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Legislative bid to make NJ more competitive Lawyers: Changes to Business Corporation Act worth a look

By , - Last modified: September 13, 2018 at 7:49 AM
Stuart Pachman, member of the law firm Brach Eichler.
Stuart Pachman, member of the law firm Brach Eichler. - ()

Amendments to the New Jersey Business Corporation Act made earlier this year could impact a range of companies, from small, privately held businesses to large, publicly held ones, according to some lawyers.

Among the changes — which some attorneys believe are aimed at polishing the state’s image — is one that makes it easier for a company to make changes in its bylaws. Another may help to stifle unruly shareholders.

Large firms with their own legal departments are probably already taking steps to integrate the changes; but smaller ones, which may not even be aware of them, may wish to consider huddling with legal counsel.

“There were six amendments,” noted Stuart Pachman, a member of the law firm Brach Eichler LLC. “One, which gives corporate directors the ability to take action by unanimous written consent, is of value to both large and small businesses.”

Originally, he said, “directors had to meet physically” to approve significant business matters. “Then, as telephone features developed, directors were authorized to meet by conference call, and later, the New Jersey statute was again amended to validate directors’ action when all have affixed their signatures to a written consent circulated among them.”

That January 2018 amendment — signed by Gov. Chris Christie in one his last official acts — authorizes directors to “give consent by electronic transmission.”

“Typically, this would involve a resolution concerning an action that’s outside of the company’s ordinary course of business,” said Ray Felton, chair of the Corporate Department of law firm Greenbaum, Rowe, Smith & Davis LLP. “Examples could include a new contract, or the purchase or lease of real estate.”

Another change limits derivative and class actions “which are traditional remedies available to shareholders aggrieved by corporate action or inaction,” said Pachman. “Sometimes, though, this right gets abused. Say you’ve got shareholders A, B and C. Shareholder C thinks A and B are stealing or otherwise misusing the company’s money. By law, C generally has no standing to directly sue the other shareholders, but he does have a ‘derivative right’ to ask the company to sue them.”

The problem, Pachman added, is that sometimes derivative actions are nothing more than nuisance suits “undertaken only to obtain a settlement from the company on behalf of the shareholder bringing the action; in fact, there’s no benefit to the company itself.” This amendment “provides procedures to facilitate the dismissal of spurious actions,” he noted. “And if a court finds that an action was commenced or maintained without the exercise of reasonable diligence or for an improper purpose, the court may order the plaintiff to pay expenses incurred by the defendant.”

The amendments also address issues that may arise when legal actions asserting essentially the same claim are brought by different shareholders in different jurisdictions. “This not only multiplies a corporation’s defense costs, but can result in inconsistent rulings,” according to Pachman. “To remedy these issues, and that of forum shopping — where a plaintiff will look for a favorable jurisdiction in which to sue — New Jersey corporations are now expressly authorized to include in their bylaws a forum selection clause and provide for sanctions for its violation.”

“Say a shareholder wants to bring an action against the board of directors,” said Felton. “Now, a New Jersey company can require the action to be brought in a New Jersey-based court, as opposed to one in the shareholder’s state.”

For a smaller or closely held businesses, “you’re likely to have all of the shareholders in New Jersey anyway,” he added. “But the larger your company is, the more likely you are to have shareholders in other states too, so this law could be a benefit.”

The amendments also try to balance shareholders’ rights with a company’s need to maintain its confidential information. “The traditional right of shareholders to inspect the corporation’s books and records can result in harm to the corporation if confidential information obtained by inspection were provided to a competitor,” Pachman related.

“One of the recent statutory amendments expressly authorizes corporations to impose, before permitting inspection, reasonable limitations or conditions on the use or distribution of inspected material,” he continued. “I’d recommend this to any size organization that has multiple shareholders, especially if you have any suspicions about any of them. Problems with this kind of disclosure can even happen in a family-owned business, especially when multiple generations are involved in it.”

Two other amendments are primarily aimed at larger companies. One authorizes bylaws “to include express procedures, conditions and limitations on the information that is required to be provided in a proxy statement involving a shareholder-nominated candidate,” according to Pachman. “The bylaws may also require the nominating shareholder to indemnify the corporation against losses resulting from false or misleading information submitted to it.”

That provision — which primarily affects publicly held companies — gives a business some relief from activist shareholders or organizations that want to push a political agenda, like divesting from certain countries or from doing business with a business that, say, has a reputation for polluting the environment, noted Felton.

“Groups like that may nominate someone to the board of directors simple to push their cause through the proxy statement (information that SEC-registered companies generally have to file before soliciting a shareholder vote on the election of directors and the approval of other corporate actions), even if they’ve got no chance of being elected,” he said. “This New Jersey amendment won’t prohibit such nominations, but will let companies set higher levels of share ownership and/or a minimum duration of ownership by a nominating shareholder, and will let the company establish a limit on the number of times the same person can be put on the proxy for nomination. It will reduce, but not eliminate, the use of nominations to push political or business causes.”

One other amendment focuses on merger negotiations, offering more protection for company directors. “A merger-target corporation’s directors are sometimes faced with the dilemma caused by the need to satisfy their fiduciary duty to obtain the highest price reasonably available and the acquirer’s desire to include agreement protections that reduce the possibility of losing the deal to a third party,” said Pachman.

“This amendment to the New Jersey statute now makes it expressly clear that the target’s board may accede in a merger agreement to a ‘force the vote’ provision that requires a shareholders’ vote on the merger to occur, even if events subsequent to the board’s approval cause the board to withdraw its recommendation,” he said. “The board has also been authorized to amend a plan of merger to a limited extent even after approval by the shareholders, but prior to the time the merger becomes effective.”

The changes represent a lot of information for companies to digest, “but as these amendments percolate through the business community, more companies are likely to adopt some or all of them,” Pachman said.

Added Felton, “As a business attorney, clients frequently ask me if they should incorporate in New Jersey or in a state like Delaware. So anything that can keep us more competitive is a plus.”

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