In the 2015 legislative session, the General Assembly of Maryland effected several useful changes to the Maryland General Corporation Law (the “MGCL”). House Bill 522 (now Chapter 526 of 2015 Session Laws and referred to herein as the “act”) was signed by Governor Lawrence J. Hogan, Jr. on May 12, 2015, and will become effective on October 1, 2015.  Provisions of the act will be of interest to Maryland corporations, Maryland real estate investment trusts, and their counsel involved in mergers and acquisitions.

Actions by Written Consent with Future Effective Dates

Amendments to Section 2-408 and Section 2-505 of the MGCL clarify that, subject to specified conditions, consents to corporate action may be placed in escrow and become effective at a future time.  The amended provisions will permit certainty in transaction closings and similar situations where an action needs to be signed in advance.

Directors. The act amends Section 2-408 of the MGCL to provide that an individual, whether or not currently a director, may consent to corporate action with the consent becoming effective at a future time. The effective time of the consent may be conditioned on the occurrence of a future event, provided that the effective time may be no later than 60 days after the consent is delivered to the corporation. The consent will not become effective if the individual providing the consent is not a director at the effective time or has revoked the consent before the effective time (the consent is revocable unless otherwise provided).

Stockholders. The act similarly amends Section 2-505 of the MGCL to provide that a person, whether or not currently a stockholder, may consent to corporate action with the consent becoming effective at a future time. The effective time of the consent may be conditioned on the occurrence of a future event, provided that the effective time may be no later than 60 days after the consent is delivered to the corporation. The consent will not become effective if the individual providing the consent is not a stockholder at the effective time or has revoked the consent before the effective time (the consent is revocable unless otherwise provided).

Clarifying the Two-Step Merger Process

Two-step merger agreements involving public companies often include a “top-up option” or similar mechanism permitting a 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. In 2013, Delaware amended the Delaware General Corporation Law (the “DGCL”) to adopt Section 251(h) to limit the need for a top-up option in certain acquisitions of publicly-traded Delaware corporations.

In 2014, the MGCL was similarly amended to add new Section 3-106.1, which permits the board of a target Maryland corporation to approve the second-step merger (without a stockholder vote) if the acquiring entity has purchased at least the percentage of shares of the target in the tender offer that would be required to approve the merger at a meeting of stockholders.  Similar to Section 251(h) of the DGCL, Section 3-106.1 eliminates the complexity of a top-up option in some transactions.

The act amends Section 3-106.1 of the MGCL to clarify the provision and enhance its utility.

Transaction Flexibility.  Section 3-106.1 currently requires that, in order to be governed by the section, an agreement to merge must contain language that expressly opts into the section. It is arguably unclear, however, whether parties may opt into Section 3-106.1 while reserving other options to effect the merger. The act amends Section 3 106.1 to provide that the agreement to merge need only permit (and not necessarily require) the merger to be effected under the section thereby offering greater flexibility to transaction parties.

Timing and Ownership.  Section 3-106.1 is currently silent as to when a buyer would be deemed to own the shares necessary to complete a back-end merger. Thus it is unclear when the merger parties could consider the tender offer consummated. Uncertainty whether full payment for tendered shares is required to complete the tender offer, for example, could have an important effect on transaction timing. The act defines “consummate” to mean “irrevocably accept for purchase or exchange stock tendered pursuant to a tender or exchange offer,” clarifying that only acceptance for purchase is necessary to “consummate” the tender offer. Additionally, the act provides that shares exchanged in the tender offer will be deemed to be owned by the buyer when stock certificates have been physically received by the depository or, for uncertificated shares of stock, when such stock is transferred into the depository’s account or an agent’s message has been received by the depository. Notably, the act follows the policy decision of Delaware to exclude stock tendered by guaranteed delivery from the shares deemed “received” by the depository.

