United States: NJ Legislature Passes Three New Laws Amending The NJBCA

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.

www.daypitney.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.