1. NOW WRAP YOUR MIND AROUND THAT....
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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
         1. III. Shareholder Meetings ..........................................................................................................8 IV. Board Meetings....................................................................................................................9 V. Written Actions....................................................................................................................9 VI. Committees ........................................................................................................................10 VII. Board Members..................................................................................................................10 A. Standard of Conduct...............................................................................................10 B. Election ..................................................................................................................13 C. Vacancies ...............................................................................................................13 D. Removal .................................................................................................................14 VIII. Officers ..............................................................................................................................14 A. Standard of Conduct...............................................................................................14 B. Election/Appointment ............................................................................................15 C. Removal .................................................................................................................16
2. III. SHAREHOLDER MEETINGS
   1. Shareholders are to have an initial meeting to elect a board of directors. Minn. Stat. § 302A.171.
      1. Meetings of shareholders are to be held annually or on a less frequent periodic basis, but need not be held unless required by the Bylaws or Articles. Minn. Stat. § 302A.431.
         1. If a meeting has not been held in the last 15 months, however, a shareholder or shareholders holding 3% or more of the shares may call a regular meeting. Id., subd. 2. The meeting can cover any business and also includes an election of any directors who serve for an indefinite term. Id., subd. 4.
            1. Special meetings of shareholders may be called by the CEO, CFO, two or more directors, a person authorized by the Articles or Bylaws, or a shareholder or shareholders with 10% or more of shares. Minn. Stat. § 302A.433, subd. 1 Business at special shareholder meetings is limited to the purpose stated in the notice for the meeting. Subd. 4
            2. The special meeting provision allowing meetings to be called by a shareholder or shareholders with 10% of the shares is mandatory and cannot be changed by Articles or Bylaws. See Minn. Stat. § 302A.111, subds. 1, 2 (not listing Section 433 as a provision that can be modified in the Articles, a Shareholder Control Agreement, or the Bylaws).
            3. If either a regular or special shareholder meeting is held due to demand of one or more shareholders, it must be held in the county where the principal executive officer of the corporation is located. Minn. Stat. § 302A.431, subd. 3; 302A.433, subd. 3.
            4. Notice of any meeting must be given to every shareholder entitled to vote. Minn. Stat. § 302A.435. Absent a specific notice requirement fixed by law (or shorter period established by the Articles or Bylaws), notice of a shareholders meeting must be given at least 10 days, but not more than 60 days, before the meeting.
            5. Meetings to approve certain transactions, such as mergers, require a lengthier notice period. E.g., Minn. Stat. § 302A.613, subd. 1 (plan of merger exchange must be submitted at a shareholder meeting for which written notice is provided at least 14 and not more than 60 days before the meeting).
            6. Meetings may take place by telephone or other remote communication. Minn. Stat. §§ 302A.431, subd. 3, 302A.433, subd. 3, 302A.436.
            7. A shareholder may cast votes by appointing a written proxy filed with a corporate officer at or before a shareholder meeting. Minn. Stat. § 302A.449.
3. IV. BOARD MEETINGS
   1. Meetings of the board may be held as provided in the Articles or Bylaws at any place that the board chooses. Minn. Stat. § 302A.231, subd. 1. They can also take place by remote communication. Id., subd. 2. Unless the Articles or Bylaws provide otherwise, a director may call a board meeting by giving at least ten days’ notice. Id., subd. 4. The notice need not state the purpose of the meeting unless the Articles or Bylaws require it. Id. One issue that can sometimes create friction is whether a board member is entitled to have his or her personal lawyer present at a board meeting. The caselaw on this issue is relatively limited. See, P. Colton, A Corporate Director’s Right to Counsel at Board Meetings: When is the Door Closed to Counsel?, 71 THE HENNEPIN LAWYER 16 (July/Aug. 2002) (discussing caselaw and concluding that little reliance can be placed in the caselaw and statutory commentary on the issue).
      1. V. WRITTEN ACTIONS
         1. An action that is required or permitted to be taken at a shareholder meeting may be taken by written action signed or consented to by authenticated electronic communication by all of the shareholders entitled to vote in the action. Minn. Stat. § 302A.441. The Board can take any action by written action if it is allowed in the Articles and is an action that does not require shareholder approval. Minn. Stat. § 302A.239. For the board to take written action the action has to be either signed or consented to by authenticated electronic communication by all of the directors. Id.
4. VI. COMMITTEES
   1. Generally, a resolution approved by the affirmative vote of a majority of the board may establish committees having the authority of the board in the management of the business of the corporation only to the extent provided in the resolution. Minn. Stat. § 302A.241, subd. 1. A committee does not have to consist of board members, but committee members must be natural persons. Id., subd. 2.
