Tribal Legal Code Project: Tribal Corporations Codes

Introduction

A tribal government has many preliminary concerns to address prior to the creation of a corporations code. The threshold issue is a political/philosophical question that the tribal council must decide prior to reviewing the technical questions associated with the enactment of a code. Tribal governments particularly must consider their tribal sovereignty. Clearly, each tribe has the inherent legal authority to enact a corporations code. It is not a question of whether a tribe has the power to enact a code. It is clear at this time in the history of the tribes that tribes have the inherent power to enact corporations codes. Instead, what must be considered is whether a tribe wishes to enact a corporations code. It is each tribal community’s view of itself that must be reconciled with the notion of enactment of a corporations code. Clearly enacting a corporations code is a political stat that a tribe is choosing to develop in a parallel fashion to the states. In making such a decision a tribal government must make sure that their nations view of their individual sovereignty is consistent with the enactment of a corporations code.

Many tribes are struggling to define their political identity in relationship to non-tribal governing units and do not wish to mirror those entities. Yet, as they evolve as governments the tribes are finding that in dealing government to government or in dealing with economic enterprises some common language or currency is required. This is particularly true when the tribes are seeking to forge economic liaisons with non-tribal entities. The tribes are increasingly seeking capital infusions/joint ventures and to do so must relate to non-tribal entities. In addition, tribal community members are seeking to establish increasingly sophisticated internal economic enterprises that do not resemble their traditional economic relationships so that the tribes are looking beyond their historically sanctioned units of economic organization.

If a tribe is ready and willing to make the decision to accept non-traditional economic organizational structures then the tribe needs to look at the alternatives available. Prior to making such a decision each tribe should review what traditional economic units were available for internal economic activity and for extra tribal economic activity, e.g., that activity carried on with other tribes or non-tribal entities. This will give the tribal government a historical backdrop to consider when deciding whether to enact a tribal corporations code, that is if the tribe has historically had economic structures the tribe may be able to adapt those structures to current economic needs or use them to adopt modified corporate structures which will be acceptable to tribal and non-tribal entities.

It is perfectly acceptable to decide that a tribe is not going to adopt a tribal corporations code. And in so doing the tribe may decide it wishes to economically isolate or that it wishes not to sanction any economic entity that is not rooted in the commercial history of the enacting tribe. The key is to act in all matters in a manner that is consistent with the overall general plan of each tribe. Each tribe should have developed a philosophical general plan as to how the tribe wishes to pursue its sovereignty in relationship to the economic well being of the tribes members. It is essential in governing to act in a consistent fashion, with in a plan that is accepted by the general membership.

If a general economic plan is in place then it is possible to devise plans that evolve toward that goal in a progressive fashion. The economic goals may or may not include a corporations code. This article is designed to aid those tribes who are seeking to move toward a corporations code without implying that it is the only recommended economic model for a tribe. This article presumes that a tribe considering a corporations code has already made the decision pursuant to their general plan that economic growth for their individual tribe would be enhanced by adopting a corporate model.

Working Definitions Essential Prior to the Drafting of a Code

Having made a decision that a corporate structure is desirable then each tribe must examine the varieties of corporations available and determine which of these corporations would fit into their current needs. In so doing the tribe should consider current needs and probable growth during reasonable increments, for economic purposes ten years is a reasonable projected planning period. A code does not have to have every conceivable corporate alternative but should actually be designed to fit each tribe’s general eco plan. For purposes of discussion this section of the article will review and define the different corporations available to a tribe. It is important to note that these definitions are designed to work in a tribal and non-tribal context.

One of the areas where a tribe may have some ability to adapt as opposed to adopt a corporations code is in the definitions. It is possible to evolve definitions from those traditionally used in non-tribal codes, to ones used in tribal codes which may incorporate tribal concepts. In so doing the codes may be more acceptable to tribal people and not lose their acceptability in the non-tribal context. The last section of the article will contain tribal codes enacted by three different tribes. The reader may consider these as working models. They should not be duplicated, as each tribe should design their own codes. However, it is often helpful as point of reference to view what other tribes have done. The annotations in those codes are the work products of this writer and should not be viewed as the work of those tribes. The annotations are designed to assist a drafter of a code in considerations for creation of a corporations code where a code is not in existence.

A CORPORATION is a legal entity created pursuant to the laws of a sovereign that is normally composed of a number of persons and exists separately from those persons, whether or not the persons remain members of the corporation. It is normally created for business purposes and as an entity has distinct and inherent powers and liabilities conferred by the sovereign under which it has been created.

