In the 2015 legislative session, the Maryland General Assembly implemented several useful changes to the Maryland General Corporation Law (the “MGCL”). House Bill 522 (now Chapter 526 of 2015 Session Laws and referred to herein as the “act”) was signed by Governor Lawrence J. Hogan, Jr. on May 12, 2015, and became effective on October 1, 2015. The resulting changes will be of interest to Maryland corporations, Maryland real estate investment trusts, and their mergers and acquisition counsel.
Actions by Written Consent of Directors and Stockholders with Future Effective Dates
Amendments to §§ 2-408 and 2-505 of the MGCL clarify that, subject to specified conditions, consents to corporate action may be placed in escrow and become effective at a future time. The amendments will increase certainty in transaction closings and similar situations where an action needs to be signed in advance.
Specifically, amendments to § 2-408 (concerning directors) and § 2-505 (concerning stockholders) allow an individual, whether or not a director (under § 2-408) or stockholder (under § 2-505) at the time of providing consent, to give consent to take effect at a time in the future. The effective time of the consent may be conditioned on the occurrence of a future event, provided that the effective time may be no later than 60 days after the consent is delivered to the corporation. In order for the consent to become effective, the individual providing the consent must be a director (under § 2-408) stockholder (under § 2-505) at the effective time and may not revoke the consent before the effective time. The consent is revocable unless otherwise provided.
Clarifying the Two-Step Merger Process
Two-step merger agreements involving public companies often include a “top-up option” or similar mechanism permitting a successful purchaser in a tender offer to acquire from the target corporation a sufficient number of shares to accomplish a “short form” merger at the back-end. In 2013, Delaware amended the Delaware General Corporation Law (the “DGCL”) to adopt § 251(h) to limit the need for a top-up option in certain acquisitions of publicly-traded Delaware corporations.
In 2014, the MGCL was similarly amended to add new § 3-106.1, which permits the board of a target Maryland corporation to approve the second-step merger (without a stockholder vote) if the acquiring entity has purchased at least the percentage of shares of the target in the tender offer that would be required to approve the merger at a meeting of stockholders. Similar to § 251(h) of the DGCL, § 3-106.1 eliminates the complexity of a top-up option in some transactions.
The act amends § 3-106.1 of the MGCL to clarify the provision and enhance its utility.
Transaction Flexibility. Currently, § 3-106.1only applies when an agreement to merge contains language that expressly opts into the section. It is arguably unclear, however, whether parties may opt into § 3-106.1 while reserving other options to effect the merger. The act amends § 3 106.1 to provide that the agreement to merge need only permit (and not necessarily require) the merger to be effected under the section thereby offering greater flexibility to transaction parties.
Timing and Ownership. Section 3-106.1 currently is silent as to when a buyer would be deemed to own the shares necessary to complete a back-end merger. Thus it is unclear when the merger parties could consider the tender offer consummated. Uncertainty whether full payment for tendered shares is required to complete the tender offer, for example, could have an important effect on transaction timing. The act defines “consummate” to mean “irrevocably accept for purchase or exchange stock tendered pursuant to a tender or exchange offer,” clarifying that only acceptance for purchase is necessary to “consummate” the tender offer. Additionally, the act provides that shares exchanged in the tender offer will be deemed to be owned by the buyer when stock certificates have been physically received by the depository or, for uncertificated shares of stock, when such stock is transferred into the depository’s account or an agent’s message has been received by the depository. Notably, the act follows the policy decision of Delaware to exclude stock tendered by guaranteed delivery from the shares deemed “received” by the depository.
Any and All Outstanding Shares. The act codifies the mechanics common in tender offers by allowing the buyer to exclude the shares held by related parties from the tender offer. Specifically, amended § 3-106.1 provides that shares of the target corporation owned by the acquiring entity, in addition to shares owned by a direct or indirect parent of the acquiring entity or a direct or indirect wholly owned subsidiary of the acquiring entity or parent, may be excluded from the tender offer. Shares in the target corporation owned by those related parties will, however, count towards determining whether a buyer has sufficient shares to effect a back-end merger. Further, the act specifies that only shares that are the subject of the offer need to be cancelled or converted, providing further clarity regarding treatment of shares owned by the buyer and related parties, and eliminating ambiguity with regard to treatment of preferred stock which is not subject to the tender offer.
Stock Subscription Does Not Create Voting Rights
The act also amends § 2-202 of the MGCL to clarify that, unless provided otherwise in a stock subscription agreement, a subscriber has no voting or other rights with respect to the stock subscribed for until the stock is issued and fully paid.
