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Published in The Objection, A Publication of the MDLA New Lawyers Section, Minnesota Defense Lawyers Association, Vol. I, Summer 2006.

For more information, contact Kenneth A. Kimber, kak@hanftlaw.com or
218-722-4766.
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One of the more satisfying components of practicing law is that most individuals within the legal profession possess a commitment to serve the communities in which they practice. Attorneys serve their communities in a variety of ways—coaching a mock trial team, running for political office, coaching their son or daughter's athletic team, providing pro bono legal representation for those in need, and serving on a board of directors for a non-profit organization.

Non-profit organizations commonly seek individuals to volunteer their time to serve in leadership roles in their organization. There is a heightened interest for attorneys to serve in these leadership roles. With this general expectation that the attorney will provide a certain area of expertise in his or her role on the board of directors, a young attorney who is asked to serve on a board of directors is faced with what can seem like a daunting task of educating him or herself about the intricacies of the non-profit and acting as an effective participant on the board of directors. While this author would strongly discourage attorneys from providing legal advice to a board of directors of a non-profit on which he or she serves, an effective participant on a board of directors of a non-profit must still be aware of the details of Minnesota non-profit law.

Because of the breadth and depth of non-profit law in the State of Minnesota, this primer article will focus on particular elements of the Nonprofit Corporation Act. The article is intended to be a statutory primer for individuals who may be beginning to serve on the board of directors of a non-profit for the first time and for those attorneys who may need to refresh their memories.

1. Background of the Minnesota Nonprofit Corporation Act.

Statutory law for non-profits in the State of Minnesota is governed by the Minnesota Nonprofit Corporation Act, Minnesota Statutes Chapter 317A ("MNCA"). Originally enacted in 1951, the MNCA underwent a significant revision in 1990 for updating, clarifying ambiguities and inconsistencies, and completing otherwise incomplete portions. Minn. Stat. § 317A.001, Preface to Reporter's Notes.

For those familiar with the Minnesota Business Corporation Act, the MNCA "follows the [same] general organization format and statutory coding." Id. The MNCA does not apply to "cooperative associations, public cemetery corporations and associations and private cemeteries" as well as "religious corporation[s]" in certain circumstances. Minn. Stat. § 317A.051. A religious corporation may elect to be governed under the MNCA or certain sections of the MNCA. Id. at subd. 2.

A non-profit can be incorporated "for any lawful purpose" in the State of Minnesota. Minn. Stat. § 317A.101.

2. The Board of Directors.

In Minnesota, a "board of directors" is statutorily defined as a "group of persons vested with the general management of the internal affairs of a corporation." Minn. Stat. § 317A.011, subd. 4. The "business and affairs of a corporation must be managed by or under the direction of the board of directors. Minn. Stat. § 317A.201. All directors have voting power and have equal rights, unless otherwise provided in the articles of bylaws. Id. The board must have three or more members, as designated in the articles or bylaws. Minn. Stat. § 317A.203. Directors may not serve terms of more than ten years and are elected or appointed according to the articles or bylaws. Minn. Stat. § 317A.207. The number of terms is not limited. Id. at General Comment.

"A director may resign at any time by giving written notice to the corporation." Minn. Stat. § 317A.221. The resignation does not need to be approved and can be made effective at a later date. Id. at (a). Directors can also be removed with or without cause. Minn. Stat. §§ 317A.223, 317A.225. The method for removal of directors varies according to whether there are members with voting rights and if the director is appointed or elected. See Id.

3. Other Relevant Terms.

The board of directors is regulated both by the "articles" as well as "bylaws." Minn. Stat. § 317A.011. The "bylaws" are the code adopted for the regulation or management of the internal affairs of the corporation." Id. at subd. 5. Bylaws are not mandatory. Minn. Stat. § 317A.181, subd. 1. Within the corporation, there are also individuals, "members," who retain membership rights in the corporation as defined under the articles or bylaws. Id. at subd. 12. Members can have voting rights, depending on the bylaws or articles.

4. Incorporation.

If you are helping start a non-profit, there are certain provisions that are required in the articles of incorporation and additional provisions that can be modified either in the articles or bylaws. See Minn. Stat. § 317A.111. There are special provisions governing private foundations (see Minn. Stat, § 317A.113), selecting the name for the non-profit (see Minn. Stat. § 317A.115), reserving the name with the State of Minnesota Secretary of State (see Minn, Stat. § 317A.117), and designating a registered office and registered agent (see Minn. Stat. § 317A.121).

