Under Minnesota Law, the formation and operation of business corporations are governed by the Minnesota Business Corporation Act (the “MBCA”), Minnesota Statutes, Chapter 302A. Here is a link to the MBCA: https://www.revisor.mn.gov/statutes/?id=302A. Following is an article for legal practitioners as well as interested entrepreneurs on the basics for corporation formation under Minnesota Law.
A corporation is formed under the MBCA, and its corporate existence commences on the date of filing of valid articles of incorporation, that contain at least the four required provisions set forth in Minnesota Statutes Section 302A.111, subdivision 1, signed by an incorporator or incorporators pursuant to Minnesota Statutes Section 302A.011, subdivision 29 and accompanied by the appropriate fee for filing. Generally, no further act is required to create a corporation under the MBCA.
Once the articles of incorporation have been filed with the secretary of state and all required fees have been paid, the secretary of state, presuming all conditions required for formation have been performed, will issue a certificate of incorporation. The certificate of incorporation contains the effective date of incorporation. The effective date of incorporation is important in order to determine when limitation of liability with respect to the equity holders of the entity arises.
Generally, a corporation under the MBCA may be incorporated for any business purpose or purposes unless some other statute requires incorporation for any of those purposes under a different law. For purposes of drafting articles of incorporation, unless the entity is being formed for a specific purpose that needs to be clearly identified in the articles of incorporation, there is no need to include a purpose statement.
Required Provisions in Articles of Incorporation
Valid articles of incorporation must contain: (1) the name of the corporation; (2) the address of the registered office of the corporation and the name of its registered agent, if any, at that address; (3) the aggregate number of shares that the corporation has authority to issue; and (4) the name and address of each incorporator.
The Minnesota Secretary of State’s website, http://www.sos.state.mn.us/ contains a form of articles of incorporation that includes the required provisions. Here is a link to that form: http://www.sos.state.mn.us/media/1388/domesticbusinesscorparticlesofinc.pdf and the automated online business formation follows the same construct. This form is often used by DIY business owners to incorporate a business entity. This form does not include changes to certain of the default provisions of the MBCA that can only be changed in the articles of incorporation. According to the reporter’s notes to Minnesota Statutes Section 302A.111, the purpose of section 302A.111 “is to list applicable rules and available options that can be altered or adopted in the articles or the bylaws … the descriptions of the rules or options contained in subdivisions 2, 3 and 4 are cryptic … and do not control the language of the sections referred to after the descriptions. The descriptions merely convey the basic effect of the governing sections described, but the incorporator should read and understand the basic governing sections before taking actions. Under this section, it is theoretically possible to incorporate by following the information required by subdivision 1, and the filing fee, on a single sheet of paper or even on a postcard.” The reporter goes on to state, “the incorporators should not file this extremely ‘short form’ of incorporation unless or until they make a full survey of the provisions referred to in subdivisions 2, 3 and 4.” Once the original articles of incorporation have been filed with the secretary of state, the only way to modify the articles of incorporation to change the statutory defaults is to amend the articles of incorporation, which requires additional time and expense.
Valid articles of incorporation must contain the name of the corporation. Minnesota Statutes section 302A.115 states that the corporate name:
(i) Must be expressed in the English language or in any other language that can be expressed in English letters or characters.
(ii) Must contain the word “corporation,” “incorporation,” or “limited,” or shall contain an abbreviation of one or more of these words or the word “company” or the abbreviation “co.” if that word or abbreviation is not immediately preceded by the word “and” or the characters “&.”
(iii) May not contain a word or phrase that indicates or implies that the business is incorporated for a purpose other than a legal business purpose.
(iv) Must be distinguishable upon the records of the office of the secretary of state from any other name of any domestic corporation, limited partnership, limited liability partnership, and limited liability company, whether for profit or non-profit, and the limited liability company on file, and each foreign corporation, limited partnership, limited liability partnership, a limited liability company on file, authorized or registered to do business in the State of Minnesota at the time of the filing of the articles of incorporation, whether that entity is for profit or for non-profit, and each name the right to which is at the time of incorporation reserved or preserved for another entity.
The first three requirements for a corporate name are generally self-explanatory to both a client and a practitioner. The requirement to include the corporation designation, sometimes requires a client who wants to operate without the designation to file a reserved name (see “Assumed Name” discussion below).
