United States: 2017 Legislative Update

Last Updated: June 5 2017
Article by Scott R. Wilson and J.W. Thompson Webb

In 2017, the Maryland General Assembly, during its 437th session, adopted stockholder-friendly legislation concerning Maryland corporations and real estate investment trusts, while rejecting or delaying more radical changes to the Maryland General Corporation Law ("MGCL") and the Maryland REIT Law.

Changes to Maryland Corporate Law Effective October 1, 2017

In its 2017 legislative session, the Maryland General Assembly passed two bills that will impact Maryland corporations and Maryland real estate investment trusts, Senate Bill 481/House Bill 744 (the "2017 Miscellaneous Bill") and Senate Bill 398/House Bill 759 (the "Holding Company Bill"). Both bills were supported by the Business Law Section of the Maryland State Bar Association and will become effective October 1, 2017.

In addition to certain technical changes to the MGCL and Maryland REIT Law described below, the 2017 Miscellaneous Bill implements the following:

  1. No Fee Shifting – New Section 2-113(a) of the MGCL prohibits provisions in the charter or bylaws of a Maryland corporation imposing liability on stockholders for the corporation's attorney's fees and expenses in stockholder litigation. The prohibition is similar to Section 102 of the Delaware General Corporation Law. As a policy matter, the Maryland General Assembly implicitly determined that "fee shifting" in the event of unsuccessful stockholder litigation is coercive and should be prohibited.
  2. Exclusive Forum – As previously discussed in this blog, many Maryland corporations have adopted forum selection bylaws requiring stockholders to bring litigation against the Maryland corporations and their officers and directors in specified courts, frequently the Circuit Courts of the State of Maryland. As has been widely observed, there are many benefits to the adoption of such a bylaw provision, including the avoidance of costly multi-jurisdictional litigation. New Section 2-113(b) of the MGCL accepts the validity of that premise and expressly permits Maryland corporations to adopt bylaw and charter provisions that would require newly-defined "internal corporate claims" to be brought in one or more specific jurisdictions. Any such charter or bylaw provision adopted after October 1, 2017, however, may not prohibit bringing claims in Maryland state and Federal courts.
  3. Director Personal Jurisdiction - New Section 6-102.1 of the Courts and Judicial Proceedings Article establishes that directors of Maryland corporations are subject to personal jurisdiction in Maryland when served through the resident agent of the corporation with a complaint concerning an internal corporate claim. This implied consent statute is intended to function in a manner similar to its long-standing Delaware counterpart. Section 6-102.1 of the Courts and Judicial Proceedings Article is also applicable to trustees of Maryland real estate investment trusts.

In terms of more technical amendments, the 2017 Miscellaneous Bill also:

  • effects changes to the Maryland REIT Law in order that new Sections 2 113(a) and 2-113(b) will also be applicable to Maryland real estate investment trusts;
  • amends Section 2-514 of the MGCL to make it easier for Maryland corporations to create a procedure through which a corporation may identify a beneficial owner of its stock in order to treat the beneficial owner as a stockholder (newly permitting that the charter or bylaws may provide such a procedure and, unless the charter or bylaws provide otherwise, the board may adopt such a procedure); and 
  • clarifies that, if the charter of a Maryland corporation has been forfeited, the directors of the corporation are not subject to a standard of conduct other than the statutory standard of conduct set forth in Section 2-405.1.

The 2017 Miscellaneous Bill was signed by Governor Hogan on May 25, 2017.

The Holding Company Bill introduces new Section 3-106.2 of the MGCL. Section 3-106.2 facilitates the creation of a holding company through merger of a Maryland corporation into a wholly-owned subsidiary without a stockholder vote, provided that the rights of the stockholders of the surviving holding company are substantially the same as the rights that they had as stockholders of the former parent corporation. The merger process contemplated by Section 3 106.2 to create a holding company structure is similar to the procedure contemplated by Section 251(g) of the Delaware General Corporation Law, which also permits a merger to create a holding company structure without a stockholder vote. The bill also makes a corresponding change to the Maryland REIT Law. The Holding Company Bill was signed by Governor Hogan on April 18, 2017.

Other Noteworthy Bills

The 2017 legislative session was also noteworthy for several bills that did not pass the General Assembly.

