New Maryland Corporate Legislation
Governor Ehrlich signed new legislation affecting Maryland corporations at the Wednesday, May 26, 2004 Legislative Session bill signing. The legislation is House Bill 737 which, although styled as a miscellaneous bill, contains several interesting provisions relevant to our practice. House Bill 737 makes various changes to the laws governing reverse stock splits under a corporate charter, signatures on corporate securities, non-unanimous action by consent of common stockholders, and corporate dissolution. A brief summary of the Bill is set forth below.
Reverse Stock Splits
Unless a corporation’s charter provides otherwise, the Bill authorizes the board of directors of a Maryland corporation with stock registered under the Securities Exchange Act of 1934 or that is registered as an open-ended investment company under the Investment Company Act of 1940 to amend its corporate charter to effect a reverse stock split resulting in a ratio of no more than 10:1 in any twelve month period:
1. Upon approval of a majority of the entire Board of Directors and;
2. Without stockholder approval.
Within twenty days after the effective time of the reverse stock split, the corporation must give written notice of the reverse split to each holder of record as of the effective date.
This provision addresses the phenomenon of public companies conducting reverse splits in order to raise their share price to meet the minimum price per share requirements for initial or continued listing on NASDAQ, AMEX or another exchange. This provision is not applicable to privately-held companies. The new reverse stock split provisions will be included in Section 2-309 of the MGCL.
Signatures on Certificates of Stock and other Securities
The new Bill adds to the list of officers authorized to sign stock certificates by adding the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer and Vice Chairman of the Board to the current listing of President, Vice President and Chairman of the Board. Those changes will be made to Section 2-212 of the MGCL.
The new Bill also authorizes action by non-unanimous consent of common stockholders entitled to vote generally in the election of directors. Under the Bill, if specifically authorized by the corporation’s charter, common stockholders entitled to cast at least the minimum number of votes that would be necessary to authorize or take the action at a stockholders’ meeting may take action or consent to any action (by delivering consent in writing or by electronic transmission) if the corporation gives notice of the action to each holder of common stock no later than ten days after the action’s effective date. The Bill also contains rules governing the appropriate solicitation of consents and addresses certain procedural matters. These rules are very similar to Delaware, which has traditionally authorized non-unanimous stockholder action. Unlike the Delaware statute 1
however, the new law does not permit non-unanimous action by written consent of common stockholders unless specifically authorized in the Charter. Any consent authorized by the Bill must be delivered to the corporation’s principal office in Maryland, its resident agent or the officer or agent of the corporation that has custody of the corporation’s minute book. A stockholder may deliver this consent in paper form, by hand, by certified or registered mail (return receipt requested), or by electronic transmission.
Written consent does not take effect unless written consents signed by a sufficient number of stockholders to take the action are delivered to the corporation within 60 days of the earliest dated consent. Any charter documents filed with the SDAT relating to an action taken by consent may state that the action was approved by the stockholders under the consent provisions of the Bill or current law.
With this provision Maryland is taking another important step towards increasing the flexibility of Maryland corporate governance requirements. In 2000, the MGCL was amended to allow for non-unanimous consents of preferred stockholders. The new provisions will be included in Section 2-505 of the MGCL.
Many lawyers and corporate officers working with the dissolution provisions of the MGCL have been uncertain of the effect of the current language providing that “directors of the corporation become trustees of its assets for purposes of liquidation” upon the filing of articles of dissolution 2
. In particular, some Maryland practitioners have raised concerns that the references to trustee status could hold such directors to a trustee standard of care and/or jeopardize the ability of directors to take advantage of exculpatory provisions or receive indemnification, etc. The revisions to the dissolution statute remove references to directors of dissolving corporations as trustees and explicitly provide that the business and affairs of the corporation shall be managed under the direction of the Board of Directors solely for the purpose of winding up the corporation. The statute also explicitly provides that dissolution does not subject the corporation’s directors to a different standard of conduct.
* * * * *
Amendments to the MGCL will take effect on June 1, 2004. If you have any questions regarding any of these matters, please do not hesitate to contact D. Scott Freed at 410-347-8763 firstname.lastname@example.org
, Eva Hill at 410-347-8798 email@example.com
or Frank S. Jones, Jr. firstname.lastname@example.org
1 DGCL §228.
2 Current §3-410(a) of the MGCL.