The Massachusetts Legislature has enacted a new Business Corporation Act, found in Chapter 156D of the Massachusetts General Laws (the “BCA”). The BCA becomes effective on July 1, 2004 and applies to all existing business corporations, as well as those created on or after the effective date. The BCA does not apply to professional corporations, nonprofit corporations, limited liability companies, limited partnerships, or special purpose corporations (such as banking and insurance institutions) specific provision for which is made in other portions of the General Laws.
On its effective date, the BCA will completely supersede the former Business Corporation Law, found in Chapter 156B (the “former law”), for business corporations, although the former law has not been repealed. The BCA also supersedes the provisions of the former law applicable to non-Massachusetts corporations, found in Chapter 181.
As of this date, the Secretary of State has not issued regulations under the BCA or published forms for most filings which are required under the BCA. However, the BCA allows for the filings to be made without the use of an official form if the document contains the required statutory information.
The BCA alters the former law in many respects, including the manner in which a corporation is organized, the issuance of stock, ordinary corporate governance issues, the payment of dividends and distributions, the making of changes in corporate charter documents, and appraisal rights. In addition, the BCA creates entirely new concepts such as “domestication” (which enables a change in corporate jurisdiction) and “conversion” (which permits a corporation to convert itself into a different type of legal entity, such as a limited liability company).
The purpose of this memorandum is to address certain matters which are likely to have a direct and immediate effect on existing corporations. If you contemplate making any material corporate changes or engaging in any substantial corporate transaction (such as a financing, sale or acquisition of assets, reorganization, recapitalization, merger, consolidation, liquidation, or dissolution) you should consult with counsel. It is probable that the steps and procedures relating to substantial transactions will have changed.
Some of the highlights of the BCA applicable to existing corporations are as follows:
Registered Agent and Registered Office
Under the former law, a Massachusetts corporation was not required to appoint a registered agent for service of process if the clerk of the corporation resided in Massachusetts. The corporation’s official address was, usually, its principal place of business. Under the BCA, all corporations must designate both a registered agent and a registered office.
The registered agent may be (i) a natural person, including an officer of the corporation, resident in Massachusetts; (ii) a domestic corporation; or (iii) a foreign corporation qualified to do business in Massachusetts. The registered office may be the principal place of business of the corporation, but it must be the business office of the registered agent. It is possible for any officer of the corporation to be its registered agent if the corporation’s principal place of business is designated as the registered agent’s office.
The BCA simplifies document filings somewhat. Filings will now require the signature of a single officer, and documents may be filed electronically (once the Secretary of State is set up to handle all electronic filings).
Notice of Meetings
In addition to the written notice of meetings of shareholders and directors used under the former law, it will now be possible to give notice of shareholder and director meetings electronically, by fax, or orally under reasonable circumstances.
Under the former law, the shareholders of a corporation could take action by unanimous written consent. Under the BCA, it will be possible for the shareholders to take action by the written consent of a majority of the shareholders. Notice of the vote must be given to non-consenting shareholders seven (7) days prior to the date on which the corporation implements the vote. The corporation’s Articles of Organization must contain specific authorization in order to take advantage of this option.
Meetings by Remote Communication
Non-publicly traded corporations may conduct meetings of shareholders and directors entirely by remote communication. The meeting may be held by telephone conference, e-mail or through the use of peer-to-peer software. Prior to authorizing such meetings, the board of directors is required to establish some reasonable means for verifying the identity of participants, ensuring that all participants are able to hear or read the proceedings substantially concurrently, and recording the vote given by any participant. A corporation does not need to amend its Articles in order to conduct cyberspace meetings, although it is possible to preclude the use of such meetings by amending the Articles. The corporation’s Bylaws should be reviewed to ensure that holding such meetings does not contravene any existing Bylaw provision.
Proxies, Quorums and other Voting Issues.
Proxies given under the BCA may be valid for up to eleven months, as opposed to the six month period allowed under the former law, and are valid even if given by fax or electronically.
Under both the former law and the BCA (absent a specific provision to the contrary) persons owning a majority of the outstanding stock constituted a quorum for purposes of a shareholder meeting. Under the old law, a quorum could be broken if enough shareholders left the meeting. Under the BCA, the departure of shareholders does not automatically break the quorum.
