2004 Improvements to Minnesota Business Corporation Act

Transcription

1 A PUBLICATION OF THE CORPORATE GROUP OF DORSEY & WHITNEY LLP May 27, 2004 CORPORATE UPDATE 2004 Improvements to Minnesota Business Corporation Act On May 15, 2004, Governor Pawlenty signed legislation making important and long-needed improvements to the Minnesota Business Corporation Act ( MBCA ), Chapter 302A of the Minnesota Statutes. Among other things, the new legislation: Permits non-public Minnesota corporations to opt in to less-than-unanimous written shareholder consent (either in their originally filed articles of incorporation or in an articles amendment adopted by unanimous shareholder approval); Creates a bright-line safe harbor for asset sales not requiring shareholder approval (by adopting the Model Business Corporation Act s safe harbor for sales in which a defined significant continuing business activity remains); Modernizes dissenters rights by (1) permitting opt-out in the articles from dissenters rights triggers relating to articles amendments (although amending the articles to opt out is itself a trigger) and (2) adding a statutory "market out" for NYSE, AMEX and NASDAQ National Market stock comparable to that in the Delaware General Corporation Law ( DGCL ) and many other corporation statutes; Eliminates the statutory class or series vote required to increase or decrease the aggregate number of authorized shares of the class or series; Clarifies that directors of Minnesota corporations are elected by plurality, not majority-of-quorum, vote; and Permits conversions between Minnesota corporations and LLCs. Because these amendments were included in legislation (S.F. No. 1803) that also contained appropriations provisions, they will become effective on July 1, 2004 (instead of the usual default effective date for Minnesota legislation, August 1). Minnesota corporations and their legal counsel will want to consider changes to charter documents and standard forms to take advantage of these important improvements. The legislation adopting these revisions to the MBCA also makes parallel amendments to analogous provisions in the Minnesota Limited Liability Company Act (Chapter 322B). In addition, the legislation adopts the Uniform Limited Partnership Act of 2001 (new Chapter 321), effective January 1, 2005, and repeals the current Minnesota Limited Partnership Act (Chapter 322A) by phase-out through January 1, 2007.

2 Non-unanimous Shareholder Consent Section 302A.441 of the MBCA currently permits shareholders to take action by written consent in lieu of a meeting only if such consent is unanimous. The DGCL and an increasing number of other state corporation statutes permit non-unanimous shareholder consent either by default or as an opt-in provision. Non-unanimous consent without a meeting and without the need for prior notice can give corporations the ability to amend articles and make other important changes quickly and efficiently, as often required to complete financings and M&A transactions. The DGCL default rule applies to all Delaware corporations, both public and non-public. A number of states have restricted non-unanimous shareholder consent to non-public corporations, because the need for flexibility is often most acute in non-public corporations and excluding public corporations avoids a number of countervailing policy concerns. Revised Section 302A.441 will permit Minnesota corporations that are not publicly held (i.e., corporations that neither have a class of equity securities registered under Section 12 of the Securities Exchange Act of 1934 nor are subject to Section 15(d) of such Act) to provide for non-unanimous shareholder consent in their articles of incorporation. The opt-in provision may be included in the original articles or added to the articles by amendment. In order to protect shareholder expectations, an articles amendment opting in to non-unanimous consent must be approved unanimously by shareholders entitled to vote whether at a meeting or by consent in lieu of a meeting. When action is taken by non-unanimous consent under revised Section 302A.441, all shareholders must be notified of the text and effective time of the action taken no later than five days after the effective time of the action. Failure to provide such notice does not, however, invalidate the written action. Shareholders who do not sign a non-unanimous consent have dissenters rights of appraisal to the extent they would have had them if the action had been taken at a meeting. Safe Harbor for Asset Sales Until recently, all state corporation statutes required shareholder approval of sales of assets outside the normal course of business, when the assets sold constituted all or substantially all the assets of the corporation. The definition of all or substantially all has generally been left to case law development. Delaware case law requires both quantitative and qualitative analysis of assets in order to determine whether they constitute substantially all. Case law development in Minnesota and other states outside Delaware has been extremely limited and unclear. As a result, whether Delaware, Minnesota or other state law applies, there is often substantial uncertainty regarding the need for shareholder approval when a corporation disposes of a significant amount of assets. To address this recurring uncertainty, the Model Business Corporation Act (which serves as the basis for the corporation statutes in the majority of U.S. jurisdictions) was amended in 1999 to eliminate the all or substantially all test and substitute a bright-line safe harbor test. Under the Model Act approach, shareholder approval is required for an asset sale outside the ordinary course only if it would leave the corporation without a significant continuing business activity. The Model Act then provides: If a corporation retains a business activity that represented at least 25 percent of total assets at the end of the most recently completed fiscal year, and 25 percent of either income from continuing operations before taxes or revenues from continuing operations for that fiscal year, in each case of the corporation and its subsidiaries on a 2

