Corporate governance is a system of rules, policies, and practices that dictate how a company's board of directors manages and oversees the operations of a company.
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CORPORATE GOVERNANCE; STUDY GUIDE #1SOURCES OF CORPORATE GOVERNANCE RULES
Following the rules of corporate governance can also help inreducing the potential for disruptive and expensive shareholderdisputes, and assure that the liability shield that establishing abusiness as a corporation is designed to provide its shareholdersis preserved.
A company’s lack of adherence to corporate formalities and corporate governance rules can risk the application ofthe corporate veil-piercing doctrine. In determining whether to apply the doctrine, Minnesota courts look to anumber of factors. Specifically, courts rely upon the two-prong test first articulated by the Minnesota SupremeCourt in Victoria Elevator Co. v. Meriden Grain Co., 283 N.W.2d 509 (Minn. 1979). The first prong of the VictoriaElevator test considers whether or not the shareholder has established a sufficiently separate corporate entityaccording 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 byfairness 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 rulescan have many practical, legal and economic benefits.
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CORPORATE GOVERNANCE FOUND ONLINE: http://www.aoblr.com/PDFs/CorpGovernance.pdf Randy G. Gullickson, Esq.Larina A. Brown, Esq.Anthony Ostlund BaerLouwagie & Ross P.A.3600 Wells Fargo Center90 South Seventh StreetMinneapolis, MN 55402Telephone: 612‐349‐6969www.aoblaw.com
SOURCES OF CORPORATE GOVERNANCE RULES
The most common sources of rules that govern the existence and operations of acorporation are the Articles, the Bylaws, or other agreements such as Shareholder ControlAgreements, Buy-Sell Agreements, or Employment Contracts.
In addition, the Minnesota Business Corporations Act (“MBCA”),Minn. Stat. Ch. 302A contains many procedural and substantiveprovisions relating to corporate governance, including many “default”provisions that apply to Minnesota corporations unless the Articles orBylaws modify the statutory requirements.
CORPORATIONS; MINNESOTA STATUTES
CHAPTER 302A BUSINESS CORPORATIONS.pdf
unless theArticles or Bylawsmodify the statutoryrequirements
A. THE ARTICLES
The corporate existence beginswith the filing of theArticles of Incorporation.Minn. Stat. § 302A.153.
302A.153 EFFECTIVE DATE OF ARTICLES. Articles of incorporation are effective and corporate existence begins when the articles ofincorporation are filed with the secretary of state accompanied by a payment of $135, whichincludes 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 atanother time within 30 days after filing if the articles of amendment so provide. Articles of mergermust be accompanied by a fee of $60, which includes a $25 merger fee in addition to the $35filing 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 toearn a profit are presumed to be engaged in a partnership, and to share profits and losses inaccordance with the rules that apply to partnerships. Minn. Stat. § 323A.0202; Brcka v. FalconElec. Corp., 2001 WL 641524, at *6-7 (Minn. Ct. App. June 12, 2001) (“The supreme courthas . . . recognized, without adopting, the rule that when a business is operated following afailure to perfect a contemplated incorporation, the business becomes a partnership. The supremecourt [has also] applied the rule that when a business successfully incorporates but later fails tooperate 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 therecan be no doubt that all subsequent corporate acts are theacts of a de jure corporation. This is important because the doctrine of de factocorporations is inapplicable in this state afterthe enactment of this act.”)
it is important that if any decisionsor actions have been taken on behalfof the corporation before the Articleshave been filed that the Company ratifythem upon coming into existence
THE ARTICLES MUST INCLUDE
name of the corporation
address of the registered officeof the corporation
name of registered agent
aggregate numberof shares that the orporation has authority to issue
name and address of eachincorporator
Minn. Stat. § 302A.111, subd. 1
provisions that“may” be includedin the Articles
other provisions thatmay be included in either theArticles or the Bylaws
Articles can be amended or modifiedonly in accordance with Sections302A.133 to 302A.139.Minn. Stat. § 302A.131.Only Shareholders can amendthe Articles.Minn. Stat. § 302A.135, subds. 2, 4.
LLC’s have rules that are similar to those that applyto corporations with regard to theirArticles of Organization. See Minn. Stat. § 322.B.115.
BYLAWS ARE OPTIONAL
After the filing of Articles of Incorporation, the incorporators or the directors named inthe Articles can either hold an organizational meeting or take written action to complete theorganization of the business, including adoption of Bylaws. Minn. Stat. § 302A.171. Thepurpose of Bylaws is to establish rules for the internal government of the corporation. LittleCanada 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 neednot, have bylaws”). However, once adopted, Bylaws “must be obeyed” by the corporation, itsdirectors, 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, theshareholders 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 haslikened 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 itsBylaws, 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 toa corporation’s Bylaws. Minn. Stat. §§322B.60, 322B.603.
types of contracts that commonly serve as a source for rules thatgovern the management or operations of a corporation
Shareholder Control Agreements
specifically enforceable as long as it is signed by all theshareholders, id., but such agreements must not violatestatutory provisions that cannot be modified
written agreements among shareholders that relateto the control of any phase of the business and affairsof the corporation, the relations between and amongthe shareholders, and/or its liquidation/dissolution.Minn. Stat. § 302A.457, subd.1.
Buy-Sell agreements are governed by Minn. Stat. § 302A.429. Section 429 dictates that awritten restriction on the transfer of shares, whether set forth in the Articles, Bylaws, shareholderresolution, or agreement, is enforceable if it is not “manifestly unreasonable under thecircumstances” 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 WasteMills, 520 N.W.2d at 495 (enforcing contractual repurchase option contained in the Bylaws).
agreement by a number of stockholders to combine their votes in order to effectuate a particularpolicy is not unlawful in absence of evidence of intent to defraud other stockholders or to securea private benefit at expense of the corporation or the other stockholders. Hart v. Bell, 23 N.W.2d375, 380 (Minn. 1946). Voting Agreements are written agreements “among persons who arethen 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 ShareholderControl Agreement, or in the Bylaws. Id., subd. 3. This set of provisions includes the followingexamples:
Directors serve indefinite terms that expire at the next regular meeting ofshareholders (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 applyunless the corporation has modified these rules through its own corporate governancedocuments. Approximately 20 of these provisions can be modified only in the Articles or in aShareholder 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 (Section302A.401, subd. 2)
All shares have equal rights and preference as to all matters not otherwiseprovided for by the board (Section 302A.401, subd. 2).
Certain preemptive rights of shareholders (Section 302A.413).