When a non-profit corporation is already formed, additional statutes govern changes in the registered office or registered agent (see Minn. Stat. § 317A.123) and amendment of articles (see Minn. Stat. § 317A.131). Specific procedures must be followed to amend the articles. See Minn. Stat. § 317A.133 and § 317A.139.

Importantly, articles of incorporation and articles of amendment must be filed with the Secretary of State and are not effective until they are filed with payment. Minn. Stat. § 317A.151 at subd. 2. Once the articles of incorporation are filed, the non-profit retains the ability to act like any other business. Minn. Stat. § 317A.161. The non-profit can sue and be sued, own or lease property, dispose of property, trade in securities, make contracts, invest, make donations, and pay pensions or other benefits. For a more complete list of what powers a non-profit has, see Minn. Stat. § 317A. 161.

5. Board Meetings.

Board meetings must be held as provided in the articles or bylaws of the non-profit. Minn. Stat. § 317A.231, subd, 1. There must be at least one board meeting per year. Id. If no place is designated, the meeting will take place at the registered office of the non-profit. Id. Meetings can be held by "remote communication," i.e., a telephone conference. Id. at subd. 2. Board meetings may be called by any director with five days notice of the date, time and place of the meeting. Id. at subd. 4 (a). The date, time and place can also be pre-designated in the articles or bylaws. Id. at subd. 4 (b). E-mail, facsimile and other electronic means are sufficient methods for notice. Id. at subd. 4 (c). Notice can be waived. Id. at subd. 4 (d).

A meeting may not move forward unless there is a quorum of directors at the meeting. Minn. Stat. § 317A.235. The percentage of directors that constitutes a quorum can be modified in the articles or bylaws but may not be less than 1/3 of the directors currently holding office. Id. Board actions are taken by an affirmative vote of a majority of the directors present at the meeting, unless the bylaws or articles require a larger number. Minn. Stat. § 317A.237. Actions can also be taken if the directors approve of the action by an authenticated electronic communication. Minn. Stat. § 317A.239, subd. 1. Any written action taken without a meeting is effective upon approval by the required number of directors. Id. at subd. 2.

By resolution and majority vote, the board of directors may also approve to form committees that have the authority of the board to conduct or manage certain business for the non-profit. Minn. Stat. § 317A.241, subd. 1. Minutes must be kept and made available upon request. Id. at subd. 4.

6. Standard of Conduct, Conflicts of Interest and Liability for Directors.

In this era of heightened scrutiny of corporations in general, Minnesota has enacted a specific standard of conduct for directors of non-profits. Directors are required to "discharge the duties of the position of director in good faith, in a manner the director reasonably believes to be in the best interests of the corporation, and with the care an ordinarily prudent person in a like position would exercise under similar circumstances." Minn. Stat. § 317A.251, subd. 1. While the terms contained in this definition seem somewhat amorphous, it reinforces a reasonable person standard. There is no liability for a director who performs these duties. Id. In fulfilling these duties, directors may rely on certain information provided to them by qualified persons, unless they have actual knowledge otherwise. Id. at subd. 2. Assent to board action is presumed for an individual director unless the director specifically dissents according to the provisions contained in Minn. Stat. § 317A.251. Id. at subd. 3. Unpaid directors cannot be held civilly liable for "an act or omission by that person if the act or omission was in good faith and within the scope of the person's responsibilities ... and did not constitute willful or reckless misconduct." Minn. Stat. § 317A.257. Despite this apparent immunity from liability, it is not absolute. Id. Thus, an unpaid director can still be sued by the attorney general for breach of fiduciary duty, or causes of action based on federal law, causes of action based on an express contractual obligation, an action based on a breach of a public pension plan fiduciary responsibility, or death or physical injury personally and directly caused by the individual.

Minnesota has also adopted specific rules regarding conflicts of interest for directors. Minn. Stat. § 317A.255. Non-profits cannot enter into contracts or other transactions between the non-profit and: (1) a director or family member of a director; (2) a director of a related organization or family member of a director of a related organization; or (3) an organization "in or of which the corporation's director, or a member of the family of its director, is a director, office, or legal representative or has a material financial interest." Id. at subd. 1. No conflict exists if: (1) the contract or transaction was fair and reasonable when entered into; (2) the material facts regarding the contract or transaction and the conflict of interest are fully disclosed and two-thirds of the members vote in good faith to approve the transaction; or (3) the material facts regarding the contract or transaction and the conflict of interest are fully disclosed and a majority of the board or committee voting ratifies the transaction. Id. at subd. 1 (b)(1)-(4). The terms "material financial interest," "member of the family" and "related organization" are further defined in the MNCA. See Minn. Stat, §§ 317A.255, subds. 2 and 4; and 317A.011, subd. 18. Overall, it is better for a non-profit not to enter into a transaction or contract with a relative of a director, employee or director.