      1. Notably, though one need not be a director to be a member of a committee, all committee members are deemed to be directors for the purpose of the standard of conduct rules expressed in Minn. Stat. § 302A.251, conflict of interest rules expressed in Minn. Stat. § 302A.255 and the indemnification provisions of Minn. Stat. § 302A.521.
         1. Committees – other than the special litigation committees (discussed in Section XI below) – are subject to the direction and control of the board. Minn. Stat. § 302A.241, subd. 1 A committee may create a subcommittee and delegate some or all of its authority to that subcommittee. Id., subd. 2a. A subcommittee can consist of one or more members of the committee.
            1. “The establishment of, delegation of authority to, and action by a committee does not alone constitute compliance by a director with the standard of conduct set forth in section 302A.251.” Id., subd. 6.
5. VII. BOARD MEMBERS
   1. A. Standard of Conduct
      1. Minn. Stat. § 302A.251, subd. 1 provides that a director shall discharge the duties of the position of director in good faith (honesty in fact), in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. Directors owe a fiduciary duty to the corporation and to the corporation’s shareholders. Wenzel v. Mathies, 542 N.W.2d 634, 641 (Minn. Ct. App. 1996); In re Fergus Falls Woolen Mills Co., 41 F.Supp. 355, 364 (D. Minn. 1941).
         1. In addition to the standard of conduct and duties of a director, Minnesota law imposes additional duties on one who is also a shareholder of a closely held corporation. Such shareholders “owe one another [the duty] to act in an honest fair, and reasonable manner in the operation of the corporation.” Minn. Stat, § 302A.751, subd. 3a; see also, Evans v. Blesi, 345 N.W.2d 775, 779 (Minn. Ct. App. 1984) (law imposes on such shareholders the “highest standard of integrity in their dealings with each other”).
            1. In fulfilling his or her duties, a director is entitled to rely on information, opinions, reports, or statements, including financial statements and other financial data prepared or presented by: (1) one or more officers or employees of the corporation whom the director reasonably believes to be reliable and competent in the matters presented; (2) counsel, public accountants, or other persons as to matters that the director reasonably believes are within the person’s professional or expert competence; or (3) a committee of the board upon which the director does not serve, duly established in accordance with section 302A.241, as to matters within the designated authority, if the director reasonably believes the committee to merit confidence. Minn. Stat. § 302A.251, subd. 2.
            2. Nonetheless, if a director who has knowledge concerning the matter in question that makes his or her reliance on any of the last three sources of information unwarranted, but relies upon them anyway, that director may be vulnerable to a claim that he or she has violated the standard of conduct required of a director.
            3. In considering the best interests of the corporation, a director may consider the interests of the corporation’s employees, customers, suppliers, and creditors, the economy of the state and nation, community and societal considerations, and the long-term as well as short-term interests of the corporation. Minn. Stat. § 302A.251, Subd. 5.
            4. A director who is present at a meeting of the board when an action is approved by affirmative vote of a majority of the directors present is presumed to have assented to the action approved, unless the director: (1) objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting; (2) votes against the action at the meeting; or (3) is prohibited by section 302A.255 from voting on the action. Id., subd. 3.
            5. A director’s personal liability to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director may be eliminated or limited in the Articles. However, the Articles shall not eliminate or limit the liability of a director: (a) for any breach of the director’s duty of loyalty to the corporation or its shareholders; (b) for acts or omissions not in good faith or that involve intentional misconduct or a knowing violations of the law; (c) under section 302A.559 (liability for illegal distributions) or 80A.23 (securities law violations); (d) for any transaction from which the director derived an improper personal benefit; or (e) for any act or omission occurring prior to the date when the provision in the Articles eliminating or limiting liability becomes effective. Minn. Stat. § 302A.251, subd. 4.
            6. LLC’s have similar rules regarding the standard of conduct required. Minn. Stat. § 322B.663.
   2. B. Election
      1. Directors must be natural persons. The method of their election and any additional qualifications for directors can be determined by the terms of the Articles or Bylaws. Minn. Stat. § 302A.205.