There are several features of a corporation that distinguish it from other business entities and which influence those seeking to establish a business to chose this form as opposed to partnerships or other forms. A summary of those features include:

Limited Liability. This is generally the feature that is the basis for the most compelling rationale for the establishment of a corporation. A corporation protects the property and resources of each individual shareholder. The shareholders are not personally liable for the business debts of the corporation, the only risk to the shareholder is that amount of capital or resources the shareholder has invested. All other personal property of the shareholder is sheltered from creditors. However, one of the things a tribe may wish to do to protect people dealing with corporations is require that corporations have liability insurance so that if someone is injured by the corporation the injured party can at least make a financial recovery. This is particularly true for non-profit corporations that generally have fewer assets.

Federal Income Taxation. Corporations are typically separate tax entities. They have their own tax rates, and the profits given out to shareholders are generally taxable to the shareholders. This point should be of interest to tribes looking for tax revenues, every traditional taxation point should be examined as a revenue source for a tribe.

Centralized Management. Management is by a team as opposed to every person who has a financial interest managing the firm. Decision-making is vested in the directors and officers of the corporation, the members of this management team may or may not be shareholders of the corporation. This is particularly important where the number of owners is unwieldy or where the owners decide that management should be delegated to a team of business professionals who are not owners.

Continuity of Existence. Most corporations are formed to exist into perpetuity. This makes the business structure far more stable than other types of business organizations. For instances the death or withdrawal of a does not end a corporation’s existence, and no shareholder has the power to compel or force a dissolution. Corporations are designed to outlive the individuals who form them and can survive a shareholder losing interest in the underlying business objectives of the corporation. The corporation continues by replacing shareholders, or capital contributors.

Interests are Easily Transferred. Unless the corporation has restricted by contract the transferability of shares, the shares of a corporation may be freely sold, assigned or otherwise disposed of by a shareholder owner. The person who succeeds to the ownership of the shares automatically becomes a shareholder in the corporation with whatever rights all shareholders have by virtue of that status.

Types of Corporations:

Closed: This is a corporation where the directors and officers of the corporation are able to fill all vacancies in their ranks by their own votes. That is, there does not have to be a vote of all shareholders or members. This type of corporation is generally smaller and is often used by families who are wishing to establish a corporate identity to run a family business and shield the personal assets of the individual family members. This type of corporate structure is restricted so that a member of the corporation can not sell their shares in the open market e.g., stock markets, all or most of the shareholders actually will participate in the management of the corporation, and the transferability of ownership shares is restricted by the corporation.

Open: This is a corporation where the directors and officers of the corporation are elected by the shareholders or members of the corporation. Importantly, these corporations are considered those who have shares that are traded on the securities exchanges, or shares for which there are regular published price quotations, and also those who because of the number of shareholders of record or the size of their assets are subject to special regulation pursuant to the Federal Securities and Exchange Act of 1934. Additionally some corporations that have made a registered public distribution of securities are governed by The Federal Securities Act of 1933 and state statutes that have special requirements for these distributions.

Public Service Corporations: These are highly specialized organizations and should generally be established for those purposes which would serve the general public of the reservation, for instance water, electric or gas companies. They should also be fully regulated so that the general public good is served by the corporation. These corporations are designed to serve a public need and must be regulated to insure that the services are delivered to the community. A failure of this type of corporation would result in the loss of an important service which would have the potential to effect the entire reservation so the business practices of such a corporation would require more monitoring than other types of corporations.

Municipal Corporations: This is a public corporation, and would be created by the tribe for political purposes, it would encompass residents of a certain geographical area and would allow them to conduct themselves as a civil government. This could be used on reservations that had districting to give the residents local control and would be done pursuant to a charter from the central government or in this instance the tribal council. Normally, the municipal corporation is subservient to a central government with the powers of the municipal corporation being delegated by the central government.

A For-Profit Or Business Corporation: This is a corporation which has as its purpose the transaction of business for the stated purpose of earning a profit for the members of the corporation. Usually, a corporation has one primary business function, e.g., timber harvesting, farming, ranching, manufacturing, gambling, banking, etc. A person may belong to more than one corporation. And it is not uncommon for a corporation to create a second corporation, called a subsidiary. The creating corporation is known as the parent corporation and the parent corporation owns at a minimum a majority of the shares of the subsidiary. This is to insure that the parent corporation has control of the subsidiary corporation. This usually happens when members of the parent corporation have over lapping interests. An example would be a parent corporation that drew up harvesting plans for timber, and a member of the parent corporation also owned some trucks and wanted to have a corporation own the logging trucks, so a subsidiary company is established for the purpose of owning the logging trucks.