As indicated above, the name of the corporation needs to be distinguishable on the records of the office of the secretary of state. The Minnesota Secretary of State will not accept for filing names that are already in use. On the Minnesota Secretary of State’s website at http://www.sos.state.mn.us/business-liens/start-a-business/how-to-check-business-name-availability/ it is possible to search to determine the availability of a business name. It is always important to determine that the name is available before filing the articles of incorporation because if the name is not available the secretary of state will reject the articles of incorporation filing. In order to create an entity that uses an existing word or name, the person attempting to use that word or name must receive consent from the person that already has that name.
Assumed or Reserved Names
Oftentimes, a business will want to use a name that does not include the required references to a corporation or some other “for profit” designation. In order to do that, a corporation must include a name with the proper designation in its articles of incorporation and then file for a reserved name after the fact to do business with any name other than the official name that includes the specific designation. Commonly this is referred to as an “assumed name,” a “d/b/a” or “doing business as.” A person can obtain an assumed name or reserved name by filing a form with the Minnesota Secretary of State to request that the name be reserved. Any person may exclusively reserve or use an assumed name indefinitely as long as the proper reservation is filed annually with the Minnesota Secretary of State. Further, the person with a reserved name or assumed name may transfer the right to use that name to another person by or on behalf of the entity that has the reserved name as filed with the Minnesota Secretary of State by filing a notice of transfer that specifies the name and address of the transferee.
The forms to reserve a name or transfer a reserved name can be found at the Minnesota Secretary of State’s website at http://www.sos.state.mn.us/business-liens/business-forms-fees/assumed-namedba/. Note that while the statute refers to “reserving” a name, the secretary of state’s website uses the term “assumed” instead of “reserved.” These concepts are the same and the actions set forth in Minnesota Statutes Section 302A.117 are covered in the forms provided on the Minnesota Secretary of State’s website.
Registered Office and Registered Agent
Valid articles of incorporation must contain the address of the registered office of the corporation and the name of the registered agent, if any, at that address set forth in the articles of incorporation. A corporation must continuously maintain a registered office within the State of Minnesota in order to be formed and to remain in good standing. The registered office must be a physical address and not a post office box. The registered office need not be the same as the principal place of the business or the principal executive offices of the corporation.
As indicated in Minnesota Statutes Section 302A.121, subdivision 2, a corporation may designate a registered agent who may be a natural person residing in the State of Minnesota, a “domestic corporation” or a “foreign corporation.” Minnesota Statutes Section 302A.011, subdivision 8 defines the term “domestic corporation” to mean “a corporation, other than a foreign corporation, organized for profit and incorporated or governed by Minn. Stat. Chapter 302A.” Minnesota Statutes Section 302A.011, subdivision 12 defines the term “foreign corporation” to mean “an organization organized for profit that is incorporated under the laws other than the laws of this state for a purpose or purposes for which a corporation may be incorporated under this chapter.” In the event the articles of incorporation name a registered agent, then the registered agent must maintain a business office identical to the registered office of the corporation. Generally, in practice, domestic corporations only name the registered office and do not go to the expense of naming a registered agent since the registered office is available for service of process.
In order to change a registered office or registered agent, the articles of incorporation need to be amended. This amendment, however, does not need to go through the same approval process required to amend other elements of the articles of incorporation since these changes are administrative and not substantive. Minnesota Statutes Section 302A.123 provides the procedure that a corporation must follow to change its registered office or registered agent.
Under Minnesota Statutes Section 302A.123, subdivision 1, registered agents may resign by filing with the secretary of state a signed written notice of resignation that includes a statement that a signed copy of the notice has been given to the corporation at its principal office or to a legal representative of the corporation. The corporation must then appoint a new registered agent within 30 days after the notice has been filed with the Minnesota Secretary of State.
Valid articles of incorporation must state the aggregate number of shares that the corporation has authority to issue. Minnesota Statutes Section 302A.401 provides provisions related to the authorized shares of a corporation. A corporation cannot issue more shares than are authorized in its articles of incorporation. The term “share” is defined to mean “one of the units, however designated, into which the shareholder’s ownership interests in a corporation are divided.” When a shareholder holds a share of a corporation’s stock, he, she or it is the holder of an ownership interest that includes the right to: (a) receive distributions from that corporation, usually in the form of dividends, (b) receive any value remaining after the payment of the corporation’s debts and obligations in the event of a dissolution or liquidation of the corporation; (c) sell, transfer or convey his, her or its shares for value (or for no value) to another person, subject to any transfer restrictions imposed in the governing documents or under securities laws; and (d) unless restricted, vote to approve or disapprove certain corporate actions.
