iEarlier this month, Governor Chris Christie signed into law a package of legislation intended to make New Jersey more business friendly, including a law placing additional restrictions on shareholder derivative suits. The package of legislation seeks to bring New Jersey’s corporate statutes more in line with the corporate statutes of neighboring states such as Delaware, and was based largely on provisions contained in the Model Business Corporation Act.
I. Shareholder Derivative Proceedings and Class Actions.
The first bill signed into law by Governor Christie, A-3123/S-2326, repeals the provision of law that currently addresses derivative actions brought by a shareholder in the right of a corporation, N.J.S.A. 14A:3-6, and adopts new statutory provisions in its place. The new statute imposes new substantive requirements on such derivative actions and makes certain of its provisions applicable to shareholder class actions against a corporation or its directors, but only imposes these requirements if the corporation amends its certificate of incorporation to adopt those provisions.
The new statute provides that a shareholder cannot commence or continue a derivative proceeding unless the shareholder: (1) was a shareholder at the time of the act or omission complained of or became a shareholder through transfer by operation of law from one who was a shareholder at that time, and the initiating shareholder remains a shareholder throughout the entire derivative proceeding; and (2) fairly and adequately represents the interests of the corporation in enforcing the right of the corporation.
Additionally, no shareholder may commence a derivative proceeding until: (1) a written demand has been made upon the corporation to take suitable action; and (2) 90 days have expired from the date the demand was made, unless the shareholder has earlier been notified that the demand has been rejected by the corporation or unless irreparable injury to the corporation would result by waiting for the expiration of the 90-day period. If the corporation commences an inquiry into the allegations made in the demand or complaint of a shareholder, the court may stay any derivative proceeding as the court deems appropriate.
A shareholder derivative proceeding may be dismissed if the maintenance of the derivative proceeding is “not in the best interests of the corporation” as determined in good faith by a majority vote of the directors of the corporation, or a majority vote of a board-appointed committee or court-appointed panel. If a shareholder commences suit after the shareholder’s demand on the corporation is rejected, the shareholder will have the burden of proving that the decision made by the board of directors, board-appointed committee or the court-appointed panel was not made by “independent directors” – individuals with no material interest in the challenged act, beyond the economic interest common to all shareholders generally and who have no material, personal or business relationships with the defendant directors or officers who have a material interest in the act or transaction challenged.
A derivative proceeding or shareholder class action may not be discontinued or settled without the court’s approval. If the court determines that a proposed discontinuance or settlement will substantially affect the interests of the corporation’s shareholders or a class of shareholders, the court must direct that notice be given to the shareholders affected.
The new statute now includes an important fee-shifting provision under which a court may require a plaintiff shareholder to pay the corporation’s expenses in defending a derivative proceeding in the event that the court determines that the proceeding was commenced or maintained without the exercise of reasonable diligence by the plaintiff or without reasonable cause or for an improper purpose. Additionally, for both derivative shareholder and class action proceedings, challenging shareholders holding less than 5% of the outstanding shares of the corporation may be required to give a bond or other security to pay the corporation’s reasonable expenses incurred in the defense of the action, unless the shares of the challenging shareholders have a market value in excess of $250,000 (up from $25,000 in the prior statute).
The foregoing restrictions will only apply to a corporation if it amends its certificate of incorporation to expressly incorporate these restrictions in the certificate of incorporation. Therefore, corporations seeking to take advantage of these new restrictions on shareholder derivative suits and shareholder class actions must take all necessary actions to amend their certificates of incorporation to include these restrictions, including obtaining shareholder approval of any such amendments.
II. Shareholder Meeting Participation by Remote Communication and Clarification of Remedies for Dissenting Shareholders.
The second bill signed into law by Governor Christie, A-3050/S-2327, amends N.J.S.A. 14A:5-1 regarding participation in shareholders’ meetings and N.J.S.A. 14A:11-1 regarding dissenters’ rights in corporate mergers and corporate transactions.
This bill amends N.J.S.A. 14A:15-1 to allow shareholder participation in shareholder meetings by remote communication, subject to certain guidelines. The amended statute provides that, to the extent authorized by the corporation’s board of directors, shareholders may participate in a meeting of the shareholders by means of remote communication and shall be deemed present and 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 statute does not define “remote communication,” and requires the corporation and its board of directors to adopt guidelines and procedures to govern any such authorized participation by remote communication. The amended statute now requires that with respect to any class or series of remotely participating shareholders, the notice required to be given to shareholders regarding any shareholder meeting must also describe the means of remote communication to be used at such meeting.
This bill also amends N.J.S.A. 14A:11-1 to clarify the ability of a shareholder to challenge a corporate merger or corporate action. The amended statute now provides that if a shareholder is entitled to dissent from a corporate action under N.J.S.A. 14A:11-1(1), then the shareholder’s dissenters’ rights under N.J.S.A 14A:11-1 shall be the exclusive remedy of a shareholder to challenge such a corporate action (regardless of whether the shareholder has previously exercised the shareholder’s right to dissent) unless the subject corporate action: (1) was not effectuated in accordance with the provisions of Chapter 11 of Title 14A of the New Jersey Business Corporation Act or the corporation’s certificate of incorporation; or (2) the corporation engaged in fraud, material misrepresentation or other deceptive means in obtaining approval of any such transaction.
III. Amendments to Shareholders’ Protection Act.
The third bill signed into law by Governor Christie, A-3049/S-2328, amends the Shareholders’ Protection Act, N.J.S.A. 14A:10A-1 et seq. (the “SPA”), to (i) make the protections in the statute applicable to all New Jersey corporations (whether such corporations have their principal executive offices or significant business operations in New Jersey or not), (ii) make it easier to exempt board-approved transactions from the scope of the SPA under certain circumstances, and (iii) allow shareholders holding 5% or more of the voting power of a resident domestic corporation to be exempt from the provisions of the amended SPA if such corporation did not have its principal executive offices or significant business operations in New Jersey as of the date of adoption of the amendments to the SPA.
The provisions of the SPA prior to the adoption of the above-referenced amendments provided that the SPA was applicable to New Jersey corporations that had, as of the acquisition date in question, their principal executive offices in New Jersey or significant business operations in New Jersey. The amended SPA now provides that the SPA will apply to all New Jersey corporations (regardless of whether they have principal executive offices or significant business operations in New Jersey). However, New Jersey corporations not subject to the SPA as of the effective date of the amendments to the SPA as a result of not having a principal executive office in New Jersey or significant business operations in New Jersey may opt out of the SPA by amending their Bylaws within 90 days of the effective date of the amendments.
The amendments to the SPA now also make it easier to exempt certain board-approved transactions from the scope of the SPA under certain circumstances. The SPA previously provided that a resident domestic corporation could not engage in a business combination with a shareholder that beneficially owned 10% or more of the corporation’s outstanding voting stock for a period of 5 years from the date that the interested shareholder crossed the 10% threshold, unless the business combination was approved by the corporation’s board of directors before that interested shareholder’s stock acquisition date. The amended SPA now provides that a business combination with a shareholder may be engaged in by a corporation if the original acquisition of stock by the shareholder was approved by the board of directors of the corporation and any subsequent business combinations with that interested shareholder are approved by the board of directors of that corporation, provided that any such subsequent business combination is approved by: (1) the board of directors of the corporation or a committee of the board of directors consisted 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 amended SPA now includes a “grandfather” provision that provides that a beneficial holder of 5% or more of the voting power of a resident domestic corporation on the effective date of the amendments to the SPA shall be exempt from the provisions of the amended SPA if such corporation did not have its principal executive offices or significant business operations in New Jersey as of such date.