A Non-Profit Business Corporation: This is a corporation that does not exist for the purpose of paying dividends or profits to shareholder/members. Generally speaking non-profit corporations do not exist for the purpose of making money, rather they have a primary purpose that is non-monetary. State sanctioned non-profit purposes include religious, charitable, educational, or social services. Examples of non-profits in a tribal setting would generally be found in the human services areas and could include any of the following: substance abuse treatment programs, case management service providers, CASA programs, counseling programs. One of the principle factors that often influences founders of non-profit organizations to select corporate status is that foundations and individuals seeking to make donations which are tax deductible, must make those deductions to non-profit organizations. Part of forming as a non-profit is the qualification by the corporation pursuant to the Internal Revenue Service as a non-profit that allows this deduction to take place. (These corporations are often known as 501(c) (3) corporations.)

Ancillary Considerations

The foregoing discussion illustrates that the creation of corporations is only one segment of the picture. If the corporation wishes to function in any external fashion whether it be for the purpose of securing funding, or the development of projects off reservation, or encouraging off reservation participants to enter into a reservation business relationship these corporations would necessarily have to interface with existing state and federal requirements. Tribes seeking to develop corporations codes must create entities which look like the corporations described above so that these corporations can realize the full benefits and protections of the status conferred by creating a corporation. In addition, the tribal community and others who will be involved with the corporations need to have the protections offered by the non-tribal entities who regulate corporations. So even if a tribe seeks to have its own corporations code it is clear that developing such a code is opening the door to further involvement/entanglement with non-tribal governments. It is clear even from this brief discussion that tribally established corporations must, to be successful, if utilizing non-reservation resources comply with many state and federal regulations. Part of complying with those regulations will result in the establishment of corporations that mirror to a great extent the corporations allowed by the state governments.

A tribe in establishing a corporations code must additionally realize that creating a code requires the ability to enforce compliance with the code. This means the tribe must have the internal management capacity necessary to create a system that includes monitoring, investigating and enforcement capabilities. The tribe must be cognizant of the fact that by creating a corporations code they will be allowing for the establishment of entities about which the general reservation and non-reservation public have certain expectations. Furthermore, federal and state laws have combined with a body of case law amassed over decades to enforce those expectations. Any council adopting a corporations code should then consider how they wish a tribal court to develop a body of law for the enforcement of that code and give that guidance in the language which establishes the code. If that guidance is not given to the court, the judicial officer who is deciding a dispute will also decide what resources they may look to for principles of interpretation.

Creating any code without these functions in place can result in a loss of faith in the institutions created and undermine the development sought to be enhanced by allowing for corporations. If a tribe is unable to have the supportive structure in place an option is to allow for corporations created pursuant to state law to operate on reservation with the enforcement pursuant to state laws. Note, this does not mean that a corporation could not be held accountable in tribal court for corporate activities, it is suggesting that the function of enforcing corporate compliance with corporate establishment statutes be left to the states if the tribe is not ready to assume that responsibility.

Other alternatives include developing a code for a reservation on an as needed basis. That would mean allowing for the gradual development of a code as the business requirements of the reservation develop. A tribal council could consistent with the general economic plan for a reservation legislate different corporations into the tribal code as the tribal business community required and the tribal governmental structure could support. The tribal business community must have evolved to the place where members of that community feel comfortable with the considerable requirements of establishing and maintaining a corporation. Depending on the complexity of the business venture the formation documents can require considerable legal knowledge. If this is true the tribe must have in the local community the legal knowledge to meet such requirements or understand they will be relying on non-tribal resources. If the documents are complex the tribe must have at its disposal legal resources adequate to review the documents and insure that corporations chartered or established by the tribe are complying with the tribal code. In addition to the incorporation formalities at a minimum corporations must keep minutes; annual reports must be filed; separate tax returns must be filed; establish a registered office and a registered agent.

A further important consideration is the additional requirements placed on corporations and the parallel structures the tribe may wish to impose on a corporation. Specifically, the fees for incorporation and any imposition of a taxing structure that would be in addition to or instead of a tax structure that the state or federal government may seek to impose. If the taxation structure or division of the tax scheme has not been agreed upon previously by the state and/or federal government there maybe the added cost of litigation to clarify the taxation authority of the various governmental entities.

Formation Requirements of Tribal Corporations

Each tribe may establish their own corporations code. However, in so doing there are standardized requirements which should be included in every code. Initially the code must establish what specific office in the tribal government will accept the filing of the documents establishing a corporation, who will collect the filing fees, and who will review the documents prior to authorizing or approving the corporation as a tribal business entity. This would include a description of how a corporation would be deemed formed, i.e., whether a certificate would be issued or some other form of recognition.