7. Officers.

Under the MNCA, non-profits must have officers, including a president and treasurer. Minn. Stat. § 317A.301. Other officers are possible to the extent allowed by the articles or bylaws. Minn. Stat. § 317A.311. An individual may hold more than one office at a time. Minn. Stat. § 317A.315. These officers must be elected or appointed by the board of directors, unless otherwise provided in the articles or bylaws. Minn. Stat. § 317A.301. The duties of the president and treasurer are more fully outlined by the statute, but generally speaking, the president is responsible for general active management of the non-profit and the treasurer handles the financial aspects of the non-profit. Minn. Stat. § 317A.305, subds. 2 and 3. The officers may delegate their responsibilities to other persons. Minn. Stat. § 317A.351. That being said, the delegating officer still remains subject to the same standard of conduct for an officer regardless of delegation. Id. The standard of conduct for officers is identical to that for directors, as cited in Minn. Stat. § 317A.251, subd. 1. Minn. Stat. § 317A.361.

As with directors, officers may resign or be removed. Minn. Stat. § 317A.341. Resignation must be written and removal may occur by the board of directors or the members, whichever elected or appointed the officer, unless modified by the articles or bylaws. Id. at subd. 1 and 2.

8. Members.

Non-profits are not required to have members. Minn. Stat. § 317A.401, subd. 1(a). In fact, the default provision, if not otherwise stated in the bylaws or articles, is that a non-profit corporation will not have any members. Id. If a non-profit decides to have members, these members can be grouped into one or more membership classes. Id. The criteria for membership should be displayed in the articles or bylaws. Id. at subd. 2. Membership cannot be granted without the consent of the person who will become a member. Id. Members are granted one vote and equal rights unless otherwise stated in the articles or bylaws. Id. at subd. 4. Membership cannot be transferred by the member unless otherwise stated in the articles or bylaws. Minn. Stat. § 317A.405 (b).

If a non-profit has members, there must be at least one annual meeting of the membership. Minn. Stat, § 317A.431, subd. 1. If no meeting is held within the preceding 15 months and a sufficient number of members request a meeting in writing, the board must have a meeting of the members. Id. at subd. 2. At the meeting, the members may elect successor directors, must be given a report on the activities and financial condition of the corporation, and other miscellaneous business consistent with the notice of meeting requirements. Id. at subd. 4. In certain circumstances, voting members can call special meetings. Minn. Stat. § 317A.433. At special meetings, the members may conduct only the business identified in the notice of the meeting. Id. at subd. 4. A district court of the county where the corporation's registered office is located may also order a meeting of members to be held in certain circumstances. Minn. Stat. § 317A.434, subd. 1. A quorum for a meeting of members is ten percent of the members entitled to vote. Minn. Stat. § 317A.451, subd. 1. Before a meeting, the non-profit must prepare a membership list identifying the address and number of votes of each member ... entitled to vote at the meeting. Minn. Stat. § 317A.439, subd. 1. This list can be inspected by a member, the member's agent or the member's attorney prior to the meeting. Id. at subd. 2.

Members cannot be held personally liable "for the acts, debts, liabilities, or obligations of the corporation." Minn. Stat. § 317A.407, subd. 1. However, members, or the attorney general can seek equitable remedies against the corporation or an officer or director for a violation of the MNCA. Minn. Stat. § 317A.467. The non-profit can charge dues or fees for membership. Id. at subd. 2. Certain individuals can act as delegates on behalf of some or all of the members as long as it is authorized by the articles or bylaws. Minn. Stat. § 317A.415.