Setting forth the authorized capital for a new corporation can look deceptively easy but there are several issues to consider when determining the number and nature of the authorized shares.
Number and Value
The total authorized equity (shareholders’ aggregate ownership interests) of a corporation equals the total “pie” with each “share” being a proportionate slice of the pie. The number of authorized shares is an arbitrary number since regardless of the number each equals a percentage interest that will always equal 100%. Generally, the aggregate number of shares authorized is some derivative of 100, such as 1,000, 10,000 and so on.
Shareholders’ perception of the “value” of a share or the value of the capital or property contributed by shareholders to the corporation may shape the number of shares authorized. For example, if five “founders” form a corporation with each founder contributing $10,000 in exchange for shares in the corporation. The corporation’s articles of incorporation authorize 100 shares for issuance. If the corporation issues all of its authorized shares to the five founders, each founder would hold 20 shares (100 ÷ 5). Even though the 20 shares are equal in value to the $10,000 contributed, the founding shareholders may not perceive 20 shares as reflective of the value given.
Technically, a corporation does not issue shares; the board of directors of a corporation has the authority to authorize and issue shares. A board of directors’ ability to issue shares can be limited in the articles of incorporation as set forth in Minnesota Statutes Section 302A.401, subdivision 1 which states: “Subject to any restrictions in the Articles, a corporation may issue securities and rights to purchase securities only when authorized by the Board.”
Authorized, Issued and Outstanding
In addition to the perception of value discussed above, the number of authorized shares should anticipate future issuances of stock. At any given moment, a shareholder of a corporation holds shares that represent his, her or its percentage ownership interest in that corporation. A shareholder’s percentage ownership is calculated by dividing the number of shares held by a shareholder by the total number of shares issued and authorized. When the board of directors of a corporation issues additional shares (as long as there is a sufficient number of authorized but unissued shares) to new shareholders, the percentage ownership held by an individual current shareholder will decrease or be diluted. Based on the total number of authorized shares of corporation set forth in a corporation’s articles of incorporation, a shareholder can always determine his, her or its ultimate dilution by dividing the number of shares the shareholder owns by the total number of authorized shares.
For example, if the corporation discussed above has 1,000,000 shares authorized in its articles of incorporation, and it issues 10,000 to each of its founders who contributed $10,000, the corporation will then have 1,000,000 shares authorized with 50,000 shares issued and outstanding. The company will have available for issuance 950,000 shares. When it comes to the current ownership of the company, the 50,000 shares issued and outstanding equals the magnitude of the outstanding equity of the corporation, or 100% of the equity of the company, which is owned among the five founders in accordance with each holder’s percentage interest ((10,000 ÷ 50,000) x 100) which is 20%.
If the corporation issues 150,000 shares to a new shareholder, the total number of issued and outstanding shares will increase to 200,000 and each of the founders’ percentage ownership will be diluted from 20% to 5% percentage ownership ((10,000 ÷ 200,000) x 100) while the new shareholder will hold 75% of the corporations’ issued and outstanding shares ((150,000 ÷ 200,000) x 100).
In addition to determining the number of authorized shares, the concept of percentage ownership is important to consider when determining quorum and shareholder approval requirements and dilution needs to be considered (and discussed with clients) with respect to preemptive rights.
In addition to setting forth the number of authorized shares, the articles of incorporation also need to state the par value of any shares of the corporation to be issued. Minnesota Statutes Section 302A.401, subdivision 2(c) states that unless a different par value is specified in the articles of incorporation, the par value of the shares shall be one cent ($.01) and that shall be done “solely for the purpose of a statute or rule imposing a tax or fee based upon the capitalization of the corporation and that par value can be fixed by the Board for the purposes of a statute or rule requiring the shares of the corporation to have a par value.”
Classes and Series
For purposes of forming a corporation, it is not only important to include the initial authorized number of shares but it is also important to include any terms that may be related to those shares. The MBCA states that all shares are of one class (common shares) with each share entitled to vote equally and with equal rights and preferences in all matters (not otherwise provided for by the board) unless and to the extent that the articles of incorporation fix relative rights and preferences for different classes or series of shares.
For purposes of drafting initial articles of incorporation, current and future financing considerations, as well as the purpose and equity structure of the entity may dictate a complex authorized capital provision that includes classes and series of common and preferred stock. These concepts are discussed more completely in other chapters.