3 consolidated basis, the corporation will conclusively be deemed to have retained a significant continuing business activity. Section 302A.661 of the MBCA has been amended to provide that shareholder approval of an asset sale is not required if the corporation retains a significant continuing business activity. The provision goes on to adopt the same safe-harbor definition of significant continuing business activity as the Model Act. Dissenters Rights Reforms A significant difference between Delaware and Minnesota corporate statutory law has been the number and type of events that trigger dissenters rights of appraisal. Delaware appraisal rights only arise in the case of mergers or consolidations, and there is a market out excluding any merger or consolidation in which the dissenter owns shares traded on a national securities exchange or the NASDAQ National Market and will receive publicly traded shares in the merger or consolidation. A much larger number of actions trigger appraisal rights in Minnesota, namely, (1) merger, (2) a plan of share exchange, (3) a sale of all or substantially all of the assets of the corporation and (4) any amendment to the articles of incorporation that materially and adversely affects the rights or preferences of the dissenter s shares by altering or abolishing a preferential, redemption, preemptive or voting right. Historically, there has also not been a Minnesota market out. In 1999, the Model Act dissenters rights provisions were amended to eliminate nearly all articles amendment triggers and to add a market out provision comparable to that in Delaware. The 2004 revisions to Section 302A.471 are aimed at bringing Minnesota more in line with Delaware, the Model Act and an increasing number of state statutes taking a less expansive approach to dissenters rights. First, revised Section 302A.471 permits Minnesota corporations to opt out of dissenters rights triggers related to articles amendments by including a provision so stating in their articles of incorporation either as originally filed or by amendment. Amendment of the articles to opt out, however, is itself a dissenters rights trigger under revised Section 302A.471. Second, revised Section 302A.471 includes a new market out applicable to dissenters who own shares traded on the NYSE, AMEX or NASDAQ National Market. Holders of such shares have no appraisal rights, except in short-form mergers under Section 302A.621 and in trigger transactions in which they receive consideration other than NYSE, AMEX or NASDAQ National Market shares. For example, a shareholder of a Minnesota corporation with shares quoted on the NASDAQ National Market would not have dissenters rights under revised Section 302A.471 in a stockfor-stock merger with an NYSE-traded acquirer. But such shareholder would have dissenters rights if the same acquisition were structured as a cash merger. Election of Directors The DGCL, the Model Act and nearly all other state corporation statutes explicitly provide that directors are elected by plurality vote of shareholders instead of the majority-of-quorum or majority-of-outstanding votes required to approve other matters submitted to shareholders. Plurality voting ensures continuity of the board without holdovers by filling directorships even where a majority vote is not obtained. The MBCA has never explicitly stated that directors are elected by plurality vote, leading many to conclude that Minnesota corporate directors must be elected by the general majority-of- 3

