The General Assembly of Maryland has enacted House Bill 668/Senate Bill 469 (Chapters 292/293 of the Laws of Maryland 2020), making several updates to the Maryland General Corporation Law (the "MGCL") and the Maryland REIT Law (the "MRL"). The legislation became law without Governor Hogan's signature on May 7, 2020 and is effective as of October 1, 2020.1 Unless otherwise noted, all section references below are to the MGCL.
Here are the key provisions of the legislation:
Corporations Generally
Effective Time of Articles of Incorporation. Section 2-102(b) is amended to permit a later effective time for articles of incorporation, which may not be later than 30 days after the State Department of Assessments Taxation of Maryland (the "SDAT") accepts the articles of incorporation for record. This change aligns the effective-time requirements for articles of incorporation with other charter filings with the SDAT. When converting another business entity to a Maryland corporation, articles of incorporation must accompany the articles of conversion, and this change facilitates filing articles of conversion that provide for a later effective time.
Determination Regarding Indemnification of Directors. Section 2-418(e) is amended to provide more flexibility in delegating to a committee of the board of directors the power to determine whether a director should be indemnified by the corporation. Prior to the amendment, the statute permitted delegation to a committee only if a quorum of directors who were not party to the proceeding ("non-party directors") could not be obtained. As amended, the non-party directors, by majority vote, may designate a committee of one or more non-party directors to make the determination as to entitlement to indemnification.
Inspection Rights of Stockholders. Section 2-513 is amended to limit statutory inspection rights regarding certain corporate records to holders of common stock, unless the charter provides otherwise. This change does not affect the inspection rights of any existing stockholders, as the amendment does not apply to any class or series of stock created or classified before October 1, 2020. Accordingly, holders of preferred stock created or classified on or after October 1 will not have statutory inspection rights unless such rights are provided in the charter.
Charter Restatement in Articles of Merger. Section 3-109(d) is amended to clarify that articles of merger may include not only amendments to the charter, but a complete amendment and restatement of the charter, which is a common practice in merger transactions, particularly where a public company is acquired in a reverse triangular merger and its charter survives but is amended and restated in the merger to transform it into one that is appropriate for a wholly-owned subsidiary of the acquiring company.
Registered Open-End Investment Companies
In General. The legislation includes several important amendments for Maryland corporations that are open-end investment companies registered under the Investment Company Act of 1940, as amended (the "1940 Act"). These amendments facilitate the operations and transactions of registered open-end investment companies (commonly referred to as mutual funds or exchange-traded funds (ETFs) and referred to herein as "open-end funds") by generally limiting the voting rights of stockholders of open-end funds to the election of directors and those matters requiring a vote of security holders under the 1940 Act. This aligns the governance of Maryland corporations that are open-end funds more closely with that of statutory trusts that are open-end funds and for which the governing instrument generally provides flexibility to the board of trustees to take many actions without a vote of the shareholders. These changes should be considered in light of existing open-end fund charter provisions.
Charter Amendments. Section 2-604 is amended to require that a charter amendment by a Maryland corporation registered as an open-end fund be approved by a majority of the entire board of directors and in the manner and by the vote required under the 1940 Act. The 1940 Act does not generally require that charter amendments be approved by stockholders. Accordingly, the board of directors of an open-end fund will typically have more flexibility to amend the charter in a manner consistent with the 1940 Act without stockholder action.
Transfers of Assets. Section 3-104(a)(4) is amended to clarify that, unless a corporation's charter or bylaws provide otherwise, transfers between or among classes or series of stock of an open-end fund do not require stockholder approval. The statute previously provided that a transfer of assets by an open-end fund to another legal entity could be made without stockholder action, but did not address a purely internal reorganization among different fund series of the same corporation, giving rise to a potential interpretive question and an odd result in light of the more general power to transfer assets. Accordingly, fund reorganizations that do not require the approval of the holders of voting securities under the 1940 Act may be effected without stockholder action.
Statutory Mergers, Consolidations and Share Exchanges. Section 3-105(a)(8) is added to provide that a statutory merger, consolidation or share exchange by an open-end fund must be approved by a majority of the entire board of directors and in the manner and by the vote required under the 1940 Act. While open-end funds do not typically engage in reorganizations through statutory mergers, consolidations or share exchanges (open-end fund "mergers" are typically transfers of assets under state law), these amendments are consistent with the other changes to the MGCL for open-end funds.
Dissolution. Section 3-403(b) is added to provide that the dissolution of an open-end fund must be approved by a majority of the entire board of directors and in the manner and by the vote required under the 1940 Act. The 1940 Act does not generally require stockholder approval of a dissolution of an open-end fund. Accordingly, the board of directors of an open-end fund will typically have more flexibility to dissolve an open-end fund without stockholder action, although existing charter provisions and the power to transfer assets referred to above together often enable the same result.
Real Estate Investment Trusts
Shareholders of Record. Consistent with the existing MGCL definition of "stockholder", Section 8-101(e) of the MRL is added to define "shareholder" as a shareholder of record, thus excluding beneficial holders of shares of beneficial interest of a real estate investment trust formed under the MRL. (During the legislative process, a typographical error referencing the "recorded" holder of shares was inserted into the draft bill and became law. We expect that this plain error will be corrected during the 2021 legislative session to properly reference "a record holder of shares.")
Reverse Share Splits. MRL Section 8-601.1 is amended to expressly permit a real estate investment trust to conduct a reverse share split without shareholder action by cross-reference to MGCL Section 2-309(e). Under this provision, unless prohibited by the declaration of trust, the board of trustees of a real estate investment trust with a class of equity securities registered under the Securities Exchange Act of 1934 may amend the declaration of trust with the approval of a majority of the board of trustees and without shareholder action, to effect a reverse share split of not more than ten shares of beneficial interest into one share of beneficial interest in any twelve-month period. Especially in times of volatility in the public equity markets, the power to effect limited reverse share splits without stockholder action has proven to be very useful for publicly registered Maryland corporations in our experience, and we expect similar benefits for real estate investment trusts formed under the MRL.
Nonstock Corporations
In addition to the changes to the MGCL and the MRL described above, Section 5-202(b) of the Corporations and Associations Article of the Annotated Code of Maryland is amended to modernize certain provisions relating to the governance of nonstock corporations. These amendments provide that the charter or bylaws of a nonstock corporation may (1) regulate the management of the business and affairs of the nonstock corporation and (2) regulate the exercise or allocation of voting power between or among the directors and members. Section 5-202(b) is also amended to allow a nonstock corporation to include in its charter or bylaws the right of members to vote on a stated proposal or for the election of directors or any officers elected by the members by electronic transmission.
* * * * *
As always, our colleagues and we are available to discuss these or other matters of Maryland law.
Jim Hanks
Patsy McGowan
Michael Leber
[1] Bills that were not vetoed became law in Maryland this year without the Governor's signature pursuant to the Maryland Constitution. Bill signing ceremonies were avoided this year due to the COVID-19 pandemic.