Chapter 156D - Massachusetts' New Business Corporation Act (The first in a two-part series)
BY WILLIAM F. SWIGGART
Massachusetts' new business corporation law, Chapter 156D, takes effect July 1, 2004. The Act adds flexibility in effecting ministerial changes, new procedures and remedies, and certainty by codifying policies from case law.
This new act will affect the internal operations of Massachusetts incorporated companies, and the methods by which foreign corporations maintain their corporate standing within the state. Its improvements may cause Delaware-incorporated companies to consider domesticating here.
While there is little that an existing corporation must do to be ready for the new law's effectiveness, the discerning reader will spot areas where, to take full advantage of the Act, bylaws and corporate charter must be amended, and proven corporate housekeeping methods must be changed. Specific such measures will be offered in the second article in this series.
Organization and Content
Chapter 156D is longer, but more organized than the prior act. It imports concepts and methods from the ABA model corporation statute and jurisdictions such as Delaware. Massachusetts corporate cases such as for stockholder derivative actions, the Donahue vs. Rodd line of cases that impose a fiduciary duty on stockholders to protect minority stockholders, and anti-takeover provisions developed in the early 1990s are codified.
Document Filings & Certificates
Chapter 156D increases flexibility in the filing of documents-allowing any document to carry a delayed effective date-of up to 90 days. At the same time, it greatly increases the penalty-up to $100,000-for filing a false document with the Secretary of State. Once filed, one may obtain almost any type of certificate needed from the Secretary of State that a filing did in fact take place.
Newly defined terms include:
Quaere: Why is there no definition of "independent director?"
- "Organic Law," meaning the rules governing the internal affairs of an entity (distinguished as either "Private," i.e. bylaws, "Public," i.e. articles, etc.), appears frequently in Chapter 156D.
- "Secretary" replaces Clerk, but "Articles" (not "Certificate," as in Delaware) remain the primary filing document in Chapter 156D.
- "Notice" gets an entirely new section that applies to all notices to be given under the act.
Validity of Corporate Acts
Emergency. New provisions enable a corporation to function validly even when a catastrophic event prevents the assembly of a quorum of directors.
Ultra Vires. This section defines just three proceedings in which a corporation's power to act may be challenged: (1) by a shareholder against the corporation to enjoin the act, (2) by the corporation against a director, officer, agent, etc. and (3) of judicial dissolution.
Like Delaware, the act now lists specific words to be included within a corporate name such as "Inc.," "Corporation," and "Company". In the event of a name conflict, a foreign corporation seeking to do business here may register under a "fictitious name." A person aggrieved by any filing of a conflicting corporation name, though, must complain to the Secretary of State within 90 days. The period to reserve a new name is doubled to 60 days, plus a single extension of another 60.
Shareholder Agreements. The act sets a default period for the duration of a stockholders' agreement of 10 years while providing for automatic termination in the event of an IPO, etc.
- Deadlocks, etc. Previously, the only means to resolve a deadlock that prevented the holding of a stockholder's meeting was the threat of court ordered dissolution. Now, a stockholder may obtain a specific court order to hold such a meeting. The act also provides for other specific court remedies for other ministerial corporate failings.
- While a majority consent may now be signed in lieu of a meeting, the requirements are still much stricter than Delaware in that:
- the Articles must expressly allow it;
- each signature must bear the date of signing;
- all consents must be delivered for filing in the minute book within 60 days of first signature; and
- 7-60 days' prior notice of the consent must have been given to all nonconsenting shareholders.
- Chapter 156D requires Web display of the shareholders list for any meeting that is to be convened only electronically. Court intervention is provided specifically to enforce the shareholders' inspection right.
- Proxies. Chapter 156D specifies the duration of proxies and, in a helpful codification of case law, details the circumstances whereby a proxy may be deemed coupled with an interest, and therefore irrevocable.
Derivative ProceedingsChapter 156D sets forth detailed proceedings for the commencement and conduct of, including:
- Stay of court proceedings when the corporation commences an investigation;
- Dismissal if a court determines that a majority vote of "independent directors" or "independent persons" appointed by the court has determined that dismissal is in the "best interests of the corporation;" and
- That the court may award counsel fees to the winning party-in contravention of the American rule.
Board of Directors
Chapter 156D continues the old rule that the number of directors expands to the number of shareholders up to three unless provided otherwise in the Articles. If so provided:
The act adds provisions for the creation and operation of committees. It defines a director conflict of interest, and sets forth a procedure for a director to disclose same to the rest of the board, and thereby obtain waiver of the conflict.
- The number of directors may now vary instead of being a fixed number; and
- Unanimous consents may be delivered electronically in lieu of meeting.
Significantly in light of the post-Enron reforms, rules for loans to directors are codified.
- Permits the corporation to indemnify an officer or director against personal liability: "if he reasonably believed that his conduct was in the best interests of the corporation, or at least not opposed to the best interests of the corporation."