         1. To be elected to the board, a director only needs to receive a plurality (as opposed to a majority) of the voting shares present. Minn. Stat. § 302A.215, subd. 1. Unless the Articles provide otherwise, this section provides for cumulative voting. Id. Cumulative voting means that the shareholder gets to cast a number of votes equal to the number of shares he or she owns multiplied by the number of directors up for election – and can designate the votes entirely for one candidate or distribute the votes on multiple candidates as he or she desires. Id., subd. 2. This can be an important aspect of minority shareholders’ rights, because cumulative voting allows even minority shareholders with sufficient (but less than majority) voting power to achieve board representation Importantly, shareholders planning to cumulate their votes must give written notice of that intent before the vote on the election. Id. The ability to modify or amend the Articles or Bylaws to deny or restrict cumulative voting is restricted, and cannot be achieved if enough shares sufficient to elect a single director under cumulative voting vote against the amendment. Id., subd. 3. LLC’s also have rules that provide for cumulative voting. Minn. Stat. § 322B.63.
            1. C. Vacancies
            2. Unless different rules for filling vacancies are provided for in the Articles or Bylaws, vacancies on the board resulting from the death, resignation, removal, or disqualification of a director may be filled by the affirmative vote of a majority of the remaining directors, even if they constitute less than a quorum. Minn. Stat. § 302A.225. Vacancies on the board resulting from newly created directorships may be filled by the affirmative vote of a majority of the directors serving at the time of the increase. Each director elected by the board to fill a vacancy holds office until a qualified successor is elected by the shareholders at the next regular or special meeting of the shareholders.
            3. D. Removal
            4. Any or all of the directors may be removed at ANY time with or without cause, if (1) the director was named by the board to fill a vacancy; (2) the shareholders have not elected directors in the interval between the time of the appointment to fill a vacancy and the time of the removal; and (3) a majority of the remaining directors present affirmatively vote to remove the director. Minn. Stat. § 302A.223. A director also can be removed by shareholders by vote of majority of shares. Id. In a corporation that has cumulative voting, unless the entire board is removed simultaneously, a director is not removed from the board if there are votes sufficient to elect the director at an election of the entire board under cumulative voting cast against removal of the director. Id., subd. 4.
6. VIII. Officers
   1. A. Standard of Conduct
      1. An officer must discharge the duties of an office in good faith, in a manner the officer reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances. Minn. Stat. § 302A.361. This standard includes the duties of good faith, loyalty, and care. “Officers are subject to much the same standard of conduct as are directors, with a few differences.” Reporter’s Notes; see also, Miller v. Miller, 222 N.W.2d 71, 78 (Minn. 1974) (officers entrusted with active management occupy fiduciary relationship to the corporation). The standard of conduct is not automatically met, as in the case of directors, by reason of reliance upon information provided by others unless it is subsumed under the circumstances within the phrase “ordinarily prudent person in a like position under similar circumstances.” Minn. Stat. § 302A.351, Reporters Notes. An officer has no right to rely on information provided by another person if the matter relied upon is within that officer’s area of direct responsibility. “On the other hand, that officer may have a right to rely on others if the matter is outside the scope of the relying officer's responsibility.”
   2. B. Election/Appointment
      1. The Board of Directors appoints the corporate officers. The MBCA specifically calls for appointment of a chief executive officer and chief financial officer. Minn. Stat. § 302A.305. In addition, “[t]he board may elect or appoint, in a manner set forth in the articles or bylaws or in a resolution approved by an affirmative vote of a majority of the directors present, any other officers or agents the board deems necessary for the operation and management of the corporation….” Minn. Stat. § 302A.311.
      2. “Any number of offices or functions of those offices may be held or exercised by the same person.” Minn. Stat. § 302A.315.
      3. Officers are required, and persons exercising the functions of officers are deemed elected. Minn. Stat. §§ 302A.301; 302A.321. This rule has had a comparable existence as the “de facto” officer rule. A “de facto officer” of private corporation is one exercising powers of office under color of election or appointment. State v. Kylmanen, 231 N.W. 197, 198 (Minn. 1930) (“The general rule is that a person is a director de facto where he is in possession of the office and exercising the duties thereof under color or appearance of right. . . . One may be a de facto officer though he is ineligible to hold the office.”).
      4. LLC’s have similar rules. Managers are required. Minn. Stat. § 322B.673. The standard of conduct required of managers of an LLC is located in Minn. Stat. § 322B.69.
   3. C. Removal
      1. An officer may resign by giving written notice to the corporation. Minn. Stat. § 302A.341, subd. 1. An officer may be removed at any time, with or without cause, by a resolution approved by the affirmative vote of a majority of the directors present, subject to the provisions of a shareholder control agreement. Id., subd. 2. A Minnesota court has held that a CEO does not have authority to terminate a CFO (unless the Shareholder Control Agreement provides otherwise), as this authority is vested in the board. Fisher v. Jeddeloh, No. A07-0630, 2008 WL 933478 at *2 (Minn. Ct. App. April 8, 2008).
7. 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.