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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. IX. Conflicts of Interest............................................................................................................16 X. Compensation ....................................................................................................................17 XI. Special Litigation Committees...........................................................................................19 XII. Indemnification Rights.......................................................................................................20 XIII. Books and Records ............................................................................................................23 XIV. Equitable Remedies ...........................................................................................................25
    1. Minnesota corporate governance rules specifically address the handling of conflict of interest transactions. Corporate transactions with a director (or entity related to a director) should be approved in a manner consistent with Minn. Stat. § 302A.255.
      1. Under that statute, a contract or transaction between a corporation and one or more of its directors, or between a corporation and an organization in or of which one or more of its directors are directors, officers, or legal representatives or have a material financial interest, is not void or voidable because the director or directors (or related organizations) are parties or because the director or directors are present at the meeting of the shareholders or the board or a committee at which the contract or transaction is authorized, approved, or ratified, if it is approved in a manner consistent with any of the following: (a) The contract or transaction was, and the person asserting the validity of the contract or transaction sustains the burden of establishing that the contract or transaction was, fair and reasonable as to the corporation at the time it was authorized, approved, or ratified; (b) The material facts as to the contract or transaction and as to the director's or directors' interest are fully disclosed or known to the holders of all outstanding shares, whether or not entitled to vote, and the contract or transaction is approved in good faith by (1) the holders of two-thirds of the voting power of the shares entitled to vote which are owned by persons other than the interested director or directors, or (2) the unanimous affirmative vote of the holders of all outstanding shares, whether or not entitled to vote; (c) The material facts as to the contract or transaction and as to the director's or directors' interest are fully disclosed or known to the board or a committee, and the board or committee authorizes, approves, or ratifies the contract or transaction in good faith by a majority of the directors or committee members currently holding office, but the interested director or directors shall not be counted in determining the presence of a quorum and shall not vote; or (d) The contract or transaction is a distribution described in section 302A.551, subdivision 1, [outlining certain standards for making distributions], or a merger or exchange described in section 302A.601, subdivision 1 or 2. Minn. Stat. § 302A.255, subd. 1.
        1. In one Minnesota case, a corporation had four directors present at a board meeting. Possis Corp. v. Continental Machine Inc., 425 N.W.2d 286, 290-92 (Minn. Ct. App. 1988). Two of them were “interested” directors with a conflict of interest. Id. at 289. The other two were “non-interested,” or independent, directors. Id. The two interested directors were not allowed to vote on the transaction because they had a conflict of interest. Id. at 290. The two remaining independent directors voted for the corporate action; however, they did not represent a “majority of the directors present” to pass the action under Minn. Stat. § 302A.237. Id. at 291-92. The corporate act was therefore void.
          1. LLC’s have similar rules. Minn. Stat. § 322B.666
    1. Subject to any limitations in the Articles or Bylaws, the board may fix the compensation of directors. Minn. Stat. § 302A.211. Traditionally, the board has set the salary for the officers as well as the directors. See, e.g., Schmitt v. Eagle Roller Mill, 272 N.W. 277, 285 (Minn. 1937) (refusing to find that salary for officer as set by directors was excessive); cf. C.J. Duffey Paper Co. v. Reger, 588 N.W.2d 519 (Minn. App. 1999) (affirming award of officer compensation where CEO had set his own compensation).
      1. There are fiduciary considerations in setting levels of compensation. Minn. Stat. § 302A.211, Reporter’s Notes. The board should consider the financial health of the corporation in setting such compensation, see Backus v. Finkelstein, 23 F.2d 531, 537 (D. Minn. 1924), and conform to the business judgment rule. A salary should not be unreasonable, excessive, or arbitrary. Seitz v. Union Brass & Metal Mfg. Co., 189 N.W. 586, 587 (Minn. 1922). Such a salary may be vulnerable to a suit in equity brought by a minority shareholder. See also Minn. Stat. § 302A.211, Reporter’s Notes (noting that unreasonable director compensation may be challenged through an action for equitable relief under Section 302A.467). Additionally, a Minnesota court has held that bonuses received by corporate officers without authority from board of directors must be returned. Barrett v. Smith, 242 N.W. 392, 395 (Minn. 1932). Generally, a claim that excess compensation should be repaid to the corporation is viewed to be a derivative action brought on behalf of the corporation rather than a direct claim brought on behalf of shareholders – even in closely held corporations – unless the claim is that one director has been excluded from ompensation paid to others. Wessin v. Archives Corp., 592 N.W.2d 460, 465 (Minn. 1999).
