In its 2014 legislative session, the General Assembly of Maryland effected several significant changes to the Maryland General Corporation Law (“MGCL”).  Signed by Governor Martin O’Malley on May 15, 2014, Senate Bill 713 and House Bill 916 will be effective October 1, 2014.   The bills (referred to herein together as the “act”) are identical and include provisions that will be of interest to Maryland corporations and statutory real estate investment trusts and their counsel.

Simplifying public company mergers.  Two-step merger agreements involving public companies often include a “top-up option” or similar mechanism permitting the successful purchaser in a tender offer to acquire from the target corporation a sufficient number of shares to accomplish a “short form” merger at the back-end.  Under Section 3-106 of the MGCL, the offeror, upon acquiring 90% of the target, may cash out remaining stockholders who did not sell their shares in the tender offer by a merger without a vote by the target’s stockholders.  The act adds a new Section 3-106.1, which will permit the board of the target entity to approve the second-step merger if the acquiring entity has purchased at least the percentage of shares of the corporation in the tender offer that would be required to approve the merger at a meeting of stockholders.  Section 3-106.1, modeled on Section 251(h) of the Delaware General Corporation Law, will be useful in eliminating the need for top-up options and the associated complexity.  New Section 3-106.1 will be applicable only to publicly reporting entities.  Thus, the tender offer step of the combination will be subject to the tender offer rules under the Securities Exchange Act of 1934.

The act also amends Section 8-501.1 of the Maryland REIT Law to make the same mechanism available to publicly reporting Maryland real estate investment trusts.

Waiving the corporate opportunity doctrine.  The act amends Section 2-103 of the MGCL to make clear that a Maryland corporation has the power to renounce any interest or expectancy in, or in being offered an opportunity to participate in, business opportunities that are developed by or presented to one or more of its directors or officers.

The corporate opportunity doctrine, under Maryland law and many other jurisdictions, requires a corporation’s directors and officers to offer business opportunities in which the corporation has an interest or expectancy to the corporation before the director or officer is permitted to pursue the opportunity on his or her own behalf.  The corporation may renounce any such opportunity, thereby permitting the director or officer to pursue the business opportunity in another capacity.  The doctrine has been developed through common law as an outgrowth of the duties of officers and directors to the corporation.  In situations where a director might have extensive involvement in the corporation’s industry, he or she may encounter numerous opportunities in which the corporation might be thought to have an “interest or expectancy,” and the corporate opportunity doctrine can become burdensome and its application ambiguous.  The act offers Maryland corporations some relief from that burden and ambiguity by making clear that a Maryland corporation may renounce corporate opportunities by charter or by resolution of its board of directors.  The act does not alter the corporate opportunity doctrine, but the ability to renounce prospectively certain opportunities can provide comfort to directors and officers who serve other entities or who are actively involved in the same industry as the corporation.

The act also amends Section 8-301 of the Maryland REIT Law, making clear that Maryland statutory real estate investment trusts have the same power to renounce corporate opportunities.

Qualifications of directors.  Questions often arise regarding the impact of director qualifications set forth in a corporation’s charter or bylaws.  Section 2-403 of the MGCL currently provides that a director “shall have the qualifications required by the charter or bylaws.”  There is little case law regarding director qualifications in Maryland.  The act amends Section 2-403(a) to provide that a nominee for director must have the qualifications that are required of a director.  The amendment makes clear that a corporation need not permit nomination of an individual who, if elected, would not have the qualifications to serve.  The act also amends Section 2-403(b) to permit a corporation to provide in its charter or bylaws that, if a director ceases to have qualifications required by the charter or bylaws, the director’s term will conclude.  The director qualifications, and the provision that a director’s term will end upon a failure to have those qualifications, must be set forth in the charter or bylaws at the time the director is elected.

Clarifying who will be holdover directors.  Many Maryland corporations now require that directors be elected by majority rather than by a plurality.  The requirement of majority voting can result in a failed election.  Sometimes the number of incumbent directors who were not reelected exceeds the number of available seats on the board of directors.  In that situation, it is not clear which directors will continue to serve as “holdover” directors.  The act amends Section 2-405(a) to provide that, in such a circumstance, the directors who have been properly elected and, if the board is classified, any directors whose terms did not expire will determine by majority vote of the validly-elected members of the board of directors who will hold over and continue to serve as directors.  Amended Section 2-405(a) permits a corporation to set forth in its charter or bylaws alternative procedures for determining which directors will hold over and continue to serve.

The act’s other provisions.

•    The act deletes Section 2-309(c)(5), which currently provides that a stock dividend payable in one class of stock may not be distributed to holders of shares of a different class of stock unless approved by the board of directors pursuant to specific authority in the charter or approved by stockholders.

•    The act includes amendments to Section 2-408 to clarify the application of that section to voting by directors when a corporation’s charter provides certain directors with different voting rights.

•    The act amends Section 2-502(e), which currently provides that the board of directors has the sole power to fix a record date and appoint the date, time and place of a special stockholders meeting.  As amended, that section permits the charter or bylaws to provide otherwise, thus permitting more flexibility.

•    The act adds a new Section 2-510.1 to provide statutory recognition of stockholder voting agreements.

•    The act amends Section 3-109 to make clear that articles of merger, articles of consolidation, articles of share exchange and articles of transfer may describe consideration with reference to facts ascertainable outside the articles, thus simplifying the task of drafting such articles for filing in Maryland.

¹Senate Bill 713 appears as chapter 550 of the 2014 Session Laws and House Bill 916 appears as chapter 551.  The bills are identical and the Governor signed both.

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This article was written by J.W. Thompson Webb, Scott R. Wilson and Christopher R. Johnson in the Baltimore office of Miles & Stockbridge P.C.

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