United States: Summer Preparedness: Don't Forget The Sunscreen Or Your Articles And Bylaws!

The period between the annual meeting of shareholders and the commencement of year-end activities, such as preparation for the annual audit, is an excellent time for bank holding companies and banks to assess their articles of incorporation and bylaws and to determine if any changes are appropriate. Having recently prepared the proxy statement, corporate governance and structural issues are front of mind for key management members. In addition, reviewing articles and bylaws now also allows management adequate time to vet any possible changes and to brief the board of directors regarding those proposed changes. The board then has ample opportunity to deliberate any proposed changes in advance of the next annual meeting of shareholders, in case a company decides to seek a change that requires shareholder approval.

We generally recommend as a best practice that both bank holding companies and banks fully review their articles and bylaws on an annual basis. Below are three specific issues that you should consider when reviewing your governance documents in the coming months.

Are your authorized shares adequate?

On an annual basis, bank holding companies and banks should review the capitalization authorized by their articles of incorporation to ensure they have sufficient authorized shares for both future plans and unknown opportunities. A company's authorized capitalization should be large enough to permit it to pursue attractive capital raising or acquisition opportunities without the delay or uncertainty caused by the need for a concurrent shareholder approval of an increase in authorized shares. Companies should also take into consideration shares needed for existing or potential future employee stock plans or other equity plans.

An increase in authorized shares requires shareholder approval of an amendment to the articles of incorporation. Under the Virginia Stock Corporation Act, such approval would require two-thirds vote of all shares entitled to vote, unless the particular company's articles specify a different approval threshold (which cannot be less than a majority of shares entitled to vote).

Should you have "blank check" preferred stock?

If not already provided for, bank holding companies and banks should consider whether to amend their articles of incorporation to authorize "blank check" preferred stock. Blank check preferred stock refers to authorized shares of preferred stock from which a board of directors has been granted authority to create, without further shareholder approval, different series of preferred stock with such voting rights, preferences, limitations and other terms and conditions that the board may determine. Blank check preferred stock can provide a company greater flexibility in raising capital because it permits a company to tailor the terms of an equity security for a specific market opportunity. This flexibility is of particular value to bank holding companies and banks because it permits the voting rights, conversion rights and other terms of an equity security to be crafted in order to avoid regulatory hurdles related to, among other things, a shareholder being deemed to "control" the bank holding company or bank.

The availability of blank check preferred stock also serves as an anti-takeover defense, as it enables a company to quickly issue a series of preferred stock with special voting or other rights that can make a takeover more difficult for a hostile suitor. Because of its potential to be used as a defense against a takeover, certain shareholder advisory services, such as Institutional Shareholder Services (ISS) or Glass Lewis, view blank check preferred stock with some skepticism and may recommend that shareholders vote against its authorization. Given that possibility, a company that wishes to authorize blank check preferred stock should consider the public guidance of the larger shareholder advisory services, particularly if the company's shareholder base contains a high percentage of institutional investors.

Authorization of blank check preferred stock requires shareholder approval of an amendment to the articles of incorporation. Under the Virginia Stock Corporation Act, such approval would require two-thirds vote of all shares entitled to vote, unless the particular company's articles specify a different approval threshold (which cannot be less than a majority of shares entitled to vote).

Would you benefit from an exclusive forum provision?

An exclusive forum provision designates a specific court as the exclusive forum for certain types of legal proceedings unless a bank holding company or bank agrees to a different forum for a particular proceeding. Exclusive forum provisions may cover (i) derivative actions brought on behalf of a bank holding company or bank, (ii) claims of breaches of fiduciary duties owed to a bank holding company, a bank or their shareholders and (iii) claims arising under the Virginia Stock Corporation Act or a bank holding company's or bank's articles or bylaws. These provisions are intended to decrease litigation risk and cost by preventing forum "shopping" by plaintiffs and the litigation of similar claims in multiple jurisdictions. These benefits can be of particular value in transactional contexts – such as mergers and acquisitions – where it has become exceedingly common for plaintiffs' firms to announce "investigations" and possible lawsuits shortly after any public announcement of a transaction.

There has been increasing interest in exclusive forum provisions after the Delaware Court of Chancery upheld the validity under Delaware law of such a provision in 2013, and the Delaware General Corporation Law was amended in 2015 to expressly permit such provisions. Virginia followed suit and, also in 2015, Section 13.1-624 of the Virginia Stock Corporation Act was amended to allow for a Virginia company's bylaws to contain a requirement that a circuit court or federal district court in the Commonwealth or the jurisdiction in which the corporation has its principal office will be the exclusive forum for certain types of litigation. Such provisions have been adopted by at least nine Virginia public corporations, including several bank holding companies.

The addition of an exclusive forum provision may be accomplished either through a an articles amendment or a bylaws amendment. Under the Virginia Stock Corporation Act, if a company wanted to amend its articles to include an exclusive forum provision, such approval would require two-thirds vote of all shares entitled to vote, unless the particular company's articles specify a different approval threshold (which cannot be less than a majority of shares entitled to vote). Unlike amending the articles of incorporation, a bylaws amendment would only require board approval (assuming the particular company's articles and bylaws did not specifically provide otherwise).

Conclusion

Given summer's ideal timing, now is a perfect opportunity for you to review your articles and bylaws. Conducting this review in the months following your annual meeting will give you ample time to discuss with your board and prepare for any shareholder approval that may be required.

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.

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