The New Jersey legislature recently passed three new pieces of legislation amending the New Jersey Business Corporation Act (the "NJBCA"). The legislation will now be sent to Gov. Chris Christie, who is expected to sign each of the bills. The legislation was drafted by the New Jersey Corporate and Business Law Study Commission, a legislative commission formed to study and review New Jersey corporate law, with the goal of modernizing these laws and making New Jersey a more attractive state within which to incorporate. [1]
The legislation:
- Creates a new section regarding shareholder derivative litigation that, if adopted in the certificate of incorporation, allows independent board members greater flexibility to move to dismiss litigation that they deem is not in the best interests of the corporation and implements fee shifting and other provisions in the context of derivative and shareholder class action proceedings;
- Amends the Shareholders' Protection Act (the "SPA") to make all New Jersey corporations subject to the SPA and to allow certain business transactions to take place that previously would have been prohibited under the SPA, if the requisite approvals are obtained;
- Amends the dissenters' rights section to provide that such section is the exclusive remedy absent fraud or material misrepresentation; and
- Allows remote participation by shareholders in annual or special shareholders' meetings.
Please note that, in response to certain of these
amendments, New
Jerseycorporations may need to take certain
actions, in one instance before a statutorily mandated deadline, as
noted below.
Summary of Amendments
Shareholder Derivative and Class Actions.
This bill repeals former N.J.S.A. § 14A:3-6, governing
procedural requirements in connection with shareholder derivative
actions, and replaces it in its entirety. This new statute enhances
the substantive provisions of the former statute and makes certain
provisions applicable to shareholder class actions but only applies
if so provided in a company's certificate of
incorporation.
The new statute is designed to allow New Jersey corporations a
greater ability to move to dismiss shareholder derivative suits. It
provides that a derivative proceeding will be dismissed if the
court finds that independent directors, shareholders or
court-appointed professionals have determined that the derivative
proceeding is not in the best interests of the corporation. In
addition, the statute requires the shareholder plaintiff to hold
the shares of the corporation not only at the time of the act or
omission complained of, but also to continue to hold the shares
throughout the derivative proceeding.
The statute also makes certain provisions, which formerly applied
only in the context of a derivative suit, applicable in class
actions brought by a shareholder arising out of breach of duty
imposed by New Jersey law. These provisions include a requirement
that settlements be approved by a court.
The new statute also includes an important fee-shifting provision.
A court may require a plaintiff shareholder to pay the
corporation's expenses in the event the court determines the
proceeding was brought without reasonable cause or for an improper
purpose.
The prior statute required shareholders with less than $25,000 in
holdings to post a bond for potential fee shifting in a derivative
suit. For both derivative and shareholder class action proceedings,
the value of plaintiffs' shareholdings required to avoid the
need to post a bond has been increased from $25,000 to
$250,000.
The provisions of new N.J.S.A. § 14A:3-6 apply only
if they are expressly made applicable to the corporation by the
certificate of incorporation. Accordingly, a corporation seeking to
take advantage of this section must submit to its shareholders for
approval an amendment making new section 3-6 applicable to the
corporation.
Shareholders' Protection
Act. This bill amends certain provisions of the New
Jersey Shareholders' Protection Act, N.J.S.A. § 14A:10A-1
et seq. to make it applicable to all New Jersey
corporations and to make it easier in certain circumstances to
exempt a board-approved transaction from the SPA.
Previously, the SPA was applicable to New Jersey corporations that
had either their principal executive offices or "significant
business operations" in New Jersey. Corporations often had
difficulty determining the meaning of "significant business
operations." The amendments remove this uncertainty by
expanding the scope of the SPA to define a "resident domestic
corporation" to include all New Jersey corporations.
However, those corporations not previously subject to
the SPA (because they do not have either their principal executive
offices or "significant business operations" in New
Jersey) that will now be covered under the amended definition of
"resident domestic corporation" will be able to opt out
of the SPA by amending their bylaws within 90 days of the effective
date of the amendments.
