Minnesota Revises Business Organization Statutes
Minnesota Governor Mark Dayton has signed into law revisions to several Minnesota business organization statutes including the Minnesota Business Corporation Act, the Minnesota Revised Uniform Limited Liability Company Act, the Uniform Limited Partnership Act 2001, the Uniform Partnership Act (1994) and the Minnesota Nonprofit Corporation Act.
Minnesota Business Corporation Act
Amendments to the Minnesota Business Corporation Act (the “MBCA”) become effective August 1, 2018, and contain several provisions that modernize corporate governance processes and streamline certain types of transactions.
Written Actions by Email
In a change that has the potential to simplify corporate record keeping with regard to board and shareholder resolutions that are approved via written actions rather than live votes, Section 302A.011, Subd. 36 now specifies that a written action includes a record “consented to by authenticated electronic communication” by the persons required to approve the action under the corporation’s governing documents. The MBCA already included the concept of “authenticated electronic communication,” which means an electronic communication received by a corporation or an officer of a corporation that “sets forth information from which the corporation can reasonably conclude that the communication was sent by the purported sender.” The change to the definition of “written action” builds on the existing concept and makes clear that a written action could be circulated to board members or shareholders via email and the board members or shareholders could validly consent to the action merely by replying to the email. This would obviate the need to circulate a written document that must be printed, manually signed, and faxed or delivered in .PDF format back to the corporation.
Exclusive Forum Bylaws
Minnesota is following the approach reflected in Section 115 of the Delaware General Corporation Law (DGCL) with respect to exclusive forum bylaws which seek to control the forum in which internal corporate claims may be litigated by shareholders. New Section 302A.191 of the MBCA expressly allows the articles or bylaws of a Minnesota corporation to require that all “internal corporate claims” be brought exclusively in Minnesota courts and disallows any provision of the articles or bylaws of a Minnesota corporation that prevents a party from initiating litigation over an internal corporate claim before the Minnesota courts, thus ensuring that a Minnesota corporation cannot designate the courts of another jurisdiction as the exclusive arbiters of an internal corporate claim. “Internal corporate claims” are defined to include fiduciary duty claims, all derivative claims, and any claim arising under the MBCA or the corporation’s articles or bylaws.
Pre-Authorization for Share Issuance
New subsection (b) of Section 302A.401 provides boards with greater flexibility in approving the issuance of shares. The new language specifically allows a board to pre-authorize the issuance of shares in one or more transactions or at the direction of a person who need not be a director. The pre-authorizing board resolution must specify the maximum number of shares that can be issued, the time period during which the shares can be issued, and the minimum consideration that must be received in connection with the issuance of the shares. Corporations may find this useful for delegating grants of equity awards to senior employees, and public companies may find the provision attractive for implementing at-the-market equity offerings.
Fast Track for Two-Step Mergers
Acquisitions of public companies sometimes utilize a structure known as a two-step merger that combines a tender offer with a subsequent merger. At the first step of such transactions, the acquirer launches a tender offer to acquire shares of the public corporation. Generally speaking, the tender offer will not result in acquisition of 100% of the target’s shares by the acquirer, so in the second step the acquirer proposes a merger. If the tender offer at the first step resulted in the acquirer holding more than 50% of the issued and outstanding shares of the target, then shareholder approval of the merger at the second step is assured. Nevertheless, prior to the amendments to the MBCA, Minnesota law provided that if the tender offer resulted in the acquirer holding more than 50% but less than 90% of the target’s issued and outstanding shares, the target would still be required to hold a shareholder meeting for consideration and voting upon the merger. This meant that a corporation could be forced to incur the significant costs and expenses associated with preparing proxy materials, providing notice to shareholders, and holding a meeting, even though the result of the vote was a foregone conclusion. The meaningless second step in such transactions also adds significant delay to transactions.
A new subdivision 4 to Section 302A.613 provides that the second-step merger of a publicly held corporation can be completed without a vote of the shareholders if the first-step tender offer results in the acquirer holding enough shares to approve the merger, provided that several fairly straight-forward requirements are satisfied. The elimination of the second step in certain transactions also impacts the MBCA’s dissenters’ rights provisions. A corporation seeking to utilize the streamlined procedure under Section 302A.613, Subd. 4 may, at its option, send a dissenters’ rights notice to shareholders in connection with the tender offer (even though a tender offer normally would not trigger dissenters’ rights). If a corporation elects to send the notice in connection with the tender offer, then shareholders seeking to preserve dissenters’ rights with regard to the subsequent merger must provide notice of their intent to seek payment of fair value for their shares before the consummation of the tender offer.
Domestication is generally the process of changing the status of an entity so that it is governed by the organizational laws of another state without changing the form of the entity. For example, a Delaware corporation transitioning to become governed by the MBCA rather than by the Delaware General Corporation Law would be a domestication, as would the reverse transition. This is in contrast to “conversions” which refer to a change in the form of the entity itself rather than a change in the selection of the entity’s governing law (i.e., a change from a limited liability company to a corporation). Historically, domestications and conversions under the MBCA have been handled under a single set of statutory provisions set forth in Section 302A. 682 et seq. New section 302A.682 Subd. 3 incorporates into the statute the long-term understanding of the Minnesota bar that the foregoing statutes permit domestications as well as conversions.
