Who’s in Charge Here?

In Corporate Law by Joe Pull1 Comment

In a one-person business,[1] there is no confusion about who calls the shots.  There is also no chance of disagreement concerning the operation of the business’s affairs. Confusion and disagreement can arise, however, when there is more than one person involved.

Such confusion is unnecessary. Minnesota, like other states, has well-established rules determining who makes decisions on behalf of corporations. These rules define three different decision-making roles: the shareholder, the director, and the officer. Though the same individual can hold two or even three of the roles at the same time, each role has distinct powers. Blurring or confusing the roles can give rise to conflict and even litigation, and remaining mindful of the differences between the roles can help prevent disputes.

  • Shareholder.  A shareholder is an owner of the corporation. The basic rights of a shareholder are (1) to receive money from the corporation in the form of dividends, if and when the corporation chooses to distribute profits; and (2) to vote in elections to select the corporation’s directors.[2] While shareholders may have the right to approve certain important corporate decisions, as a general matter a shareholder does not have the right to make decisions concerning the corporation’s affairs.
  • Director.  Rather, it is the board of directors that controls the corporation’s business and affairs.[3] The directors are elected by the shareholders, thereby giving the shareholders indirect control of the corporation, but direct control lies in the hands of the directors without the participation of the shareholders. “Minnesota law puts the boards of directors, not courts or shareholders, in charge of governing corporate affairs.”[4]  (There is an exception that allows shareholders by unanimous affirmative vote to take action in the same way as the board of directors may act,[5] but this exception quickly becomes difficult to use as the number of shareholders increases beyond two or three.)
  • Officer.  While the board of directors has the power to govern corporate affairs, as a practical matter the directors may not wish to be closely involved in the day-to-day activities of the corporation. Furthermore, it might be cumbersome for a board with multiple directors to make decisions concerning the mundane details of running the corporation’s daily operations. The role of corporate officer solves these problems. In effect, the board delegates some of its authority to handle the corporation’s activities to the officers, and the board confines itself to overseeing the officers and holding them accountable for their performance.[6] A Minnesota board of directors must appoint at least two corporate officers, who then have the responsibility and authority to manage the corporation’s day-to-day business.[7] The two required officers (the board may appoint additional officers, as it chooses) are a “chief executive officer” and a “chief financial officer.” The chief executive officer, or CEO, has “general active management” of the business of the corporation, while the chief financial officer, or CFO, keeps the financial records of the corporation and handles its money. Minn. Stat. § 302A.305, subd 2, 3.

The general principles outlined here are far from the whole story. There are exceptions to many of the rules, and Minnesota allows shareholders to enter into agreements to adapt or modify the statutory baseline to suit the particular circumstances and needs of the company.[8] Additionally, the rules for Minnesota limited liability companies (LLCs) may differ from the rules for corporations, though they bear many similarities. See Minn. Stat. ch. 322C. As a starting point, however, shareholders own the corporation, directors govern the corporation at a high level, and the CEO runs the corporation.

[1] The technical term is “sole proprietorship,” if the business is not a limited liability company or a corporation. For example, the five-cent psychiatry stand operated by Lucy Van Pelt in the Peanuts cartoon strip is likely a sole proprietorship.

[2] Minn. Stat. § 302A.445 subd. 3 establishes the default rule that each shareholder may cast one vote per share owned.

[3] “The business and affairs of a corporation shall be managed by or under the direction of a board, subject to the provisions of subdivision 2 and section 302A.457.” Minn. Stat. 302A.201.

[4] Erickson v. Hutchinson Tech. Inc., No. CV 15-4261, 2016 WL 310729, at *8 (D. Minn. Jan. 26, 2016). See also Matter of Hibbing Taconite Co., 431 N.W.2d 885, 893 (Minn. Ct. App. 1988) (“The standard rule of corporate organization is that the board of directors is the managing body, which normally carries out its function by delegating to and supervising the corporation’s officers.”).

[5] See Minn. Stat. § 302A.201 subd. 2.

[6] The board has the power to appoint the officers and to remove them. See Minn. Stat. § 302A.321, 302A.341 subd. 2.

[7] Minn.Stat. § 302A.301Padgett v. Core, Inc, No. C2-96-645, 1996 WL 636228, at *2 (Minn. Ct. App. Nov. 5, 1996) (“While the directors may have such a duty, it is the chief executive officer, not the directors, who has the duty of running a corporation’s day-to-day business.”).

[8] See Minn. Stat. § 302A.457, concerning shareholder control agreements.

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