the shareholders, id., but such agreements must not violate statutory provisions that cannot be modified
      1. written agreements among shareholders that relate to the control of any phase of the business and affairs of the corporation, the relations between and among the shareholders, and/or its liquidation/dissolution. Minn. Stat. § 302A.457, subd.1.
  2. Employment Agreements
  3. Buy-Sell Agreements,
    1. Buy-Sell agreements are governed by Minn. Stat. § 302A.429. Section 429 dictates that a written restriction on the transfer of shares, whether set forth in the Articles, Bylaws, shareholder resolution, or agreement, is enforceable if it is not “manifestly unreasonable under the circumstances” and is either (1) noted conspicuously on the face or back of the certificate; or (2) included in information sent to the holders of uncertified shares. Id; see also, Miller Waste Mills, 520 N.W.2d at 495 (enforcing contractual repurchase option contained in the Bylaws).
  4. Voting Agreements
    1. agreement by a number of stockholders to combine their votes in order to effectuate a particular policy is not unlawful in absence of evidence of intent to defraud other stockholders or to secure a private benefit at expense of the corporation or the other stockholders. Hart v. Bell, 23 N.W.2d 375, 380 (Minn. 1946). Voting Agreements are written agreements “among persons who are then shareholders or subscribers for shares to be issued relating to the voting of their shares.” Minn. Stat. § 302A.455.
A comparable number of statutory provisions can be modified in the Articles, in a Shareholder Control Agreement, or in the Bylaws. Id., subd. 3. This set of provisions includes the following examples:
1.  Directors serve indefinite terms that expire at the next regular meeting of shareholders (Section 302A.207)
2.  Compensation of directors is fixed by the Board (Section 302A.211)
3.  Certain methods for removal of board members or filling board vacancies (Sections 302A.223, 302A.225)
4.  Notice of board meeting need not state the purpose (Section 302A.231, subd. 3)
5.  Rules regarding establishment of committees (Section 302A.241)
6.  Mandatory indemnification for officers and directors (Section 302A.521).
D. STATUTORY DEFAULT PROVISIONS
1. The MBCA contains a number of provisions governing corporate activities that apply unless the corporation has modified these rules through its own corporate governance documents. Approximately 20 of these provisions can be modified only in the Articles or in a Shareholder Control Agreement (but not in the Bylaws). Minn. Stat. § 302A.111, subd. 2. Among the important statutory provisions that fall into this category are the following:
  1.  The power to adopt or amend Bylaws vested in the Board (Section 302A.181)
  2.  Cumulative voting for directors (Section 302A.215, subd. 2)
  3.  All shares are common shares entitled to vote and are of one class (Section 302A.401, subd. 2)
  4.  All shares have equal rights and preference as to all matters not otherwise provided for by the board (Section 302A.401, subd. 2).
  5.  Certain preemptive rights of shareholders (Section 302A.413).
CORPORATE GOVERNANCE.pdf
1. Following the rules of corporate governance can also help in reducing the potential for disruptive and expensive shareholder disputes, and assure that the liability shield that establishing a business as a corporation is designed to provide its shareholders is preserved.
  1. A company’s lack of adherence to corporate formalities and corporate governance rules can risk the application of the corporate veil-piercing doctrine. In determining whether to apply the doctrine, Minnesota courts look to a number of factors. Specifically, courts rely upon the two-prong test first articulated by the Minnesota Supreme Court in Victoria Elevator Co. v. Meriden Grain Co., 283 N.W.2d 509 (Minn. 1979). The first prong of the Victoria Elevator test considers whether or not the shareholder has established a sufficiently separate corporate entity according to the following factors, which are not exclusive: 1. Insufficient capitalization for purposes of the corporate undertaking; 2. Failure to observe corporate formalities; 3. Nonpayment of dividends; 4. Insolvency of the debtor corporation; 5. Siphoning of funds by a dominant shareholder; 6. Nonfunctioning of other officers and directors; 7. Absence of corporate records; 8. Existence of the corporation as a mere façade for individual dealings. More than one, but not all, of these factors must be present in order to provide a basis for corporate veilpiercing. Under the second prong of the test, the court looks to whether piercing the corporate veil is required by fairness and whether the corporate entity has been operated in an unjust manner with respect to the plaintiff. Id.; White v. Jorgenson, 322 N.W.2d 607, 608 (Minn. 1982)
    1. Thus, careful observance of the corporate rules can have many practical, legal and economic benefits.