- Entirely new sections require the corporation to indemnify or, in certain circumstances, advance expenses to, a director for costs incurred in a defense that is "wholly successful" in any proceeding to which he was a party.
- Applies the same indemnification to officers save for liability arising out of acts or omissions "not in good faith."
- Expressly authorizes directors' and officers' liability insurance, and for the corporation to obligate itself in advance to indemnify or expressly to opt out of statutory indemnification.
Chapter 156D adds a new method to change the state of a corporation's domicile-either into Massachusetts or outbound to any other state that allows the same procedure. Unlike a merger, no new corporation arises in the new jurisdiction-the old entity is instead adapted to the laws and requirements of the new domicile. Domestication may be desirable as a means to avoid the appraisal rights attendant upon a merger, or where it is important for some reason for the business to retain exactly the same entity. In other instances, though, domestication may prove to be more cumbersome than the creation from scratch of a new entity in the new domicile for the purpose of a merger.
Chapter 156D adds the new concept of conversion-similar to domestication-whereby an entity converts to a completely different form directly, and without merging into a different entity through the entity's adoption of a plan of entity conversion subject to approval by a 2/3 vote of the shareholders.
Amendments & Restatements of Articles
In a major change for the corporate practitioner, Chapter 156D allows amendments solely by directors' vote for the following ministerial changes:
- If no shares have yet been issued (incorporator may also amend);
- To extend the corporation's duration if it originally had limited life;
- If the corporation has only one class of shares outstanding, (1) to increase each share equally; or (2) to increase the number of authorized shares for the purpose of a share dividend.
- To change the corporate suffix or geographical designation.
- To reduce the number of authorized shares if the corporation acquired some of its own shares and the Articles prohibit their reissuance; and
- To delete a class or series of shares when the corporation acquired all issued shares of that class and the Articles prohibit their reissuance, all of the shares thereof have been acquired, or when all the shares of the class or series have been converted into other securities and the articles prohibit their reissuance.
Quaere: should the drafters have included a similar right to terminate all the shares of a class that were never issued?
The act follows Delaware in providing for the filing of restated articles of organization to "supercede the original articles."
Amendment of Bylaws. Bylaws, however, may be amended only by the shareholders unless the Articles provide for amendment by the directors.
Chapter 156D now provides for share exchange, a new procedure whereby the shares of a corporation may be exchanged for the shares or property of an acquiring corporation. This obviates shareholder approval, if: (1) the corporation will survive; (2) the articles will be unchanged except for amendments otherwise permitted without shareholder approval; (3) each shareholder of the surviving corporation will hold the same number of shares, with the same preferences, etc., immediately afterwards; (4) and the number of shares of the surviving corporation to be issued pursuant to the merger or share exchange does not exceed 20% of existing shares.
Chapter 156D permits a merger or share exchange of a subsidiary into a parent without shareholder or director approval, but requires 2/3 shareholder approval for the "sale, lease, exchange or other disposition" of assets of the corporation outside the regular course of its business.
Dissenting and Appraisal Rights
Chapter 156D details a procedure for shareholders to dissent and obtain appraisal and payment for the "fair value" of their shares. Prior law triggered appraisal only in the event of a merger or sale of all or substantially all of the corporation's assets. The new law includes these (subject to numerous exceptions) but adds:
- Consummation of a plan of share exchange;
- Amendment to the articles that "materially and adversely affects" the shareholder in respect to a detailed list that includes rights or preferences vis á vis dissolution, voting rights, preemptive rights, or reduces the shareholder down to a fractional share that is to be cashed out;
- Amendment to the articles, or bylaws, or the entering into of an agreement that adds restrictions on the transfer of the shareholder's shares; and
- Conversion of the corporation to nonprofit status or other entity.
Doing Business in Massachusetts
Chapter 156D, helpfully but not exhaustively, lists some activities that constitute doing business in the commonwealth, and many that do not:
- Those that do are: (1) buying or leasing real estate, (2) engaging in the construction or repair of any structure, railway or road, and (3) engaging in any activity requiring the performance of labor. Of these, (1) and (3) will affect the most corporations. For example, a startup corporation incorporated in Delaware but simply developing its products out of a founder's garage, and employing no workers will not be required to qualify in Massachusetts.
- Of the 11 activities that do not constitute doing business, probably the most significant are "selling through independent contractors," and "conducting an isolated transaction that is not in the course of repeated transactions of like nature." Thus, the California company selling products to businesses in Massachusetts using independent contractors as salesmen, and the Nevada software services company that sends its people to design and install a single system for a single Massachusetts based company do not have to qualify here.
Chapter 156D adds detailed requirements for the keeping of corporate records, and broadens the right of inspection by shareholders and directors to include:
- Complete minute book and corporate filings, and
- The corporation's accounting records or, if it is subject audit, its financial statements and supporting records.
Comment: Anyone considering a new incorporation in Massachusetts, or that wishes to maintain an existing Massachusetts domiciled corporation should take a long and careful look at Chapter 156D.
© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 2004; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.