During its 2019 session, the Maryland General Assembly (the “General Assembly”) passed two bills that amend the Maryland General Corporation Law (the “MGCL”). Both bills were proposed by the Business Law Section of the Maryland State Bar Association. On April 30, 2019, Governor Hogan signed both bills and they will take effect on October 1, 2019.
The 2019 General Assembly had its sights set on the future. The amendments to the MGCL reflect the General Assembly’s recognition of the various electronic means used in corporate transactions. Maryland always keeps an eye on the MGCL to stay modern and user-friendly; and now we are cutting edge with blockchain.
1. Senate Bill 136
Senate Bill 136 (“SB 136”) amends the MGCL to accommodate the growing use of blockchain technology for the electronic submission and retention of corporate documents. The definition of “Electronic Transmission” in Section 1-101(m)(2) of the MGCL will now include the “use of or participation in one or more electronic networks, including one or more distributed electronic networks or databases.” Blockchain technology is a distributed ledger database that records and shares every transaction that occurs in a network of users. Now expressly contemplated by the MGCL as a means of electronic transmission, blockchain technology can be used to record capitalization transactions and for other corporate recordkeeping governed by the MGCL.
To accommodate the use of blockchain, or distributed ledger technology, SB 136 adds two important new sections to the MGCL -- Section 2-114 and Section 2-115. Section 2-114 will expressly allow Maryland corporations to maintain a corporation’s books or records on any information storage device, including a distributed electronic network or database. The records must be convertible into a clearly legible written form for visual inspection. Section 2-114 will also permit a written record produced by electronic means as admissible evidence to the same extent as the original written record.
In new Section 2-115, SB 136 introduces certain requirements if corporations communicate with stockholders by posting on a database. Section 2-115 provides that such an electronic transmission of notices and other corporate documents is not effective until the later of (1) the posting of the information to the electronic network or database or (2) the giving of a separate notice to the intended recipient that the information has been posted to the electronic network or database.
Also of note is SB 136’s amendment to Section 2-504 of the MGCL. In relation to notice of a stockholders’ meeting, Section 2-504 of the MGCL previously prohibited electronic transmission of notice to a stockholder of a stockholders’ meeting if the stockholder requests non-electronic delivery. As amended by SB 136, Section 2-504 of the MGCL now allows a corporation to provide in its charter or bylaws for electronic transmission of such notice, in which case a stockholder’s request not to receive notices electronically will not be effective.
Other amendments to the MGCL enacted by SB 136 allow for the electronic transmission of other forms of corporate documents including stock ledgers (Section 2-209(b)), information required on stock certificates (Section 2-210(c)(3)), consents (Section 2-505) and voting trust certificates (Section 2.512).
2. Senate Bill 137
Senate Bill 137 (“SB 137”) amends provisions of the MGCL relating to (1) corporate board vacancies, (2) informal stockholder actions, (3) quorum requirements, (4) merger notices, (5) foreign entity mergers and (6) the powers of real estate investment trusts. This “miscellaneous” bill implements certain technical and other amendments recommended by the Business Law Section of the Maryland State Bar Association.
SB 137 introduces a new definition in Section 1-101 of the MGCL. “Entire board of directors” is defined in the statute to mean “the number of individuals who are directors of the corporation.” The amendment is intended to eliminate any confusion regarding whether “entire board of directors” means the number of directors currently serving or the number of directorships (in other words, the number of seats including vacancies). It will now be clear, as most practitioners have previously concluded, that the “entire board of directors” refers to that number of individuals currently serving as directors.
SB 137 amends Section 2-406(b)(2) of the MGCL to provide that, if a corporation has cumulative voting and if less than all the directors are to be removed, a director may not be removed without cause if the votes cast against the director’s removal would be sufficient to elect the director if then cumulatively voted at an election of the entire board of directors (or, if there is more than one class, at an election of the class of which the director is a member). This revision is consistent with the clarity provided by the new definition of “entire board of directors.” Similarly, Section 2-418(e)(2)(i) is amended by SB 137 to use the newly defined term “entire board of directors” rather than a reference to the full board, with respect to actions by the board in making determinations with respect to indemnification.
Section 2-407(c)(1) of the MGCL provides that a director elected by the board of directors to fill a vacancy serves only until the next annual meeting of stockholders. SB 137 amends that section to clarify that, if the corporation has elected to be subject to Section 3-804(c)(3) of the MGCL, that election will supersede Section 2-407(c)(1), and a director so elected to fill a vacancy will serve for the remainder of the full term of the class of directors in which the vacancy occurred.
SB 137 also amends Section 2-505(b)(1) and (2), which set forth procedures for informal stockholder actions by consents in writing or electronic transmission. It clarifies that, when stockholders take action by consent in lieu of a meeting, the stockholders delivering consents must represent the minimum number of votes that would be necessary to take the action at a meeting “at which all stockholders entitled to vote on the matter were present and voted.” The amendment eliminates the possibility of a stockholder incorrectly arguing that, prior to the amendment, the provision permits written action by the number of votes that would constitute a majority of the smallest quorum.
Certain notice requirements of Section 3-106(d)(1) and Section 3.106.1(e)(3) will be shortened by SB 137. Those sections require advance notice of a merger to minority stockholders when merging a 90 percent or more owned subsidiary corporation with or into its parent (Section 3-106(d)(1)) or the merger of a corporation with or into an acquiring entity when the acquiring entity owns at least enough shares to approve the merger (Section 3-106.1(e)(3)). As amended, the required notice to the minority stockholders must be given at least 20 business days prior to the articles of merger being filed, rather than the previous requirement of 30 days. SB 137 also clarifies that the timing of the effectiveness of a merger of a Maryland corporation with a foreign business entity, as set forth in Section 3-113(b), is applicable when the successor is a foreign partnership and limited liability company, not just a foreign corporation or business trust.
Finally, SB 137 amends Section 8-301(4) of the Maryland REIT Law in order that the statutory powers of real estate investment trusts will specifically contemplate guarantees. That will more closely mirror the powers of corporations set forth in Section 2 103.
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. 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.
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