Those people who meet to form a corporation are generally called incorporators, the tribe should determine what requirements they want to have for incorporators. For example, they may want to have an age requirement, a residency requirement (or require that a certain number of incorporators are residents), the number of incorporators required for each type of corporation, and whether or not they intend to allow corporations or partnerships to qualify as incorporators in addition to people who are the usual incorporators.

The incorporators are responsible for creating the documents required for incorporation, the corporation code requirements are not the only requirements of incorporation as noted above, but this article is limited to discussing those requirements. A tribe must be very careful to insure that parallel documents are in place before actually allowing a corporation to transact business. A tribe must decide on whether or not it will provide technical assistance to tribal members wishing to establish corporations to insure that tribal chartered corporations are functional business entities. The primary creation document is generally called the Articles of Incorporation, and should include at a minimum the following information:

• The name of the corporation, (most codes require that the term corporation, incorporated, or company or an abbreviation of one of those terms appear in the name, and the tribal office in charge of corporations should keep a list of corporate names to insure that names are neither reused or to similar to existing corporate names so that the community would confuse two separate companies);
• The length of time the corporation may exist, which may be forever;
• The purposes of the corporation, and each tribe must decide how specific and inclusive a purpose statement is required, many states now allow for the purpose to be set forth as "or any lawful business purpose;"
• The number of shares authorized to be issued, including information about the types, rights and preferences of the shares;
• The address of its registered office and the name of its registered agent at that office; Note: each tribe should require this to office and agent to be located within the boundaries of the reservation. In addition, the tribes should require the incorporators to agree to the jurisdiction of the tribal court for any legal disputes arising that would involve the corporation. Tribes should consider requiring all corporations intending to do business on the reservation to comply with these requirements.
• The number of directors and the names and addresses of the members of the initial board of directors; and
• The names and addresses of each incorporator.

The incorporators having prepared the articles of incorporation must then draft the bylaws or the rules of how the corporation must run. Generally the bylaws are filed with the articles of incorporation. When the bylaws are complete the following generally must occur:

• Calling the first board of directors meeting, preparing the minutes of the meeting;
• Obtain a corporate seal if the tribe is going to allow for seals, and establish a minute book for the corporation;
• Obtain blank certificates for the shares of stock, arrange for their printing or typing, and ensure that they are properly issued;
• Arrange for the opening of the corporate bank account;
• Prepare the necessary documents for the calling of a meeting of the shareholders;
• Prepare employment contracts, voting trusts, pooling agreements, share transfer restrictions, and oth special arrangements which are to be entered with respect to the corporation and its shares;
• Obtain taxpayer and employer identification numbers from the Internal Revenue Service and from the appropriate state agencies; and
• Meet all the formal requirements of registration of shares if they are to trade in the market place.

Incorporators can comply with these requirements if the venture is not complicated or if they are incorporating a relatively simple entity e.g., a non-profit corporation. However, if the venture is complicated or the goals are trading on any share markets incorporators must have specialized knowledge and technical skills to comply with these requirements. Often lawyers who specialize in corporate law are retained to insure that these requirements are met. Lawyers who have received general training but who have no experience beyond law school should not be utilized to establish complex corporations.

What follows are three tribal codes. These codes were chosen to illustrate the different but similar approaches to drafting corporations’ codes and to give a code drafter a definite starting point. The codes are from Hoopa, Cherokee, and Navajo.

Summary of Codes Selected as Models

The codes selected as models demonstrate three different approaches to drafting. They were purposely selected to illustrate the choices a tribe would have in designing a code to fit their reservation. The codes do not for the most part incorporate any pre-existing tribal business models. Rather each is a variation of the traditional corporate codes utilized by non-tribal governments. Each of the selected models can be adapted for use by a tribe seeking to adopt a first time corporations code. This summary will briefly discuss the differences among the codes.

Best Practices: Corporations Codes
Navajo Code

The Navajo Nation has a comprehensive all-inclusive code that is representative of a complex tribal business community. The portions of the code used as examples herein are not the entire code and are used to demonstrate the types of entities referred to in this article. The Navajo Nation Corporation Code is found in Title 5, Commerce and Trade and is the 19th Chapter of that title. Chapter 19 includes provisions that address three types of corporations, organizationally they are combined in this section and as such this is different than the approach utilized by Hoopa which separates out types of corporations into separate titles.