If shares of stock of the corporation are held by a nominee for beneficial owners (e.g., a nominee trust), it is possible for the corporation to allow the beneficiary or beneficiaries to vote directly. This provision may be useful when shares are held in a trust with a corporate trustee.
The BCA specifies circumstances in which each class of stock, or each series of stock within a class, is entitled to vote separately as a voting group on amendments to charter documents. The number of such circumstances is somewhat greater than was provided for under the former law, and the separate voting rights afforded under the BCA cannot be changed in the corporation’s Articles or Bylaws. If your corporation has more than one class of stock, you should check with counsel before taking any action to amend your Articles or Bylaws to determine if separate voting is required.
Number of Directors
Under the former law, a corporation was required to have the lesser of (i) three directors or (ii) as many directors as there are shareholders. While this general rule is continued under the BCA, it is now possible to amend the Articles to provide for a lesser number of directors (e.g., one) notwithstanding the number of shareholders. This option may be attractive to closely held corporations in which there is a single majority owner with small shareholdings by employees. It would avoid the need to elect sympathetic directors in order to both comply with the law and retain control over the board of directors. Corporate Bylaws may require amendment to remove conflicting provisions
Under the former law, the statutory officers of a corporation are the president, the treasurer and the clerk. Under the BCA, the name of the office of clerk has been renamed the “secretary.” The BCA allows for the continued election of a clerk if the corporation’s Bylaws so provide, and the clerk is deemed to be the secretary until a secretary is appointed.
By-law Amendments Regarding Quorum and Voting Requirements
Under both the former law and the BCA, a corporation’s Bylaws can only be adopted or amended by the shareholders unless the original Bylaws permit amendment by the board of directors. As a practical matter, most corporate Bylaws grant such authority to the directors. Under the BCA, however, the directors may not amend any provision relating to the establishment of a quorum of shareholders or voting requirements applicable to shareholders. That power is reserved exclusively to the shareholders.
New Rules on Shareholders.
The BCA provides that one or more classes of stock must have the unlimited voting power of the corporation and be entitled to receive all the net assets of the corporation upon liquidation. While the former law permitted the creation of non-voting classes of stock, it did not permit the creation of a class of stock which has voting rights but no right to receive assets on liquidation. Such a class of stock may now be created.
Shareholder Inspection Rights
The BCA expands the rights of shareholders to inspect and copy the books and records of the corporation. Among other matters, shareholders are entitled to inspect and copy excerpts of votes taken by directors and the entirety of votes taken by the shareholders. Shareholders also have rights to inspect the corporation’s financial statements, audited by a certified public accountant, or in the absence of such statements, the accounting records of the corporation. Such rights of inspection are subject to limitations set forth in the BCA.
Issuance of Shares
Under the former law, shares of stock could not be issued for certain types of consideration. Under the BCA, shares may be issued for any consideration determined by the directors to be of benefit to the corporation, including a promise to perform future services.
Pre-emptive Rights to Acquire Stock.
Under the former law, a corporation’s Bylaws could provide for the grant to shareholders of pre-emptive rights to acquire any shares of stock which the corporation might issue in the future. Under the BCA, shareholders will not have any pre-emptive rights except to the extent provided in its Articles or by contract with the corporation.
Under the former law, shares of stock redeemed by a corporation became treasury stock. The directors had to take a specific vote to restore treasury stock to authorized but unissued stock. The BCA provides that all redeemed stock is automatically restored to the corporation’s authorized but unissued stock.
Liability of Shareholders Following Dissolution
The BCA essentially allows creditors of the corporation to recover from shareholders any amounts which they may have received during the three year period following the dissolution of a corporation, even if the existence of the debt was not known at the time of dissolution. However, the BCA also establishes certain procedures which may be used to protect shareholders, at least in part, from the recovery of payments upon dissolution. Counsel should always be consulted prior to a dissolution so that appropriate protective steps may be taken.
A Final Note on By-laws.
Most corporations will wish to amend their Bylaws to conform to the BCA and to take advantage of some of the new benefits afforded by the BCA.
It should also be noted that it is possible to create emergency Bylaws which become effective if a quorum of directors is not available because of a catastrophic event. The BCA makes statutory provision for some emergency procedures even if emergency Bylaws are not adopted.