The Minnesota Business Corporation Act, Minnesota Chapters 302A (MBCA), includes two provisions – Cumulative Voting and Preemptive Rights – that automatically apply to a corporation formed under Minnesota unless these provisions are change in the Articles of Incorporation. If a business owner forms his or her own corporation on the Minnesota Secretary of State’s website, these provisions will apply. So what do they mean?
Under the MBCA, unless otherwise modified in the articles of incorporation, shareholders may cumulative their shares while voting for directors. See MINN. STAT. § 302A.111, SUBD. 2(d). 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 in Minnesota is in favor of cumulative voting while standard practice is not. Cumulative voting is a minority shareholder protection that can be very cumbersome to administer. In addition, most of the time corporations do not know shareholders are entitled to cumulative votes because it is not the norm in most states. While cumulative voting is not necessarily problematic, a corporation that does not follow the corporate formalities set forth in its governing document or the statute can be a risk for piercing the corporate veil.
Section 302A.111, subdivision 2(n) of the MBCA states that unless otherwise changed in the articles of incorporation or a 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.
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. See MINN. STAT. § 302A.413, SUBD. 7. 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. See MINN. STAT. § 302A.413, SUBD. 10. It is general practice to eliminate preemptive rights unless, after discussion, the client desires to retain preemptive rights.