The General Assembly of Maryland has enacted House Bill 781/Senate Bill 263 (Chapters 779/780 of the Laws of Maryland 2021), amending several provisions of the Maryland General Corporation Law (the "MGCL") and the Maryland REIT Law (the "MRL"). The legislation became law without Governor Hogan's signature and is effective as of October 1, 2021. Unless otherwise noted, all section references below are to the MGCL. Here are the key provisions of the legislation:
Corporations
Charter or Bylaw Provision Requiring an Internal Corporate Claim to be Brought in Specified Courts. Section 2-113(b) is amended to permit the bringing of an internal corporate claim (as defined in Section 1-101) in (a) specified circuit courts of Maryland or a federal court sitting in Maryland or (b) courts sitting in one or more specified jurisdictions outside of Maryland and specified Maryland circuit courts or a federal court sitting in Maryland. The purpose of this amendment is to clarify that a charter or bylaw provision may determine the specific venue in Maryland in which an internal corporate claim must be brought and not just generally limit internal corporate claims to Maryland state courts or federal courts sitting in Maryland. As with the prior version of the statute, the bringing of an internal corporate claim may not be excluded from Maryland state courts or federal courts sitting in Maryland and these new provisions do not apply to a charter or bylaw provision in effect as of October 1, 2017, unless and until it is altered or repealed by amendment to such provision.
Reverse Stock Split by Corporation with Equity Securities Registered under Securities Exchange Act of 1934. The application of the reverse-split provisions of Section 2-309(e) to open-end investment companies registered under the Investment Company Act of 1940 (the "1940 Act") is deleted because it is no longer necessary in light of the 2020 amendment to Section 2-604 permitting the board of an open-end investment company to approve an amendment to the charter of the corporation without stockholder action, unless required under the 1940 Act (which does not generally require a vote of security holders for charter amendments that are otherwise consistent with the 1940 Act). Section 2-607(a)(2)(ii) is amended to add a reference to Section 2-604(b).
Elimination of Requirement of Board Judgment in Removal of Officer or Agent. Section 2-413(c) is amended to delete the requirement that, in removing an officer or agent, the board of directors must find that "in its judgment . . . the best interests of the corporation will be served." Each director is already subject to the requirement in Section 2-405.1(c) of having a reasonable belief that the director's action is "in the best interests of the corporation . . ." and the deleted requirement in Section 2-413(c) was redundant.
Stockholders' Meetings by Remote Communication. Section 2-502.1(a) is amended to require that all participants in a stockholders' meeting "by means of a conference telephone or other communication equipment" be able to "read or hear the proceedings of the meeting substantially concurrently with the proceedings" rather than just hear at the same time. Section 2-503(b) is amended to permit a board of directors that "is authorized to determine the place of a meeting of the stockholders" to determine that a stockholders' meeting may be held "partially or solely" by remote communication. Section 2-503(b) is also amended to delete the requirement that the board of directors of a corporation holding a stockholders' meeting by remote communication provide a "place" for the meeting to which a stockholder may go to participate in the meeting electronically. These changes were inspired by the heavy use of remote stockholder meetings during the pandemic, as well as experience over the past several years that strongly indicated that stockholders were not requesting a physical place to access the meeting.
Issuance of Stock before Effective Time of Authorization. Section 2-606.1(a) is added to provide that a "board may not issue any . . . stock" before the effective time of any amendment classifying, reclassifying or newly authorizing such issuance. However, new subsection (b)(1) provides that stock issued before the effective time of any such charter amendment will cease to be voidable because of a failure to file the appropriate charter document "at the time the amendment becomes effective;" and new subsection (b)(2) extinguishes any resulting right or liability at the time the amendment becomes effective, except to the extent of any detrimental reliance by the person with the right or liability. This curative provision is analogous to existing provisions relating to the filing of Articles Supplementary after issuance of classified or reclassified shares pursuant to Sections 2-208 (for corporations generally) and 2-208.1 (for open-end investment companies under the 1940 Act).
Maryland Control Share Acquisition Act ("MCSAA"). Section 3-701(d)(2) is amended to clarify that a "control share acquisition" does not include an "acquisition of shares" which occurs at a time when the corporation is not subject to the MCSAA or which occurs in accordance with a contract entered into at a time when the corporation is not subject to the MCSAA. Section 3-701(e)(2) is amended to clarify that "control shares" include shares of stock included within any of the three ranges of voting power – one-tenth to one-third, one-third to a majority and more than a majority – described in paragraph (e)(1), "even if the initial shares acquired within" one of these three ranges "are excluded from a control share acquisition." Finally, Section 3-702(c) is amended to delete the proviso that a board resolution of a closed-end investment company under the 1940 Act opting in to the MCSAA "is not effective with respect to any person who has become a holder of control shares before the time that the resolution is adopted."
These amendments clarify that (1) shares of stock previously acquired in excess of the threshold established under Section 3-701(e) do not become "control shares" (and the holder does not lose voting rights with respect to such shares) when a registered closed-end fund opts in to the MCSAA and (2) additional acquisitions of shares within the applicable range of voting power after the opt-in will be "control shares" that are subject to the restrictions of the MCSAA. These clarifications are consistent with the well reasoned interpretation by Judge Davis in Neuberger Berman Real Estate Income Fund, Inc. v. Lola Brown Tr. No. 1B, 485 F. Supp. 2d 631, 641 (D. Md. 2007). The amendments further clarify that this position is the same for Maryland corporations (other than closed-end funds) that may have opted out of the MCSAA and later opted in. The proposed revisions are also consistent with the original Model Control Share Act (and commentary) drafted by the North American Securities Administrators Association in 1988.
Real Estate Investment Trusts (Title 8 Trusts)
Issuance of Shares before Effective Time of Authorization. Section 8-203 of the Maryland REIT Law ("Title 8") is amended to add a new subsection (c) including the curative language of Section 2-208 relating to the filing of Articles Supplementary for corporations after the issuance of classified or reclassified shares. Section 8-501 of Title 8 was also amended to add a new subsection (h) incorporating the substance of new Section 2-606.1 relating to the filing of an amendment to the Declaration of Trust after the issuance of the shares covered thereby. See the discussion of the corresponding MGCL provisions above. Thus, the treatment of shares issued before the filing of the relevant charter document authorizing issuance of the shares has been aligned for both Maryland corporations and Title 8 trusts.
Shareholders' Meetings by Remote Communication. Section 8-601.1 of Title 8 is amended by making Section 2-503(b), discussed above, applicable to a Title 8 trust, thus permitting a board of trustees that "is authorized to determine the place of a meeting of the [shareholders]" to determine that a shareholders' meeting may be held "partially or solely" by remote communication.
* * * *
As always, our colleagues and we are available at any time to discuss these or other matters of Maryland law.