As with officers and directors, members can resign or be terminated at any time. Minn. Stat. §§ 317A.409 and 317A.410. Resignation does not relieve the member of any dues, fees or other monies owed at the time of resignation. Minn. Stat. § 317A.409. If members are to be expelled, terminated or suspended, the non-profit must have a "procedure that is fair and reasonable and is carried out in good faith." Minn. Stat. § 317A.410. Although the statute is somewhat vague as to what procedures are "fair and reasonable" for the termination of members, there are two mandatory items that make the termination procedure "fair and reasonable:" (1) 15 or more days written notice, including the reasons for the adverse action; and (2) "an opportunity for the member to be heard, orally or in writing, not less than five days before the effective date" of the adverse action. Id. at subd. 2. If a member wants to challenge the adverse action, the challenge proceeding must begin within one year of the adverse action. Id. at subd. 3. As with a resignation, the adverse action against the member does not relieve the member of any dues, fees or other monies owed. Id. at subd. 4. The non-profit can purchase the membership, as long as purchases of memberships are authorized by the bylaws or articles. Minn. Stat. § 317A.413.

Actions of members are ratified by an affirmative vote of the majority of the members, subject to the bylaws and articles. Minn. Stat. § 317A.443. Votes can be cast orally or in writing. Id. at subd. 2. Unanimous action can be taken by members without a meeting "by written action, signed, or consent to by authenticated electronic communication, by all of the members entitled to vote on that action." Minn. Stat. § 317A.445. Actions by members may also be taken by ballot (see Minn. Stat. § 317A.447), via "remote communication" (see Minn. Stat. § 317A.450), by proxy if allowed by the articles or bylaws (see Minn. Stat. § 317A.453), or via a voting agreement between two or more members as long as the agreement is consistent with the corporation's purposes (see Minn. Stat. § 317A.457 (a)).

Members and directors are entitled to inspect documents located at the registered office, including articles, bylaws, financial statements, accounting records, voting agreements and minutes of certain meetings. Minn. Stat. § 317A.461, subds. 1 and 2.

9. Loans and Obligations.

A non-profit also retains the ability to lend money or to guarantee or pledge assets as security or financially assist a person if approved by the board of directors. Minn. Stat. § 317A.501. A loan or guarantee cannot be made to a director, officer, or employee of the corporation or a related organization or certain family members. Id. at subd. 2. The MNCA does allow for a corporation to "advance money to its directors, officers, employees or agents to cover expenses reasonably anticipated to be incurred by them in the performance of their duties for which they would entitled to reimbursement in absence of an advance." Minn. Stat. § 317A.505. Indemnification is possible in special circumstances also. See Minn. Stat. § 317A.521.

10. Merger, Consolidation or Transfer.

A "merger" combines two corporations into one of the existing corporations while a "consolidation" combines the two corporations to form a new corporation. Minn. Stat. § 317A.541, subd. 2 (1). If two non-profits seek to merge or consolidate, specific sections of the MNCA govern. Minn. Stat. § 317A.601. The non-profits must put together a plan of merger and consolidation. For further details on devising a plan of merger or consolidation, see Minn. Stat. § 317A.611. The plan of merger or consolidation must be approved and adopted by the non-profit. Minn. Stat. § 317A.613. If a non-profit has members with voting rights, the board of directors can adopt a resolution by a majority vote of all directors for approval of the proposed merger and direct that the resolution be put to a vote at a meeting of the members with voting rights. Id. at subd. 2. If there are no members with voting rights, the plan can be approved by a majority of votes of all directors. Id. at subd. 3.

Once a merger or consolidation is approved, articles of merger/consolidation must be approved, signed and filed with the Secretary of State. Minn. Stat. § 317A.615. Even if the merger or consolidation is approved, it can later be abandoned. Minn. Stat. § 317A.631. If the articles of merger/consolidation are filed with the Secretary of State, the merger or consolidation is effective. Minn. Stat. § 317A.641. Of note, there are separate rules governing a merger/consolidation with a foreign corporation. Minn. Stat. § 317A. 651.

Ultimately, the assets of the non-profits must be combined and this combining of assets may be required by members or voting members. Minn. Stat. § 317A.661. The new corporation cannot divert assets from its originally intended use. Minn. Stat. § 317A.671.

11. Dissolution.

Regrettably, sometimes non-profits must dissolve. Dissolution of non-profits used to only occur in two manners: (1) out of court if there were no substantial assets; or (2) under court supervision. Minn. Stat. § 317A.701, Reporter's Notes. Non-profits can now be dissolved by the incorporators, by the board and members with voting rights, by order of a court, or by the Secretary of State. Minn. Stat. § 317A.701.