For purposes of initial articles of incorporation, in lieu of authorizing separate classes or series of common and preferred shares, the articles of incorporation can grant the board of directors the power to establish another or any class or series of shares with different rights and preferences. In order to exercise these rights, the board of directors must set forth the designation of any class or series and fix the relative rights and preferences of that class or series in a certificate. This certificate of designation (which is an amendment to the articles of incorporation) sets forth the rights and preferences of any class of shares created by the board of directors and is filed with the secretary of state.
Valid articles of incorporation must include the name and address of each incorporator. Any person regardless of that person’s state of residency, financial solvency, status as a citizen of this country or connection to the entity to be formed can sign as incorporator of a corporation as long as that person is a natural person who is at least 18 years of age. An entity may not be an incorporator of a corporation under the MBCA. In the event a corporation is being formed as a subsidiary or a special purpose entity or some other entity that is otherwise related to an existing firm, an individual person in his or her personal legal capacity, and not in his or her capacity as an officer of the “parent” corporation, must sign the articles of incorporation as incorporator.
As indicated in the MCBA, one or more natural persons may serve as incorporators. In the event there is more than one incorporator, each of the incorporators must sign the articles of incorporation and provide their mailing address as well. The incorporator’s name becomes part of the public record and it is generally the only time specific people are associated with an entity during its life cycle (officers, not directors or shareholders, can sign all other documents filed with respect to a corporation). In some instances, the “founding” shareholder may not want his, her or its name to be part of the public record. It is important to consider who serves as an incorporator in order to facilitate the filing of the articles of incorporation. Many times the incorporator of the company is an agent of the founders of the company, such as an accountant or lawyer.
Additional Optional Provisions That Can Only Be Modified in the Articles of Incorporation
In addition to the four required provisions for valid articles of incorporation, Minnesota Statutes Section 302A.111, subdivision 2 lists 20 provisions of the statute that may only be modified in the articles of incorporation or a shareholder control agreement. While articles of incorporation can always be amended, the preparer of articles of incorporation should consider all of these provisions when drafting initial articles of incorporation.
While each provision is important, Minnesota Statutes Section 302A.111, subdivision 2(d) and (n) include two specific provisions related to voting and share issuances that should be revised in the initial articles of incorporation unless a client has specifically determined otherwise.
Under the MBCA, unless otherwise modified in the articles of incorporation, shareholders may cumulative their shares while voting for directors. Minnesota Statutes Section 302A.215, subdivision 2 states that:
“Each shareholder entitled to vote for directors has the right to cumulate those votes in the election of directors … by casting for one candidate the number of votes equal to the number of directors to be elected multiplied by the number of votes represented by the shares, or by distributing all of those votes on the same principle among any number of candidates.”
The statutory presumption is in favor of cumulative voting while standard practice is not. Under Delaware law cumulative voting must be specifically authorized. Cumulative voting is a minority shareholder protection that can be cumbersome to administer. In addition, most of the time corporations do not even know shareholders are entitled cumulative votes because it is not the norm in other states. While cumulative voting is not necessarily problematic, a corporation that does not follow the corporate formalities set forth in the governing document or the statute is problematic. Generally, articles of incorporation are drafted such that the shareholders shall not have cumulative voting with respect to their shares.
Minnesota Statutes Section 302A.111, subdivision 2(n) of the MBCA states that unless otherwise changed in the articles of incorporation or shareholder control agreement, “a shareholder has certain preemptive rights.” Much like cumulative voting, articles of incorporation are generally modified to eliminate this “default” provision in favor of preemptive rights.
Minnesota Statutes section 302A.413, subdivision 2 of the MBCA defines a “preemptive right” as “the right of a shareholder to acquire a certain fraction of the unissued securities or rights to purchase securities of a corporation before the corporation may offer them to other persons.” In essence, a corporation that has not eliminated preemptive rights in its articles of incorporation (a) must allow its existing shareholders to purchase shares equal to their percentage ownership in the company prior to the issuance of any additional shares in the corporation, and (b) must provide prior written notice to its shareholders prior to issuing more shares. Shareholders who have preemptive rights may waive those rights in writing if the shareholder so chooses.
Even if a corporation eliminates preemptive rights in its articles of incorporation, it can still provide preemptive rights under contract by granting first refusal rights and other rights to purchase equity from the corporation. It is general practice to eliminate preemptive rights unless, after discussion, the client desires to retain preemptive rights.
