Maryland Legislature Further Improves Maryland General Corporation Law
In its 2003 session, the General Assembly of Maryland enacted, and Governor Ehrlich signed, three bills that further improve the Maryland General Corporation Law (the “MGCL”). The bills summarized below were initiated, drafted and actively supported by the Committee on Corporate Laws and the Business Law Section, and were unopposed in the House Economic Matters Committee, Derek E. Davis, Chair, the Senate Judicial Proceedings Committee, Brian E. Frosh, Chair, and on the floor of the General Assembly. (All Section references below are to the MGCL.)
House Bill 471 (sponsored by Delegate Ann Marie Doory) Power to Authorize Distributions. New Section 2-309(c) allows a board of directors that has given a general authorization for a distribution to delegate to a committee of the board or to an officer of the corporation the power to fix the amount and other terms of dividends and other distributions. The board would be required to provide for or establish a method or procedure for determining the maximum amount of the distribution. This provision may be especially helpful to real estate investment trusts and investment companies that need to pay dividends at certain levels in order to maintain a preferred tax status. It may also be helpful to operating companies that are subject to dividend limitation covenants in credit agreements.
“Distribution” – Clarification of Definition. Consistent with the Model Business Corporation Act, Section 2-301(a) is amended to clarify that the reference to “money or other property” refers to money or other property of the corporation (i.e., not the corporation’s stock).
Short-Form Mergers. Section 3-106 currently permits the parent of a 90-to-100%-owned subsidiary to approve an upstream (sub into parent) or downstream (parent into sub) merger without stockholder approval. Section 3-106 also requires the parent to give notice of the proposed merger to any minority stockholders. The amendment to Section 3-106(d) of the MGCL clarifies that this notice may be given by an entity that proposes to acquire 90% or more of the stock of a Maryland corporation before it actually reaches the 90% ownership level. This change should be helpful in facilitating a speedy second-step clean-up merger following a tender offer.
Appraisal Rights. Under existing Section 3-202, stockholders who are not entitled to vote on a merger or other action are not entitled to appraisal rights on the matter. The amendment to Section 3-202 clarifies that minority stockholders in a short-form parent-subsidiary merger under Section 3-106 of the MGCL are not denied appraisal rights just because they were not entitled to vote on the merger.
Cure for Failure to File Articles Supplementary. Under current law, before newly classified stock is authorized for issuance, articles supplementary must be filed for record with the State Department of Assessments and Taxation of Maryland (the “SDAT”). Unfortunately, some companies inadvertently issue stock without first filing the articles supplementary, which calls into question whether the stockholders have received validly issued stock and whether the stock is voidable by the stockholders or void.
New Sections 2-208(e) and 2-208.1(e) clarify that a corporation may cure the failure to file articles supplementary. Up until the time that the articles supplementary are filed, the issuance of the shares would be voidable by the stockholders. After the articles supplementary are filed, the issuance would be considered valid (not void or voidable). Any right or liability that has accrued by reason of the issuance of stock prior to the time the articles supplementary with respect to the stock are effective is extinguished upon the filing of the articles supplementary, except to the extent that someone has acted detrimentally in reliance on the right or liability solely by reason of the stock issuance.
House Bill 473 (sponsored by Delegate Doory) Series Funds – Status of Assets and Liabilities. New Section 2-208.2 clarifies the status of assets and liabilities with respect to a series fund registered under the Investment Company Act of 1940 (the “1940 Act”). In general, new Section 2-208.2 provides that if the charter of a corporation registered as an investment company creates one or more classes or series of stock and separate and distinct records are maintained for those classes or series and the assets associated with that class or series are accounted for separately from the other assets of the corporation, then (1) the debts, liabilities, obligations and expenses existing with respect to a particular class or series are enforceable only against the assets of that class or series and not against the assets of the corporation generally and (2) none of the debts, liabilities, obligations and expenses otherwise existing with respect to the corporation generally or associated with any other class or series are enforceable against the assets associated with that class or series. This provision should be helpful to multi-series investment companies in reassuring stockholders that assets of their series will not be exposed to claims against another series.
Transfer of Assets by Open-End Investment Companies. Section 3-105(a) currently provides that a corporation must obtain the approval of its stockholders prior to the transfer of all or substantially all of the corporation’s assets. There are currently several exceptions to this rule in Section 3-104. The amendments provide an additional exception for the transfer of all or substantially all of the assets by a Maryland corporation registered as an open-end investment company under the 1940 Act. This change will be particularly useful for open-end funds that seek to liquidate and are required to sell underlying assets to pay for the redemption of their shares.
Senate Bill 495 (sponsored by Senator Rob Garagiola and sponsored in the House by Delegate Brian Feldman) Electronic Meetings, Notices and Consents. Several amendments to the MGCL enable Maryland corporations to take advantage of recent advances in communications technology for board and stockholders meetings and consents. Among other things, the MGCL will allow directors and stockholders to hold electronic meetings and consent to action via e-mail and other electronic transmissions. In addition, the corporation may give notice of stockholders and board meetings electronically and stockholders and directors may deliver notices electronically.
Householding. The SEC’s proxy rules permit “householding” of certain documents such as proxy statements and information statements sent to stockholders. Senate Bill 495 clarifies the procedures necessary to permit “householding” of notices to stockholders. Stockholders who want to continue to receive separate notices may opt out of the householding provisions.
All of the above provisions have become effective and many of these provisions will also apply to real estate investment trusts formed as trusts under Maryland law either by cross-reference to the MGCL or by analogy.
Submitted by Teresa B. Carnell, Chair of the Committee on Corporate Laws, and James J. Hanks, Jr., former Chair, both of Venable LLP.