        1. An officer or director may not be entitled to compensation while he is acting without good faith. Seitz, 189 N.W. at 588-89; see also, Bolander v. Bolander, 703 N.W.2d 529, 548 (Minn. Ct. App. 1999) (equitable relief, including forfeiture of compensation, may be appropriate where director/officer violated statutory standard of care to act in corporation’s best interests).
          1. A board resolution fixing compensation of a director as a director, officer or employee is not viewed to be a transaction between the corporation and a director with a material financial interest under the interested director transaction statute, Section 302A.255. Therefore, the participation by a director in approving his or her compensation does not render the compensation arrangement void or voidable. Minn. Stat., § 302A.255, subd. 2. LLC’s have similar rules. Minn. Stat. § 322B.623.
    1. Officers and directors who are sued, or otherwise become EMBROILED IN LITIGATION
      1. with respect to conduct as an officer or director may be entitled to indemnification from liability and/or payment of attorneys’ fees by the company. Under the MBCA, a corporation “shall” indemnify a person made or threatened to be made a party to a proceeding by reason of the former or present “official capacity” as an officer or director if, with respect to the acts or omissions of the person complained of in the proceeding, the person: 1. has not been indemnified by another source; 2. acted in good faith; 3. received no improper personal benefit; 4. in the case of a criminal proceeding, had no reasonable cause to believe the conduct was unlawful; and 5. believed the conduct was in the best interests of the corporation (see statute for caveat). Minn. Stat. § 302A.521, subds. 1-2.
        1. In addition, such an officer or director is entitled to payment or reimbursement by the corporation of attorneys’ fees and expenses in advance of the final disposition of the case if s/he provides a written affirmation of a good faith belief that the criteria for indemnification have been satisfied and to repay any amounts received if it is ultimately determined that the criteria have not been satisfied and the facts then known would not preclude indemnification. Minn. Stat. § 302A.521, Subd 3
          1. The Articles or Bylaws either may prohibit indemnification or advances of expenses otherwise required or may impose conditions on indemnification or advances of expenses in addition to the other conditions in Section 521, including monetary limits on indemnification or advances of expenses, as long as the prohibition or conditions apply equally to all persons or to all persons within a given class. Minn. Stat. § 302A.521,Subd. 4.
          2. The individuals typically seeking indemnification or advance of attorneys’ fees are often Board members, so the corporation must consider the appropriate manner of determining eligibility for indemnification or advances. Section 521, subd. 6 provides that such determinations in advance of final disposition of the proceeding may be made in any of the following ways: (1) by the board by a majority of a quorum, if the directors who are at the time parties to the proceeding are not counted for determining either a majority or the presence of a quorum; (2) if a quorum under clause (1) cannot be obtained, by a majority of a committee of the board, consisting solely of two or more directors not at the time parties to the proceeding, duly designated to act in the matter by a majority of the full board including directors who are parties; (3) if a determination is not made under clause (1) or (2), by special legal counsel, selected either by a majority of the board or a committee by vote pursuant to clause (1) or (2) or, if the requisite quorum of the full board cannot be obtained and the committee cannot be established, by a majority of the full board including directors who are parties; (4) if a determination is not made under clauses (1) to (3), by the affirmative vote of the shareholders required by section 302A.437, but the shares held by parties to the proceeding must not be counted in determining the presence of a quorum and are not considered to be present and entitled to vote on the determination; or (5) if an adverse determination is made under clauses (1) to (4) or under paragraph (b), or if no determination is made under clauses (1) to (4) or under paragraph (b) within 60 days after (i) the later to occur of the termination of a proceeding or a written request for indemnification to the corporation or (ii) a written request for an advance of expenses, as the case may be, by a court in this state, which may be the same court in which the proceeding involving the person's liability took place, upon application of the person and any notice the court requires. The person seeking indemnification or payment or reimbursement of expenses pursuant to this clause has the burden of establishing that the person is entitled to indemnification or payment or reimbursement of expenses. Minn. Stat. § 302A.521. subd. 6.
          3. Section 521 also provides that the termination of a proceeding by “judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent does not, of itself, establish that the person did not meet the criteria set forth in this subdivision.” Id., subd. 2(b). In Augustine v. Arizant, Inc., 751 N.W.2d 95 (Minn. 2008), a CEO and chairman of the board of a company sought indemnification for criminal proceedings in which he pleaded guilty to “knowingly and intentionally” aiding and abetting the making of a false statement or misrepresentation of material fact regarding the determination of medical benefit payments. The Minnesota Supreme Court determined that despite his guilty plea on the criminal charge, there was still an issue of material fact to be determined as to whether the officer and director had operated in “good faith” such that he was entitled to indemnity from the company for the criminal charge. Id. at 101 (the guilty plea by itself was insufficient to establish lack of good faith, because criminal defendants plead guilty for a number of reasons).