Other Provisions That May or May Not Be Included in Articles of Incorporation
In addition to the items set forth in Minnesota Statutes section 302A.111, subdivision 2, there are several provisions of that are often included in initial articles of incorporation.
First Board of Directors
The MBCA does not require that the first board of directors be named in the initial articles of incorporation. There is no need to include the names of the first board of directors in the initial articles of incorporation because Minnesota Statutes section 302A.171, subdivision 1 indicates that the incorporator may elect the first board if it is not named in the articles of incorporation. To name the first board of directors the incorporator or incorporators take an action to elect the first board. Technically a corporation is not required to include the names of its directors in any public documents. So, including the names of the first board of directors in the initial articles of incorporation may not be advisable because of the public nature of the document.
Action of the Shareholders Without a Meeting
The MBCA provides that shareholders may take an action without a meeting (by written action) and have the action approved by less than all of the shareholders as long as the articles of incorporation provide for such an action and approval. Absent a specific authorization in the articles of incorporation, a written action by the shareholders is required to be signed by all of the shareholders instead of the number of shareholders who are required to consent to an action if the action was brought before a meeting of the shareholders.
The decision to include this statutory modification in the articles of incorporation depends on the ownership relationship between the shareholders both at formation and at other times during the life cycle of the corporation. The statutory default requiring unanimous approval by all shareholders to take an action without a meeting provides some protection for minority shareholders because majority shareholder must call a regular or special meeting of the shareholders to take any corporate action (Minnesota Statutes section 302A.437 General Comment states: “a presumption that any action approved by the holders of a majority of the voting power of the shares present, in person or by proxy, at a meeting held with proper notice under section 302A.435 and where a quorum is present under section 302A.443, is legal and binding.”) which may lead to a whole host of additional requirements and issues. See Minnesota Statutes section 302A.435 for notice requirements.
Action of the Board of Directors Without a Meeting
Similar to a written action by shareholders, unless otherwise authorized in the articles of incorporation, a written action taken by the board of directors must be signed by all of the directors.
Authorization of Extraordinary Corporate Actions
Unless otherwise modified in the articles of incorporation to a larger proportion, the MBCA requires the approval of the majority of all voting shares to authorize certain extraordinary events in the life cycle of a corporation (merger, share exchange, sale of all or substantially all of the assets, conversion to a limited liability company, or commencement of a voluntary dissolution) or fundamental changes to the corporate structure. Based on the ownership structure of a corporation, it may be advisable to set the approval requirements at a proportion higher than a majority of the voting power required by statute.
Amendment to the Articles of Incorporation
Similar to the discussion above, only if modified in the articles of incorporation can the proportionate shareholder approval required to approve any amendment, alteration, change, or repeal of any provisions contained in the articles of incorporation be modified.
Limitation of Director Liability
Some practitioners included a recitation of the limitation liability that is set forth in MBCA. This provision is not required. Further, a director’s personal liability to a corporation or its shareholders for damages for breach of his or her fiduciary duty may be eliminated or otherwise limited in the articles of incorporation except as limited by the statute.
Amendment of Bylaws
Pursuant to Minnesota Statutes Section 302A.181, subdivision 2, unless otherwise reserved in the articles of incorporation to the shareholders of the corporation, the power to adopt, amend or repeal the bylaws of the corporation is vested in the board of directors. It may be advisable to include a provision in the articles of incorporation that not only provides that the shareholders must approve any adoption, amendment or repeal to any provision of the articles of incorporation as well as the affirmative vote required of the shareholders to approve such an action.
Rights of Dissenting Shareholders
Under the MBCA, a shareholder of a corporation may dissent from and obtain payment for the fair value of that shareholder’s shares in the event a corporation takes certain actions. Minnesota Statutes Section 302A.471, subdivision 1(a) states that dissenter rights of a shareholder may be limited with respect to an amendment to the articles of incorporations that materially and adversely affects the rights and preferences of the shares held by that shareholder. These are the only dissenter rights that can be eliminated or limited in the articles of incorporation. All other dissenter rights set forth in Minnesota Statutes Section 302A.471, subdivision 1 cannot be limited or eliminated by the articles of incorporation or any other governing document of a corporation.
For almost 20 years Kim Lowe has lawyered from the trenches. Kim lawyers from experience, using her knowledge of the law and understanding of how both for-profit and nonprofit business enterprises operate.