On April 2, 2013, Governor Chris Christie signed P.L. 2013, C.40, P.L. 2013, C.41 and P.L. 2013, C.42 into law. The three laws are intended to make New Jersey more business friendly by aligning New Jersey's corporate statutes with those found in neighboring states such as Delaware and New York.
A summary of each bill is provided below:
I. A-3049/S-2328 (P.L. 2013, C.40): Allows New Jersey resident domestic corporations to affirmatively disavow the applicability of the New Jersey Shareholders' Protection Act (14A:10A-1 et seq.) by amending their bylaws.
Specifically, the bill amends the definition of "resident domestic corporation" to provide that a resident domestic corporation does not include an issuer of voting stock that is organized under the laws of New Jersey but neither maintains its principal executive offices in New Jersey nor has significant business operations located in New Jersey if that corporation's board of director adopts an amendment to its bylaws electing not to be a resident domestic corporation within 90 days from the effective date of the bill (July 2, 2013).
The bill also allows a resident domestic corporation to engage in a business combination with an interested stockholder if the transaction that caused the person to become an interested stockholder was approved by the resident domestic corporation's board of directors prior to the stock acquisition date. (Generally, an "interested stockholder" is an owner of 10% or more of the outstanding voting stock of the corporation.)
The bill further allows a subsequent business combination between a resident domestic corporation and an interested stockholder if the subsequent business combination is approved by (1) the board of directors, or a committee of that board, consisting solely of persons who are not employees, officers, directors, stockholders, affiliates or associates of that interested stockholder; and (2) the affirmative vote of the holders of a majority of the voting stock not beneficially owned by such interested stockholder at a meeting called for such purpose.
Finally, the bill exempts from the provisions of the New Jersey Shareholders' Protection Act any stockholder who was the beneficial owner of 5% or more of the voting power of the outstanding voting stock of that resident domestic corporation on the effective date of the bill if the resident domestic corporation did not, on the effective date of the bill, have its principal executive offices located in New Jersey or significant business operations located in New Jersey.
II. A-3050/S-2327 (P.L. 2013, C.41): Allows corporate shareholder meeting participation by remote communication and clarifies remedies for dissenting shareholders.
The bill makes various revisions to the New Jersey Business Corporation Act, which required shareholders to be physically present to participate in meetings of shareholders.
The bill further provides that a shareholder participating in a meeting of shareholders by means of remote communication shall be deemed present and shall be entitled to vote at the meeting if the corporation has implemented reasonable measures to (1) verify that each person participating remotely is a shareholder; and (2) provide each shareholder participating remotely with a reasonable opportunity to participate in the meeting, including an opportunity to vote on matters submitted to the shareholders, and to read or hear the proceedings of the meeting substantially concurrently with those proceedings.
The bill also provides that as to that class or series of remotely participating shareholders, the notice required to be given to shareholders about the meeting shall describe the means of remote communication to be used.
Finally, the bill also clarifies the situations in which a shareholder may challenge a corporate action-amending N.J.S. 14A:11-1 by adding paragraph (5), which provides that dissenter's rights are the exclusive remedy for dissatisfied shareholders in corporate mergers and corporate transactions as specified in subparagraphs (a) and (b) of paragraph (1) of N.J.S.14A:11-1. This exclusivity provision follows section 13.02(d) of the American Bar Association's Model Business Corporation Act and provisions enacted by several other states. The intent of these provisions of the bill is that dissenter's rights should be the exclusive remedy for shareholders who are dissatisfied with the corporate actions enumerated in paragraph (1) (regardless of whether the shareholder has exercised his or her right to dissent), with the exception that a shareholder may bring an action only if the corporation has not complied with Chapter 11 of Title 14A of the New Jersey Statutes or if the corporation has engaged in fraudulent or material misrepresentation, or deceptive means, in obtaining approval of such transactions.
III. A-3123/S-2326 (P.L. 2013, C.42): Revises law concerning derivative proceedings and shareholder class actions.
The bill repeals the current law concerning actions brought in the right of a corporation by a shareholder and supplements the New Jersey Business Corporation Act with a new set of regulations concerning derivative proceedings. Certain provisions of the bill are also applicable to shareholder class actions against a corporation or its directors arising out of breach of duty imposed by New Jersey statutory or common law.
Under the bill, the regulations governing derivative proceedings and shareholder class actions are applicable only if the certificate of incorporation makes them applicable. The bill raises the value of plaintiffs' shareholdings required to avoid having to post security for a fee award-which had not been increased since 1968-to $250,000. The bill also adds the judicially developed concept that the shareholder plaintiffs must continue to hold the shares throughout the derivative proceeding.
Under the bill, a New Jersey corporation may amend its certificate of incorporation to supersede judicial case law developments regarding demand requirements and adopt the statutory standards. This allows corporations to avoid derivative suits that may impose unnecessary costs on the corporation. If adopted by a corporation, demand is required in every derivative proceeding, and disinterested directors, shareholders or court-appointed professionals are authorized to make a decision, after a good faith investigation, that the derivative proceeding is not in the best interests of the corporation.
The bill is largely based on sections 7.40 to 7.47 of the Model Business Corporation Act, with substantial additions based on section 7.44 of Chapter 156D of the Massachusetts Business Corporation Law. The New Jersey Corporate and Business Law Study Commission recommends the legislative reforms in the bill.
Summary: New Jersey corporations should be mindful of these new laws. Of particular importance are:
(i) the voluntary provisions of P.L. 2013, C.42 that afford New Jersey-based corporations the right to amend their certificates of incorporation to provide greater protections against shareholder derivative suits; and
(ii) the provisions of P.L. 2013, C.40 that clarify that the New Jersey Shareholders' Protection Act covers all publicly traded corporations that are formed under New Jersey law unless the corporation's board of directors passes a bylaw amendment opting out by July 2, 2013.