‘DExit’ to Maryland? An Alternative for Public Companies

Many corporations have changed their state of incorporation to move away from Delaware or are considering doing so. There are many reasons to consider alternative jurisdictions to Delaware but most often cited by public companies is the Delaware Chancery Court’s receptivity to claims asserted by plaintiff law firms on behalf of stockholders. Prolonged litigation, often frivolous, and expensive settlements add time and expense to corporate transactions. Some states have taken affirmative steps to create a corporate regime that will attract entities considering leaving Delaware. The notice of migrating from Delaware is often colloquially referred to as “DExit.”

While Nevada and Texas have garnered the most attention in this area, we have received many inquiries, particularly from our friends at national law firms, about Maryland as an alternative in the DExit phenomenon.

Maryland corporations have long been favored by real estate investment trusts (REITs), bank holding companies, business development companies (BDCs), registered closed end funds and select operating companies. The Old Line State boasts the largest number of New York Stock Exchange-listed corporations behind only Delaware, giving comfort to investors, advisors, underwriters and management. For those considering DExit options, here are some of the benefits of incorporating in Maryland.

1. Directors’ Standard of Conduct and the Business Judgment Rule. Directors of Maryland corporations must comply with a predictable statutory standard of conduct under Section 2-405.1(c) of the Maryland General Corporation Law (the MGCL). Further, according to Section 2-405.1(g) of the MGCL, directors’ actions are presumed to comply with that standard, making the business judgment rule a matter of statute. Even in extraordinary circumstances where courts in other states (including Delaware) may apply enhanced scrutiny or entire fairness review, Maryland courts apply the more deferential business judgment rule to directors’ actions.
2. Maryland Courts are Equipped to Handle Complex Business Matters. The long-standing Business and Technology Case Management Program for complex business cases in Maryland, originally formed in 2003, has over 20 years of published opinions and a track record for excellence. Maryland’s substantial body of case law sets its business court apart from other options, placing the predictability of Maryland courts above virtually all its peers outside Delaware. In contrast, other states competing for corporations leaving Delaware either lack dedicated business courts or have only recently established them, resulting in less certainty and precedent for parties to rely on.
3. Enhanced Anti-Takeover Protections. More than ever, investors are seeking top talent and top managers to operate their investment funds and operating companies. The MGCL provides qualifying listed corporations and their boards of directors with an array of tools to protect investor expectations and deter or defend against hostile, short-term profit seeking actions. These tools include the ability for a board to self-classify without stockholder action and, notwithstanding a contrary provision in the charter or bylaws, to increase the affirmative vote required to remove a director to two-thirds of votes entitled to be cast by stockholders. A Maryland board of directors may also fix the number of directors by its own vote and elect to grant to the board the power to fill vacancies on the board, whether from an increase in the size of the board or from the death, resignation or removal of a director. When vacancies must be filled by the remaining directors, an activist is required to remove the entire board to gain control. In addition, a Maryland corporation’s ability to defend itself is enhanced by a robust business combination (or moratorium) statute, a control share voting statute and recognition, by courts and by statute, of rights plans.
4. Exculpation and Indemnification. A Maryland corporation by its charter may limit the liability of directors and officers for money damages except to the extent that the person received an improper benefit or profit in money, property or services or if the person’s act or omission was the result of active and deliberate dishonesty. That means exculpation in Maryland is more expansive than under Delaware law, where exculpation is not available for, among other things, a breach of the duty of loyalty. Similarly, Maryland permits a broad indemnification of directors and officers and provides certain indemnitee-friendly presumptions. A Maryland corporation may indemnify a current or former director, officer or employee made a party to any proceeding by reason of their service, unless it is established that the act or omission was material and committed in bad faith or the result of deliberate dishonesty or, in a criminal proceeding, that the person had reasonable cause to believe the act or omission was unlawful.
5. Appraisal Rights. Maryland permits the charter of a Maryland corporation to eliminate appraisal rights for one or more classes of stock and generally eliminates appraisal rights for stock that is not entitled to be voted on the subject transaction. Most Maryland corporations take advantage of this option and both investors and corporations have found that doing so leads to more predictable, market-driven action and avoids judicial second-guessing.
6. Stockholder Action by Written Consent. Under Maryland law, common stockholders may act outside a meeting only by unanimous written consent unless the charter provides otherwise. Most Maryland corporations do not permit common stockholders to act outside a meeting by less than unanimous written consent. This favors the flow of information that must occur attendant to a stockholders’ meeting over the backroom dealing that can occur when action by written consent is more liberally permitted. We have found that, by requiring that stockholder action occur at a meeting, the board of directors can more effectively communicate with stockholders prior to any material changes in the corporation or its governance.
7. Bylaw Amendments May be Exclusively Reserved to the Board of Directors. Although pressure from Institutional Shareholder Services, among others, has altered the publicly listed marketplace, many Maryland corporations continue to prohibit stockholders from taking direct action to amend the bylaws, reserving this right for the board of directors. This leads to a more predictable and stable corporate governance regime and structure.
8. No Franchise Taxes. Some states charge corporations franchise taxes to raise revenue. Many public corporations in Delaware pay as much as $250,000 annually. Maryland corporations, on the other hand, pay only a modest initial capitalization fee and a $300 annual fee. For years, both yield-driven funds and operating companies have benefited from reinvestment of the significant cost savings.

This list is only the beginning. Many of our new clients have found that Maryland is an attractive alternative to both traditional and emerging states of incorporation.

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