On May 12, 2022, Governor Hogan signed several bills affecting the formation, ownership and operation of entities under Maryland law. Below is a summary of the new law. most notable Creating a statutory process for the ratification of defective corporate conduct.All changes take effect October 1, 2022.
1. Adherence to Defective Corporate Conduct
It is not uncommon during legal due diligence to discover that a company has issued more shares than it legally authorized through its articles of incorporation or made other governance mistakes. Early-stage companies often do not have the resources to hire sophisticated financial or legal professionals, are preoccupied with growth plans and simple survival, and neglect basic corporate housekeeping. There is a possibility that This type of legal flaw, and others like it, is commonly known as “flawed corporate conduct” and can exist undetected within a corporation for years and, at worst, become apparent. There is a possibility. For example:
- unauthorized issuance of shares;
- the board does not adopt the bylaws;
- failure of the board of directors to properly elect the officers of the corporation;
- A corporate action taken in the absence of a board resolution authorizing the action.
- Failure to obtain required shareholder approval for corporate actions.
- Failure to provide the required charter documents to the Maryland Department of Assessing and Taxation (“SDAT”).When
- Do not retain evidence that consideration for shares has been paid to the company.
Defective corporate conduct may be remedied under common law through a variety of approaches, but none of the certainties often favored by third-party acquirers, investors, or lenders.
House Bill 996 / Senate Bill 879 (Chs. 289/ 290) Adds a formal process and safe harbor to the Maryland Corporation Law (“MGCL”) to allow a Maryland corporation to ratify defective corporate conduct, and if a defective conduct is so ratified, that Deeds can be prevented from being nullified or nullified by virtue alone. of the flawed nature of an act. This change in law creates a process that eliminates uncertainty and could be a useful tool for Maryland businesses if they are the subject of an acquisition, investment, or financing transaction.
The statutory process specifies the specific information that must be included in ratification resolutions and the specific approvals required for ratification. In some cases, it may also be necessary to submit a verification article to the SDAT. The requirements outlined in the law depend on the nature of the authorization or corporate conduct originally required for the conduct in question to be a valid corporate conduct. The length of time that ratifications are effective and binding on corporations will likewise vary based on the specific terms enumerated.
The law also states that compliance with the new process is not the only means to ratify defective corporate conduct, and that failure to ratify through such a process does not, in and of itself, mean that such conduct is actually invalidated or revoked. It provides for making no presumption that it is possible. Therefore, existing common law approaches to ratification remain available. As a counterbalance to the formal ratification process created for the benefit of businesses, the law also provides a process for adversely affected parties to challenge ratification upon application to the courts.
2. Operating and partnership agreements that provide for the transfer of equity in the event of certain events
House Bill 342 / Senate Bill 261 (Chs. 294/ 295) Potter v. Potter, 250 Md. App. 569 (2021). In the Potter case, the court held that if a person owns an equity interest in an LLC or partnership pursuant to Maryland’s will law, the transfer of that equity interest upon that person’s death is subject to Maryland’s wills and I have ruled that I am subject to the probate law. In fact, the ruling provides for the transfer of a deceased’s interest in a company to a non-stock owner, as is common in business and partnership agreements, unless drafted and implemented in accordance with procedures required by Maryland law. You will void the provision. A will (e.g. attested by two trusted witnesses). The law of the General Assembly avoids that consequence by explicitly permitting the inclusion of death transfer provisions in operating or partnership agreements. The new law stipulates that in the case of assignments on death, such clauses are not wills (and are therefore not subject to probate scrutiny), thus maintaining an important succession planning tool.
3. Other fixes
As has been the case for many years, the General Assembly House Bill 999 / Senate Bill 431 (Chs. 292/ 293), We have amended certain sections of the MGCL to strengthen legislation or to reflect advances in corporate governance. Highlights of the bill include:
- The life of an enterprise may now be limited to a specific period of time or contingent upon the occurrence of a specific event or action (as opposed to a fixed specific period of time). This allows asset managers, who have long preferred to utilize Maryland corporations to form certain registered and unregistered funds, by giving them maximum flexibility in the tenure of their funds. We support.
- A director wishing to object to a corporate action proposed at a board meeting attended by the director may submit a written objection by electronic submission after the meeting, along with any other requirements that must be met ( This requirement previously required sending by certified mail).
- The effective time of dissolution of a company shall be the date of receipt of the dissolution clause for record by the SDAT or the time set forth in the dissolution clause, whichever is later, not later than thirty (30) days after receipt of the dissolution clause. It’s time. time was run solely upon approval by the SDAT).
- Various provisions of the MGCL, where existing language only applied to specific entities, were expanded to apply to entities generally or to incorporate specific entities not captured by the existing language. it was done.
- If a company is owned by another company that owns a majority of the voting shares, treating that company’s treasury stock as indirectly Expanded to apply to other (non-corporate) entities owned. voting rights.
- The majority approval required to waive a proposed consolidation, merger, or stock exchange prior to the effective date is amended to include approval by the governing bodies of the entities that are parties to the merger articles (previously the board of directors (as opposed to listing only ). or Board).
- Upon corporate request, the list of corporate types under which corporations are permitted to obtain insurance for persons working for such corporations has been expanded to include limited liability companies.
4. Use or maintenance of inappropriate or outdated addresses in documents of record
In documents submitted to the SDAT, entities must include their address for various purposes (for example, the address of the principal office of the business and the resident representative). Existing law prohibits entities from recording compliant or charter documents in the SDAT using addresses that are not authorized to be used for such purposes or that are not compliant with Maryland law. is prohibited. Despite these requirements, the SDAT has limited grounds for investigating obsolete or incorrect addresses and for enforcing compliance. Similarly, if a business sells, moves, or closes its assets, SDAT records show that the new asset owner has little means of segregating assets from the previous entity.House Bill 390 / Senate Bill 447 (Chs. 287/ 288)Sponsored by SDAT. Upon receipt of the affidavit, SDAT will notify the affected company of the alleged violation. Companies receiving such notice will have 45 days to refute the allegations. If not rebutted, the SDAT may invalidate the governing or charter document in question. In addition to this 45-day response period, the law includes procedures for companies to remedy alleged violations. The law is intended to reduce administrative burdens as well as inconveniences for property owners, such as repeated service at old addresses. This relief will relieve the entity of the burden of monitoring the address status of all her SDAT filings and promptly updating it as necessary. Failure to do so could jeopardize the validity of your filing and the good standing of your business in Maryland.
Miles & Stockbridge attorneys have held leadership positions on the Corporate Law Board of the Business Law Division of the Maryland Bar Association for many years. Its board oversees laws affecting the Maryland General Corporation Law and laws governing other entities in Maryland. If you have any questions about the laws summarized above, or how they affect your business, please contact our corporate, securities and tax groups.
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