  5. XIII. Books and Records
    1. Corporations must on occasion deal with requests by shareholder for corporate documents and information. A shareholder has an “absolute right, upon written demand, to examine and copy” the share register and all documents corporations are required to keep. Minn. Stat. § 302A.461, subd. 4.
      1. Thus, a shareholder is always entitled, upon a written demand, to inspect and copy: (1) records of all proceedings of shareholders for the last three years; (2) records of all proceedings of the board for the last three years; (3) the corporation’s articles and all amendments currently in effect; (4) the corporation’s bylaws and all amendments currently in effect; (5) certain financial statements; (6) reports made to shareholders generally within the last three years; (7) a statement of the names and usual business addresses of its directors and principal officers; (8) voting trust agreements; (9) shareholder control agreements; (10) the share register; and (11) a copy of agreements, contracts, or other arrangements or portions of them incorporated by reference under section 302A.111, subdivision 7. Minn. Stat. § 302A.461, subds. 2, 4.
        1. Upon a showing of “proper purpose,” a shareholder of a non-public corporation is entitled to inspect and copy any other documents, as well. Id., subd. 4. A “proper purpose” is “one reasonably related to the person’s interest as a shareholder, beneficial owner, or holder of a voting trust certificate of the corporation.” Id. It has been determined that it is a “proper purpose” to request the books and records of a corporation to determine an “accurate value on their shares of stock, and to evaluate the conduct and affairs of the corporation's officers and majority shareholders so as to determine the effects on the financial condition [of the company].” Fownes v. Hubbard Broadcasting, Inc., 225 N.W.2d 534, 536 (Minn. 1975); Uldrich v. Datasport Inc., 349 N.W.2d 286, 289 (Minn. Ct. App. 1984) (evaluation of conduct and affairs of the other shareholders, officers and directors is a proper purpose). By contrast, requesting documents for purely personal purpose, such as improving one’s position in a lawsuit against the company is not a proper purpose. Bergmann v. Lee Data Corp., 467 N.W.2d 636, 640 (Minn. Ct. App. 1991). The company may also be able to rebut the shareholder’s claimed purpose. Id. (Shareholder’s “assertion that he sought inspection to investigate alleged officer misconduct and to communicate with stockholders created a prima facie showing of proper purpose, but was rebutted by respondents' evidence that the actual purpose was to improve appellant's position in the pending [employment] suit against respondents.)
          1. While a corporation may be required to produce certain documents in response to a shareholder demand, the statute takes into consideration the legitimate concerns of corporations to avoid disclosure of confidential information. Thus, if the parties cannot agree to acceptable confidentiality agreements, a corporation may apply to a court to seek a protective order permitting the corporation to withhold portions of corporate records or prevent premature disclosure of competitively sensitive information. A protective order can also impose other reasonable restrictions on the production of corporate information. Minn. Stat. § 302A.461, subd. 4a.
  6. XIV. Equitable Remedies
    1. The MBCA provides express remedies in the case of violations of corporate governance rules contained in the Act. There are two primary sources of equitable relief in the MBCA. A court may grant “equitable relief it deems just and reasonable” where a shareholder has established that (1) the directors or persons with authority are in an unbreakable deadlock; (2) the directors or those in control of the corporation have acted fraudulently or illegally toward one or more shareholders in their capacities as shareholders or directors, or as officers or employees of a closely held corporation; (3) the directors or those in control of the corporation have acted in a manner unfairly prejudicial toward one or more shareholders in their capacities as shareholders or directors of a corporation that is not a publicly held corporation, or as officers or employees of a closely held corporation; or (4) the shareholders are so divided that they have been unable to elect successors to directors whose terms have expired or would have expired upon the election and qualification of their successors for two consecutive regular meetings. Minn. Stat. § 302A.751, subd. 1.
      1. This statute, often employed to remedy claims of minority shareholder “oppression,” grants courts broad power to consider all relevant facts and circumstances in making a determination regarding equitable relief, which can often include violations of corporate governance norms. This statute is also designed to enforce the “reasonable expectations” of the shareholders, with the statute specifically providing that written agreements, including buy-sell agreements and other agreements between or among shareholders and/or the company (some of which are discussed above), are “presumed” to reflect the parties’ reasonable expectations as to matters dealt with in the agreements. Minn. Stat. § 302A.751 Subd. 3a.