4 quorum vote required for shareholder action in Section 302A.437. The 2004 legislation amends Sections 302A.215 and 302A.437 to clarify that, unless otherwise provided in the articles of incorporation, directors are elected by plurality vote instead of the majority-of-quorum vote generally required. Class or Series Voting Requirements The DGCL, the Model Act and all other state corporation statutes provide that holders of an outstanding class or series of shares are entitled to vote separately on an amendment to the articles of incorporation if the amendment would have certain consequences, even if the class or series does not otherwise have voting rights. The Minnesota list of consequences requiring separate vote in Section 302A.137 is considerably more extensive than the Delaware list. Minnesota requires a separate vote if the number of authorized shares of the class or series would be increased or decreased; Delaware requires a separate vote on such increases or decreases unless the certificate of incorporation denies it. Minnesota also requires a separate vote if the amendment would, among other things, effect an exchange or reclassification of the class or series, create a new class or series (or increase the authorized shares of an existing class or series) with prior or superior rights or preferences or change the rights or preferences of the class or series in any way; Delaware requires a separate vote only if a change would adversely affect the rights or preferences of the class or series. The 2004 legislation eliminates entirely from Section 302A.137 the class or series voting requirement for amendments increasing or decreasing the aggregate number of shares of the class or series. The same change was made to the Model Act analog to Section 302A.137 in Two other changes to Section 302A.137 eliminate previously overlapping trigger language and provide that a class or series vote will arise from a reverse split of the class or series only if all other classes and series are not subject to a similar reverse split. Conversion from Corporation to LLC An increasing number of states have adopted provisions permitting a corporation to convert directly into a limited liability company and vice versa. The 2004 legislation adds a new Section 302A.681 to the MBCA authorizing conversions between Minnesota corporations and Minnesota LLCs. Additional new MBCA sections lay out the requirements for necessary approvals, filings with the Secretary of State and other procedural aspects of conversion, which generally follow the merger paradigm. Other Amendments In addition to conforming amendments related to the significant changes discussed above, the 2004 legislation makes a number of other revisions to the MBCA of a somewhat more technical nature. For example: Section 302A.231 is amended to permit notice to directors by electronic communication (e.g., fax or ) if the director has consented to receive notice in that manner. Section 302A.401 is amended to clarify that, although the original filing of a statement establishing a class or series of shares pursuant to a so-called blank check provision is not deemed to be an amendment of the articles for purposes 4

5 of shareholder approval and dissenters rights, an amendment of such a statement is deemed to be an amendment of the articles for such purposes. Section 302A.521 is amended to include service as an LLC governor or manager to the list of positions in which a person may serve an official capacity at the request of the corporation and thereby be entitled to indemnification. Section 302A.651 is amended to clarify that a Minnesota corporation and a foreign corporation may merge under the short-form merger statute (Section 302A.621) as well as under the long-form merger provisions (Section 302A.611 through 302A.615). Annual Registration and Administrative Dissolution The Minnesota Secretary of State sponsored additional legislation in 2004 (S.F. No. 1836) that has been approved by the legislature and awaits the governor's signature. This legislation amends the annual registration and administrative dissolution provisions in Section 302A.821, effective retroactively to January 1, Under the revisions, a Minnesota corporation will be administratively dissolved for failure to file its annual registration for two consecutive years (down from three consecutive years). The revisions also provide, however, that a corporation dissolved may file a registration, pay a $25 fee and be reinstated to good standing retroactive to the date of dissolution. There is no time limit on such reinstatement. The revisions provide that reinstatement (1) validates contracts and other acts during the period of dissolution and makes the corporation liable therefor and (2) restores to the corporation all assets and rights to the extent they were held before the dissolution (except as affected by acts occurring after the dissolution or sold or otherwise distributed after that time). Conclusion The 2004 MBCA amendments constitute an important step forward in efforts to bring Minnesota more into the mainstream of corporate statutory law. Minnesota s extreme judicial intervention provision in Section 302A.751 and other idiosyncrasies, however, remain and continue to make the MBCA a statute requiring utmost care and attention for corporate participants and their counsel. About Dorsey & Whitney Clients have relied on Dorsey since 1912 as a valued, cutting-edge business partner. With over 670 lawyers in more than 20 locations in the USA, Canada, Europe and Asia, we provide an integrated, proactive approach to our clients legal and business needs. Dorsey represents a number of the world s most successful Fortune 500 companies from a variety of disciplines including leaders in the financial services, investment banking, life sciences, securities, technology and energy sectors, as well as nonprofit and government entities Dorsey & Whitney LLP. This Corporate Update is intended for general information purposes only and should not be construed as legal advice or legal opinions on any specific facts or circumstances. An attorney-client relationship is not created or continued by sending and receiving this Corporate Update. Members of the Dorsey & Whitney LLP Corporate Group will be pleased to provide further information regarding the matters discussed in this Corporate Update. 5