Corporate Goverance

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CORPORATE GOVERNANCE; STUDY GUIDE #1
SOURCES OF CORPORATE GOVERNANCE RULES
NOW WRAP YOUR MIND AROUND THAT....
CREATED by Lisa Stinocher O'Hanlon 02.28.2013
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WARNING; MAY CONTAIN OFFENSIVE LANGUAGE
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
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.
CONTRACT
IS
LAW
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.
CORPORATIONS; MINNESOTA STATUTES
CHAPTER 302A BUSINESS CORPORATIONS.pdf
https://www.revisor.mn.gov/statutes/?id=302A
PROCEDURAL
v.
SUBSTANTIVE
unless the
Articles or Bylaws
modify the statutory
requirements
A. THE ARTICLES
The corporate existence begins
with the filing of the
Articles of Incorporation.
Minn. Stat. § 302A.153.
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
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.”)
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
THE ARTICLES MUST INCLUDE
name of the corporation
address of the registered office
of the corporation
name of registered agent
aggregate number
of shares that the
orporation has authority to issue
name and address of each
incorporator
Minn. Stat. § 302A.111, subd. 1
provisions that
“may” be included
in the Articles
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.
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
BYLAWS ARE OPTIONAL
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).
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).
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)
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.
LLCs have rules similar to those applicable to
a corporation’s Bylaws. Minn. Stat. §§
322B.60, 322B.603.
C. CONTRACTS
types of contracts that commonly serve as a source for rules that
govern the management or operations of a corporation
Shareholder Control Agreements
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
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.
Employment Agreements
Buy-Sell Agreements,
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).
Voting Agreements
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:
 Directors serve indefinite terms that expire at the next regular meeting of
shareholders (Section 302A.207)
 Compensation of directors is fixed by the Board (Section 302A.211)
 Certain methods for removal of board members or filling board vacancies
(Sections 302A.223, 302A.225)
 Notice of board meeting need not state the purpose (Section 302A.231, subd. 3)
 Rules regarding establishment of committees (Section 302A.241)
 Mandatory indemnification for officers and directors (Section 302A.521).
D. STATUTORY DEFAULT PROVISIONS
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:
 The power to adopt or amend Bylaws vested in the Board (Section 302A.181)
 Cumulative voting for directors (Section 302A.215, subd. 2)
 All shares are common shares entitled to vote and are of one class (Section
302A.401, subd. 2)
 All shares have equal rights and preference as to all matters not otherwise
provided for by the board (Section 302A.401, subd. 2).
 Certain preemptive rights of shareholders (Section 302A.413).
CORPORATE GOVERNANCE.pdf
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.
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)
Thus, careful observance of the corporate rules
can have many practical, legal and economic benefits.
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