The amendments also make it easier for corporations to
exempt board-approved transactions from the scope of the SPA. The
SPA prohibits a "resident domestic corporation" from
engaging in business combinations with a shareholder that
beneficially owns 10 percent or more of the resident domestic
corporation's outstanding voting stock ("interested
shareholder") for a period of five years from the date the
interested shareholder crossed that 10 percent ownership threshold
(the "stock acquisition date") unless that business
combination was approved by the resident domestic corporation's
board of directors before that interested shareholder's stock
acquisition date. This provision had proved difficult to navigate
because a business combination often would not have been
contemplated at the time the stock was acquired and often would not
occur until years later.
Under the amended SPA, a resident domestic corporation may engage
in a business combination if the original stock acquisition was
previously approved and the subsequent business combination is
approved (which approval can be subsequent to the stock acquisition
date) by (1) the board of directors (or a committee thereof
consisting solely of persons who are not employees, officers,
directors, shareholders, affiliates, or associates of that
interested shareholder) and (2) the affirmative vote of the holders
of a majority of the voting stock not beneficially owned by such
interested shareholder at a meeting called for such purpose.
Finally, the amendments provide that a beneficial holder of 5
percent or more of the voting power of the outstanding voting stock
of the resident domestic corporation on the effective date of the
amended SPA is exempt from the amended SPA if the resident domestic
corporation did not have its principal executive offices or
significant business operations located in New Jersey as of that
date. The intent of this amendment is to "grandfather" 5
percent shareholders newly subject to the SPA (which holders, in
the case of public companies, would be required to report their
holdings under the Securities Exchange Act by virtue of this 5
percent ownership) because such shareholders would not have
expected the SPA to apply to them.
Dissenters' Rights as Sole Remedy.
This bill amends N.J.S.A. § 14A:11-1 to provide that, if a
shareholder is entitled to dissent from a corporate action
(typically a merger or other acquisition transaction), then that
shareholder is prohibited from challenging such corporate action
(regardless of whether the shareholder actually exercised the right
to dissent) unless the corporate action in question was (1) not
effectuated in accordance with the applicable provisions under the
NJBCA or the corporation's certificate of incorporation or (2)
procured as a result of fraud, material misrepresentation, or other
deceptive means. The intent of this amendment is to prevent
shareholders from "double-dipping" and reflects the
belief that the dissenters' rights statute is an adequate
protection for shareholders who believe they are not being paid
fair value for their shares.
Remote Participation in Shareholders'
Meetings. This bill amends N.J.S.A. § 14A:5-1 to
expressly permit shareholders to participate in a shareholders'
meeting by means of remote communication to the extent authorized
by the corporation's board of directors. This amendment is
designed to reflect the fact that much of modern-day communication
takes place electronically. Because of our rapidly changing system
of communication, the commission, in drafting the legislation,
declined to precisely define what constitutes remote communication.
Accordingly, participation by remote communication will be subject
to guidelines and procedures adopted by the board, provided that
each shareholder can see and hear the proceedings contemporaneously
and can vote and participate in the meeting.
Action Items
Management and the boards of directors of New Jersey corporations
should consider the following potential action items in response to
these amendments:
- Consider the new statute governing shareholder derivative and class actions and determine whether to "opt in" to coverage under that statute. If the decision is made to opt in, the corporation's certificate of incorporation will need to be amended, which will necessitate shareholder approval.
- Consider whether the SPA will now apply to the corporation as a result of the revised definition of "resident domestic corporation" and, if necessary, determine whether to "opt out" of the statute.
- Consider the advisability of permitting participation in shareholders' meetings by means of remote communication, including the feasibility, logistics, and implications of implementation of remote participation. Adopt any bylaw amendments or board resolutions that may be needed to authorize remote participation.
Endnote
[1] Michael T. Rave is Chairman of the Commission; Ronald H. Janis is attorney to the Commission; Ellen S. Knarr is Secretary to the Commission.
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