House Bill 589 (the "Majority Voting Bill"), introduced on behalf of certain stockholder activists and institutional investors (most prominently UniteHERE and Council of Institutional Investors), proposed a modified version of Section 10.22 of the Model Business Corporation Act. The Majority Voting Bill would have had two significant effects: (1) majority voting would have – by virtue of a change in the statute and not through democratic corporate actions – become the default voting standard governing uncontested director and trustee elections for all Maryland corporations and real estate investment trusts; and (2) any incumbent nominee failing to achieve a majority vote would have been permitted to hold over for no more than 90 days at which time the board would have been required to replace the individual. Both changes to the statute would have permitted a corporation or real estate investment trust to opt out by charter, thus requiring stockholder approved charter amendments. It is noteworthy that Section 10.22 of the Model Business Corporation Act, upon which the Majority Voting Bill was modeled, requires a corporation to opt-in to its majority voting provisions rather than making them the default provisions (subject to a corporation opting-out). Moreover, although aimed at Maryland's public corporations and real estate investment trusts, the Majority Voting Bill implicated all Maryland corporations.

The Business Law Section of the Maryland State Bar Association submitted written and oral testimony in opposition to the Majority Voting Bill citing, among other things, Maryland's long history of self-determination when it comes to matters of corporate governance and the governance problems associated with requiring replacement directors and trustees within 90 days of a failed election.

Those who followed the Majority Voting Bill would have also noted that, as introduced, the bill would have reserved exclusively to stockholders the ability to adopt, repeal and modify the bylaws of a Maryland corporation. Although of great concern to many Maryland corporations and real estate investment trusts, the sponsor of the bill in his oral testimony informed the House Economic Matters Committee that such a provision had been included in error.

While the Majority Voting Bill received an unfavorable recommendation from the House Economic Matters Committee, it was referred to summer study and we anticipate that a similar bill could be reintroduced next year. Oral testimony concerning the Majority Voting Bill, both in favor and in opposition, can be found on the House Economic Matters Committee website (beginning at 1:05).

Two other failed bills are also worth noting, House Bill 691 (the self-styled "Filing Fee Fairness Act") and Senate Bill 895/House Bill 1180 (the "Maryland Commercial Receivership Act").

At issue in the Filing Fee Fairness Act was the $300 annual fee required of a Maryland corporation when filing its annual report (commonly known as its personal property return) in Maryland. The Filing Fee Fairness Act proposed to reduce that fee for those corporations with "taxable assets" less than $25,000 and greatly increase the fee for those with "taxable assets" above $50,000. The bill was opposed by various constituencies and received an unfavorable recommendation from the Economic Matters Committee. From time-to-time legislation similar to the Filing Fee Fairness Act has been introduced in the past and has never gained significant traction with the General Assembly.

The Maryland Commercial Receivership Act, the product of years of hard work from an ad hoc committee of Maryland practioners, sought to implement statutory rules governing receiverships in Maryland courts (replacing or supplementing current common law practices) and to grant new powers to court-appointed receivers. Most controversially, the act would have implemented a bankruptcy-like stay, granted to the receiver the ability to terminate executory contracts and rendered ipso facto clauses in executory contracts void with regard to Maryland corporations and other business entities in receivership. Drawn from the Uniform Commercial Real Estate Receivership Act and existing statutes in Washington State, Minnesota and Missouri, the proposed act deviated from the Uniform Commercial Real Estate Receivership Act by implicating all operating businesses formed in the State and would have granted some of the above extraordinary powers that its Missouri counterpart chose not to expressly adopt. Although aligned with existing statutes in Washington State and Minnesota, the Constitutionality of the bankruptcy-like powers in such acts remains an open question. More importantly, however, the practical concerns centered on whether so expanding the powers of receivers in state proceedings and invalidating ipso facto clauses in such proceedings was in the best interest of operating Maryland businesses – particularly when surrounding and competing states lack similar express powers.

While the Maryland Commercial Receivership Act was withdrawn in both the House and Senate, we anticipate that proponents of the bill will work to gather further input from the business community over the summer and return with a revised Maryland Commercial Receivership Act in the 2018 General Assembly session.   Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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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