This Code has as its first subchapter a section titled General Corp Law and is equivalent to the sections in Cherokee and Hoopa that cover for profit corporations and can be compared to those sections by any drafter seeking examples of for profit corporations code language. These for profit sections differ slightly but clearly are meant to address for profit organizations, and the different styles can be reviewed by each tribe interested in such a statute and adapted for individual needs and preferences.

The second subchapter is titled for Close Corporations. This section was specifically included as an example of Close Corporation statutory language. Close corporations are the most likely form of corporations to be utilized in a tribal context. They are the smaller for profit corporations and are described in the above article.

The third subchapter is for non-profit corporations. This section was included so that drafters could have a second model to review in preparation for the drafting of a non-profit code.

Best Practices: Corporations Codes
Cherokee Code

This Corporations Code is a comprehensive setting out of all aspects of corporate existence. It is set out in a format of chapters of an existing tribal code. The section re-produced here relates to corporations for profit. The chapter format is broken down into three articles. The first is reserved for future use and is titled General Provisions which suggest that the drafters intend at some point to draft a complete description of corporate possibilities pursuant to this code.

The second chapter is titled Incorporation and Regulation of Corporations Generally. A review of the sections contained in this chapter indicates that this chapter is of major importance as it specifies the relationship of the corporation to individuals, the state and to the tribe. Establishing the rights and responsibilities of each entity is the function of this chapter. The material covered in this chapter is vital and needs to be addressed in any corporations code. It is this chapter where the drafter will find the most deviation from state corporations codes as it is here where the identity of the corporations as tribal entities is established and defined.

The third chapter is titled Tribal Corporations. This is the chapter that most mirrors the traditional state corporations codes. It is here where the corporation is defined. There are nine articles that cover the entire existence of a corporation. They can be readily adapted as the basics of corporate life are completely set out in these articles. Those articles are:

Article 1. General Provisions

Article 2. Corporate Purposes and Powers

Article 3. Corporate Finance

Article 4. Shareholders

Article 5. Directors and Officers

Article 6. Organization of Corporations

Article 7. Amendments of Articles of Corporation

Article 8. Sale and Other Disposition of Corporate Assets

Article 9. Dissolution of Corporations

Best Practices: Corporations Codes
Hoopa Code

These codes were selected to demonstrate a different approach to drafting of a corporations code. Specifically the selected examples are titles of the tribe’s code and show a different approach than the one utilized by Cherokee. The format is by ordinance, a format widely used in Indian Country and as such may be e for tribal drafters to accept as a model. Each title is easily separable and can be adopted at different times and each chapter establishes its authority pursuant to the existing laws of the tribe. This is helpful as giving a legal context to the provisions. Unlike the Cherokee example the general provisions of this code are contained in a separate title, Title 51. Title 51 is meant to be introductory and controlling on the following titles that define the different corporate structures that are possible in this tribe. It has general language and a review of the sections in this first title indicates that this portion of the code was meant to serve as the foundation for the tribe’s corporate activities. It is in this title that the specific tribal concerns mentioned in the above article are addressed. Drafters should pay particular attention to the following sections:

Purpose and Construction: Which establishes for any interpreter the rules of construction, i.e., this section will guide future legislative action of the tribal council and any tribal court that is required to make a determination on the meaning of any section of the code.

Tribal Department of Commerce: This section establishes what branch of the tribal government shall oversee corporations. Many tribes are going to this format of establishing Departments of Commerce for the purpose of regulation of corporate life on the reservations.

Reporting Requirements: This section is vital in that it establishes the authority of the Department of Commerce to seek compliance with the tribe’s code. This particular section sets forth the specific authority of the director of the Department to propound interrogatories or demands to inspect documents to insure that a corporation is complying with corporate laws of the tribe.

Jurisdiction of the Tribal Court: This section establishes the authority of the Tribe’s court system. And it contains a section that should be in every corporations code indicating that the section shall not be construed as a waiver of sovereign immunity.

Registered Agents: The need for this section was discussed above. This section is a good example of such a requirement. It also serves as an example of protective language and structure for the circumstance where a corporation is out of compliance with this requirement. This protective language is of particular importance to a tribe and should be considered by all drafters.

The three additional titles are for corporations for profit, non-profit and tribal corporations. The first, the profit corporation is in Title 53 and can be compared to the Cherokee example. The second is in Title 54 and is a representative example of a non-profit corporation statute and can be used for adaptation purposes if a tribe is seeking to enact a non-profit statute. The third title is Title 51 and is entitled Tribal Entities, most probably to avoid confusion as the title actually describes tribal corporations. These are corporations/entities that are formed by the tribal council and are controlled by the council. These corporations/entities can be established for economic or governmental purposes. They were discussed in the above article and this title is an example of that type of corporation.