The Maryland General Assembly enacted House Bill 668 / Senate Bill 469 (Chapters 292/293 of the Maryland Laws 2020), making several updates to the Maryland General Corporation Law (the “MGCL”) and the Maryland REIT Law (the “MRL”). The legislation became law without the signature of Governor Hogan on May 7, 2020 and comes into force on October 1, 2020.1 Unless otherwise indicated, all references to the sections below are to the MGCL.
Here are the main provisions of the legislation:
COMPANIES IN GENERAL
Date of entry into force of the statutes. Section 2-102 (b) is amended to allow for a later effective date for articles of incorporation, which cannot be later than 30 days after the Maryland Department of State Tax Assessments (the “SDAT” ) accepts the articles of incorporation for registration. This change aligns the effective time requirements for articles of incorporation with other charter filings with SDAT. When converting another business entity to a Maryland corporation, the articles of incorporation must accompany the articles of conversion, and this change facilitates the filing of articles of conversion that provide for a later effective date.
Determination regarding compensation of directors. Section 2-418 (e) is amended to provide more flexibility in delegating to a committee of the board of directors the power to determine whether a director should be indemnified by the company. Prior to the amendment, the law allowed delegation to a committee only if a quorum of directors who were not parties to the proceedings (“non-party directors”) could not be obtained. As amended, non-party directors, by majority vote, may appoint a committee of one or more non-party directors to make the decision as to entitlement to compensation.
Shareholder inspection rights. Section 2-513 is amended to limit statutory inspection rights with respect to certain corporate records to holders of common shares, unless the charter provides otherwise. This change does not affect the inspection rights of existing shareholders, as the amendment does not apply to any class or series of shares created or classified before October 1, 2020. Therefore, holders of preferred shares created or classified as of October 1 do not have statutory inspection rights unless these rights are provided for in the charter.
Revision of the charter in the articles of merger. Section 3-109 (d) is amended to clarify that articles of amalgamation may include not only changes to the charter, but a complete amendment and rewording of the charter, which is common practice in merger transactions , especially when a public company is acquired in a reverse triangular merger and its charter survives but is amended and reformulated in the merger to make it suitable for a wholly owned subsidiary of the acquiring company.
REGISTERED OPEN-TERM INVESTMENT COMPANIES
In fgeneral. The legislation includes several important changes for companies in Maryland that are mutual fund companies registered under the Investment Companies Act of 1940, as amended (the “1940 Act”). These changes facilitate the operations and transactions of registered open-ended investment companies (commonly known as mutual funds or exchange-traded funds (ETFs) and referred to herein as “open-ended funds”) by generally limiting the voting rights of shareholders of open-ended funds in the election of directors and in matters requiring a securityholder vote under the 1940 Act. This more closely aligns the governance of Maryland corporations that are open-ended funds with that of the Statutory trusts which are open-ended funds and for which the governing instrument generally provides flexibility for the board of directors to take many actions without a shareholder vote. These changes must be considered in the light of the existing provisions of the open-ended fund charter.
Amendments to the Charter. Section 2-604 is amended to require that an amendment to the charter by a Maryland corporation registered as an open-ended fund be approved by a majority of the entire board of directors and in the manner and by the vote required under the 1940 Act. The 1940 Act does not generally require that charter amendments be approved by shareholders. As a result, the board of directors of an open-ended fund will generally have more flexibility to amend the charter in a manner consistent with the 1940 law without shareholder action.
Asset transfers. Section 3-104 (a) (4) is amended to clarify that, unless a corporation’s charter or by-laws provide otherwise, transfers between or among classes or series of shares of an open-ended fund does not require shareholder approval. The law previously provided that a transfer of assets from one open-ended fund to another legal entity could be carried out without shareholder action, but did not deal with a purely internal reorganization between different series of funds of the same company. , which raises a question of potential interpretation. and a strange result in light of the more general power to transfer assets. As a result, fund reorganizations that do not require the approval of the holders of voting securities under the 1940 law can be carried out without shareholder action.
Statutory mergers, consolidations and share swaps. Article 3-105 (a) (8) is added to provide that a merger, consolidation or exchange of statutory shares by an open-ended fund must be approved by a majority of the entire board of administration and in the manner and by the required vote. under the 1940 Act. Although open-ended funds generally do not engage in reorganizations through statutory mergers, consolidations, or share swaps (“mergers” of open-ended funds are generally transfers of assets under state law), these changes are consistent with other changes to the MGCL for open-ended funds.
Dissolution. Article 3-403 (b) is added to provide that the dissolution of an open-ended fund must be approved by a majority of the entire board of directors and in the manner and by the vote required under the 1940 Act. The 1940 Act generally does not require shareholder approval for the dissolution of an open-ended fund. As a result, the board of directors of an open-ended fund will generally have more flexibility in dissolving an open-ended fund without shareholder action, although the existing charter provisions and the power to transfer the assets mentioned above often allow the same result.
REAL ESTATE INVESTMENT TRUSTS
Registered shareholders. In accordance with the current definition of “shareholder” in the MGCL, article 8-101 (e) of the LMR is added to define “shareholder” as a registered shareholder, thus excluding the beneficial owners of beneficial interest shares. a real estate investment trust established under the AMR. (During the legislative process, a typographical error referring to the “registered” shareholder was inserted into the bill and became law. We expect this simple error to be corrected during the legislative session. of 2021 to correctly refer to “a record holder of shares.”)
Reverse stock splits. Section 8-601.1 of the AMR is amended to expressly allow a real estate investment trust to effect a reverse stock split without shareholder action by reference to section 2-309 (e) of the MGCL. Under this provision, unless the Declaration of Trust prohibits it, the board of directors of a real estate investment trust with a class of equity securities registered under the Securities Exchange Act of 1934 may amend the declaration of trust with the approval of the majority of the board of directors and without shareholder action, to effect a division of shares of not more than ten beneficial shares into one beneficial share during a period of twelve months. Particularly in times of volatility in the public stock markets, the power to perform limited stock splits without shareholder action has proven to be very useful for listed companies in Maryland in our experience, and we expect more. similar advantages for real estate investment trusts established under the LMR.
OUT OF STOCK COMPANIES
In addition to the changes to the MGCL and MRL described above, section 5-202 (b) of the Companies and Associations section of the Maryland Annotated Code is amended to modernize certain provisions relating to corporate governance. without actions. These amendments provide that the charter or by-laws of a corporation without shares may (1) regulate the management of the affairs and affairs of the corporation without shares and (2) regulate the exercise or distribution of voting rights among or among directors and members. Section 5-202 (b) is also amended to allow a corporation without shares to include in its charter or bylaws the right of members to vote on a proposal made or for the election of directors or any officer. elected by the members by electronic transmission.