Incorporators can only dissolve a non-profit if the first board of directors has not been named, designated or appointed. Minn. Stat. § 317A.711, subd. 1. Dissolution by the incorporators requires, among other items, a majority of the signatures of the incorporators on articles of dissolution which then must be filed with the Secretary of State. Id. at subd. 2-4. For further information regarding the required contents of the articles of dissolution and the effect when filed, see Minn. Stat. § 317A.733. The Secretary of State will subsequently issue a certificate of dissolution. Minn. Stat. § 317A.733.

Dissolution by the board may occur by majority vote adopting a resolution of dissolution, which must include a plan of dissolution. Minn. Stat. § 317A.721, subd. 2. If there are members with voting rights, the resolution and plan of dissolution must be submitted to the members. Id. Once the resolution is approved, a notice of intent to dissolve must be filed with the Secretary of State. Minn. Stat. § 317A.723. The dissolution proceedings may be stopped. Id. at subd. 2; and Minn. Stat. § 317A.731. The notice of intent to dissolve, once filed, must proceed as soon as possible and the directors or officers must: (1) collect or make provision for the collection of debts due and owing to the corporation; and (2) pay or make provision for the payment of debts, obligations, and liabilities of the corporation according to their priorities. Minn. Stat. § 317A.725, subd. 1. Assets can be transferred without a vote of the members and must be consistent with Minn. Stat. § 317A.735. Id. at subd. 2. In certain situations, a supervised voluntary dissolution is possible using court supervision upon application by the corporation, the attorney general, a creditor, or a percentage of the members. Minn. Stat. § 317A.741.

Notice of intent to dissolve may also be provided to creditors or claimants against the non-profit. Minn. Stat. § 317A.727. Specific procedures must be followed in providing notice to these creditors or claimants. Id. at subd. 2. Once the creditor or claim receives notice, the non-profit has 30 days from receipt of the claim to accept or reject the claim in writing. Minn. Stat. § 317A.729. A creditor or claimant whose claim is rejected has 60 days from date of rejection, 180 days from the filing date of the notice of dissolution, or 90 days after it received notice of the dissolution to pursue other remedies. Id. If notice is not provided to a creditor or claimant, claims must be brought within two years after the notice of intent to dissolve is filed. Minn. Stat. § 317A.730. If a party fails to file a claim or pursue a remedy within the time outlined in the MNCA, they are barred from pursuing the claim. Minn. Stat. § 317A.781, subd. 1. The court may require creditors and claimants to file their claims under oath with the court or a receiver. Minn. Stat. § 317A.759, subd. 1.

A court may "grant equitable relief it considers just and reasonable in the circumstances or may dissolve a corporation and liquidate its assets and business as provided" in Minn. Stat. § 317A.751. Minn. Stat. § 317A.751, subd. 1. Judicial intervention is available in actions by directors or members with voting rights, by creditor, or by attorney general. Id. at subds. 3-5, The procedures for involuntary or supervised voluntary dissolution are more fully outlined in Minn. Stat. § 317A.753. At the end of an involuntary or supervised voluntary dissolution, a decree of dissolution will be issued and the corporation will subsequently be dissolved. Minn. Stat. § 317A.763. The court administrator is responsible for filing the decree with the Secretary of State. Minn. Stat. § 317A.765. If there are assets that may be distributable to persons unknown or persons with disabilities, the assets must be reduced to money and deposited with the Commissioner of Finance. Minn. Stat. § 317A.771. Additionally, even though a non-profit has been dissolved, there still may be a claim by or against the corporation. Minn. Stat. § 317A.783.

12. Corporate Registration.

In Minnesota, the MNCA outlines procedures for the initial corporate registration (see Minn. Stat. § 317A.821) as well as the annual corporate registration (see Minn. Stat. § 317A.823). A non-profit must file its registration annually and failure to do so will result in dissolution of the non-profit. Minn. Stat. § 317A.823. The annual registration should be submitted to the Secretary of State and should be in the form outlined in Minn. Stat. §§ 317A.821 and 317A.823. Minn. Stat. § 317A.825. That said, even if the form is in substantial compliance with these sections, it will be accepted by the Secretary of State. Minn. Stat. § 317A.825. If the corporation is dissolved under Minn. Stat. § 317A.823, it can simply be retroactively reinstated by filing a single annual registration. Minn. Stat. § 317A.827.

13. Special Provisions.

Non-profits formed for the following purposes are governed by particular statutes: chambers of commerce, boards of trade and exchanges (Minn. Stat. § 317A.905); corporations to secure or maintain homes for dependent children (Minn. Stat. § 317A.907); and corporations for religious purposes (Minn. Stat. § 317A.909).

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