        1. The second statute, more specifically focused on statutory corporate governance violations, is Minn. Stat. § 302A.467. Section 467 provides that “[i]f a corporation or an officer or director of the corporation violates a provision of this chapter, a court in this state may, in an action brought by a shareholder of the corporation, grant any equitable relief it deems just and reasonable in the circumstances and award expenses, including attorneys' fees and disbursements, to the shareholder.” This statute is discretionary, not mandatory, and grants the courts broad discretion to remedy statutory violations, including violation of the statutory duty of care of an officer/shareholder. Bolander v. Bolander, 703 N.W.2d 529, 548 (Minn. App. 2005).
          1. Section 467 can be successfully paired, for example, with a denial of access to the company’s books and records as required by Minn. Stat. § 302A.461. Minn. Stat. Ann. § 302A.461, 1981 Reporter's Notes (a shareholder's right to inspect corporate records “may be enforced in a proceeding under section 302A.467”); Blohm v. Kelly, 765 N.W.2d 147, 158 (Minn. Ct. App. 2009). However, Section 467 only applies to violations of Chapter 302A. Minn. Stat. § 302A.467 (stating that the court may order equitable relief “[i]f a corporation or an officer or director of the corporation violates a provision of this chapter” (emphasis added)); Isaacs v. American Iron & Steel Co., 690 N.W.2d 373, 379 (shareholder may not make claim for equitable relief for violation of company’s bylaws under Section 467; such a claim must be based upon a provision of chapter 302A).
    1. Special litigation committees may be utilized by corporations in response to shareholder derivative lawsuits or in other situations where claims of the corporation must be considered. “Committees may include a special litigation committee consisting of one or more independent directors or other independent persons to consider legal rights or remedies of the corporation and whether those rights and remedies should be pursued.” Minn. Stat. § 302A.241.
      1. Special litigation committees enable a corporation to determine whether to pursue claims or to seek to dismiss or settle a derivative suit (suit brought by a shareholder on behalf of the corporation), and are often used where members of the Board, which would otherwise act with respect to the lawsuit, suffer from a conflict of interest. In re UnitedHealth Group, 754 N.W.2d 544, 550-51 (Minn. 2008); see also Vincent Louwagie and Cory Olson, Cutting the Cost of Derivative Claims: The Role of the Special Litigation Committee, BENCH & BAR OF MINN. (March 2009).
        1. The special litigation committee must satisfy the requirements of the business judgment rule. In re United Health Group, 754 N.W.2d at 551. A court defers to the decision of a special litigation committee if a board properly delegates its authority to act to the special litigation committee. A court should defer to an SLC's decision with respect to a shareholder derivative action “if (1) the members of the SLC possessed a disinterested independence and (2) the SLC's investigative procedures and methodologies were adequate, appropriate, and pursued in good faith.” Id. at 559 In order to determine whether the special litigation committee is independent and therefore complies with the business judgment rule, the court examines the totality of the circumstances Id. at 560.
          1. The Minnesota Supreme Court has noted that the factors employed by other courts in examining such independence included, but were not limited to: (1) whether the members are defendants in the litigation; (2) whether the members are exposed to direct and substantial liability; (3) whether the “members are outside, non-management directors”; (4) whether the members were on the board when the alleged wrongdoing occurred; (5) whether the “members participated in the alleged wrongdoing”; (6) whether the members approved conduct involving the alleged wrongdoing; (7) whether the members or their affiliated firms “had business dealings with the corporation other than as directors”; (8) whether the members “had business or social relationships with one or more of the defendants”; (9) whether the members received advice from independent counsel or other independent advisors; (10) the severity of the alleged wrongdoing; and (11) the size of the committee.
          2. If the special litigation committee fails to meet the requirements of good faith and adequate independence such that its decision merits no judicial deference, the corporation does not get a “do over” regarding the decision to allow the shareholder derivative action to proceed. See Janssen v. Best & Flanagan, 662 N.W.2d 876, 888-90 (Minn. 2003) Instead, “when the committee authorized with making a business decision for the corporation is found to lack the independence needed to grant summary judgment, or where the independence is uncertain, the derivative suit proceeds on its merits.” Id. at 889 (declining to consider adequacy of a second investigation allegedly correcting defects in the initial investigation where initial investigation was inadequate).
    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.