Any and All Outstanding Shares.  The act codifies the mechanics common in tender offers by allowing the buyer to exclude the shares held by related parties from the tender offer. Specifically, amended Section 3-106.1 provides that shares of the target corporation owned by the acquiring entity, in addition to shares owned by a direct or indirect parent of the acquiring entity or a direct or indirect wholly owned subsidiary of the acquiring entity or parent, may be excluded from the tender offer.  Shares in the target corporation owned by those related parties will, however, count towards determining whether a buyer has sufficient shares to effect a back-end merger. Further, the act specifies that only shares that are the subject of the offer need to be cancelled or converted, providing further clarity regarding treatment of shares owned by the buyer and related parties, and eliminating ambiguity with regard to treatment of preferred stock which is not subject to the tender offer.

Stock Subscription Does Not Create Voting Rights

The act also amends Section 2-202 of the MGCL to clarify that, unless provided otherwise in a stock subscription agreement, a subscriber has no voting or other rights with respect to the stock subscribed for until the stock is issued and fully paid.

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FORUM SELECTION BYLAWS

In our Client Alert dated August 29, 2013, we shared our view that it is appropriate for directors of Maryland corporations to consider adopting bylaw provisions selecting Maryland courts as the exclusive forum for adjudicating intra-corporate disputes.  (Forum Selection Bylaws for Maryland Corporations and REITS, Miles & Stockbridge Client Alert, August 29, 2013)  Since then, courts in Delaware and other states have enforced forum selection bylaws of a number of corporations.  We are not aware of any more recent judicial consideration of forum selection bylaw provisions of a Maryland corporation, whether by a Maryland court or a court of another jurisdiction.

Much attention has been paid to recent amendments to the Delaware General Corporation Law (the “DGCL”) adding a new Section 115 to the DGCL, which provides (in part):

The certificate of incorporation or the bylaws may require, consistent with applicable jurisdictional requirements, that any or all internal corporate claims shall be brought solely and exclusively in any or all of the courts in this State, and no provision of the certificate of incorporation or the bylaws may prohibit bringing such claims in the courts of this State.

Section 115 will permit a Delaware corporation to select the courts of Delaware exclusively or to select another jurisdiction non-exclusively.  In other words, if the corporation selects a jurisdiction other than Delaware, it may not prohibit bringing claims in Delaware and, thus, must permit claims to be brought in Delaware.

When offering our suggested form of a forum selection bylaw provision last year, we had suggested selecting the courts of Maryland (or a federal court sitting in Maryland).  Nothing in Maryland law precludes exclusive choice of a jurisdiction other than Maryland and we also acknowledge that courts of another jurisdiction may be convenient to a Maryland corporation., but  it is important, however, to observe the risk inherent in such a selection.

While judges and lawyers around the country are often well-versed in Delaware corporate law, close knowledge of Maryland corporate law is not nearly as common.  When litigating outside Maryland, Maryland corporations may find that lawyers and judges will default to Delaware legal principles, often to the disadvantage of a Maryland corporation.  Prosaic examples of the adverse application of Delaware corporate law can be found in the application of Delaware standards of review to evaluate decisions of the board of directors of a Maryland corporation (e.g., Fox v. Riverview Realty Partners, Civ. A No. 12-C-9350, 2013 WL 1996382 (N.D. Ill. May 10, 2013)(applying entire fairness)) and the application of more lenient demand futility standards (e.g., Felker v. Anderson, Civ. A. No. 04-C-0372, 2005 WL 602974 (W.D. Mo. 2005)(finding demand on the board of directors to have been futile)). ¹ The same risks, of course, exist for a Maryland corporation that has not adopted an exclusive forum selection bylaw provision choosing Maryland courts.

In short, while nothing prohibits the selection of a forum outside the State of Maryland, and the Maryland judges of the Business and Technology Case Management Program do not enjoy the benefits of the exclusively business-oriented docket afforded the Court of Chancery in Delaware, when it comes to the application of Maryland law, we continue to recommend designating the Business and Technology Case Management Program of the appropriate Maryland Circuit Court as the required forum for the resolution of stockholder litigation.

¹ Felker does not cite Delaware law, but the finding of demand futility is in accord with Delaware law.   

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