Minnesota Revised Uniform Limited Liability Company Act
Amendments to the Minnesota Revised Uniform Limited Liability Company Act (the “LLC Act”) include a new streamlined parent-subsidiary merger process and a change to clarify the reinstatement provisions applicable to administratively‑dissolved LLCs.
Mergers of Wholly Owned Subsidiaries
The statutory revisions add provisions which simplify the merger of a wholly owned limited liability company subsidiary into a parent Minnesota limited liability company, or such parent’s merger of two wholly owned subsidiaries into one of the wholly owned subsidiaries. The merger need only be authorized by a resolution that includes the elements of a specified plan of merger that is approved in the manner required to decide a matter in the ordinary course of business of the parent. For example, in a manager-managed LLC, unless the Operating Agreement provides otherwise, the consent of the members is required for actions outside of the ordinary course of business; the revisions to the LLC Act allow a parent-subsidiary merger to proceed with only the manager’s approval. Due to the variety of governance structures permitted under the LLC Act and the many ways these structures can be modified in operating agreements, the new Section 322C.1016 seeks to preserve flexibility by making the distinction between ordinary course of business and non-ordinary course of business matters, rather than referring to specific constituencies.
If the parent organization is not a Minnesota limited liability company, under Section 322C.1016 the parent organization can merge a wholly owned subsidiary into itself, or merge two wholly owned subsidiaries into one of the wholly owned subsidiaries, if authorized by the parent’s governing statute and upon adoption of a plan of merger that includes specified elements. A “wholly owned subsidiary” is defined to be a limited liability company in which all of the rights to distributions and management rights are owned directly or indirectly by a parent organization. This change is effective on August 1, 2018.
Section 322C.0706 provides that if an LLC “is administratively terminated” it may be reinstated through a simple statutory process. The present-tense language left some doubt as to the fate of LLCs that were formed under Chapter 322B, the now largely repealed prior LLC statute in Minnesota which had been administratively terminated before becoming subject to the LLC Act. A revision to Section 322C.0706 clarifies that the reinstatement process applies equally to LLCs that were administratively terminated under Chapter 322B rather than under the LLC Act. This change is effective retroactive to January 1, 2018, which is the date upon which the LLC Act became applicable to LLCs formed under Chapter 322B that had not already opted-in to the new statute.
Uniform Limited Partnership Act 2001
Effective January 1, 2019, changes to the Uniform Limited Partnership Act 2001 (the “ULPA”) implement the concept of domestication and provide updates to the conversion provisions to coincide with the principles reflected in the domestication and conversion provisions in the LLC Act.
The ULPA in its current form does not make a distinction between changes in an entity’s form and changes in the selection of governing law, dealing with both in a single section. The changes to the ULPA follow the statutory scheme set forth in the LLC Act, as opposed to the MBCA. Accordingly, the revisions to the ULPA separate the domestication process from the conversion process and permit a Minnesota limited partnership to domesticate to another jurisdiction as a limited partnership and a foreign limited partnership to domesticate to Minnesota as a limited partnership. The new statutory provisions provide for the conditions to domestication and the manner of approval and required filings to effect a domestication of a limited partnership.
The revisions to the ULPA provide for conversions of entities to a different form, whether domestic or foreign, to and from a Minnesota limited partnership. The current version of the ULPA also provides for this process, but the revisions reflect the splitting out of the domestication process. For example, conversions are not permitted to or from a limited partnership or a foreign limited partnership because that process is now covered by the domestication provisions of the ULPA. In addition, the revisions to the language of the conversion statutes, to be consistent with the format utilized in the LLC Act (compare, for example, 322C.1007 with the revised 321.1101), incorporate restrictions that prohibit conversions involving nonprofit corporations, organizations owning assets irrevocably dedicated to a charitable purpose and public benefit corporations.
Uniform Partnership Act (1994)
Amendments to the Uniform Partnership Act (1994) (the “UPA”) implement domestication and conversion mechanisms similar to those present in the as-amended ULPA. Previously the UPA only permitted conversions of a partnership to a limited partnership and a limited partnership to a partnership. Domestications and other changes in corporate form were not permitted. The revisions to the UPA permit domestication of partnerships in a manner similar to the ULPA’s revisions. . Rather than being limited to conversions from a partnership to a limited partnership and vice versa, the revisions to the UPA will permit conversions from a partnership to other foreign and domestic organizational forms, such as corporations and LLCs. However, as with the conversion provisions in the as-amended ULPA, conversions involving non-profit corporations, organizations owning assets irrevocably dedicated to charitable purposes and public benefit corporations are restricted. The domestication and conversion amendments to the UPA are effective January 1, 2019.
Minnesota Nonprofit Corporation Act
The changes to the Minnesota Nonprofit Corporation Act clarify provisions related to mergers of subsidiaries, noting that 317A.621 is applicable only to mergers of wholly owned LLCs and are substantially similar to the related changes to the LLC Act. Amendments to the Minnesota Nonprofit Corporation Act become effective August 1, 2018.