Warning: New Laws Affecting Business Entities in Maryland Take Effect October 1
On May 12, 2022, Governor Hogan signed into law several bills that would affect the formation, ownership, and operation of business entities under Maryland law. Below is a summary of the new law. Most notable is the creation of a statutory mechanism to approve faulty company laws. All changes will take effect from October 1, 2022
1. Ratification of Defective Company Laws
During legal due diligence, it is not uncommon to discover that a company has issued more shares than is legally permitted by its charter or has made other governance errors. Start-ups, often lacking the resources to hire sophisticated financial or legal professionals, may be preoccupied with growth plans or mere survival and neglect basic internal business administration. This type of legal error, and others like it, are commonly referred to as “corporate faulty acts” and can go unnoticed in businesses for years, revealing themselves at the worst possible time. Examples include:
Unauthorized issue of shares in shares; failure of the board of directors to adopt the articles of association; failure of the board of directors to properly elect the officers of the company; In the absence of a resolution from the board of directors authorizing the actions taken by way of social action; failure to obtain required shareholder approval for a corporate action; failure to file a required charter document with the State Department of Assessment and Taxation (“SDAT”) for the State of Maryland; and failing to keep proof that the company was paid for the shares.
Defective corporate deeds can be corrected by a variety of common law remedies, but not with the certainty that third party purchasers, investors or creditors often prefer.
House Bill 996/Senate Bill 879 (Chs. 289/290) adds a formal process and safe harbor to the Maryland General Corporations Act (“MGCL”) that allows a Maryland corporation to ratify general corporations laws. defective societies and where a defective law has been so ratified. , prevents the law from being void or voidable due to the defective nature of the law. This change in law creates a mechanism to remove uncertainty and, therefore, can be a useful tool when Maryland corporations are the target of an acquisition, investment or financing transaction.
The process set out in the Act specifies certain information that must be included in an approval resolution, as well as certain approvals that may be required for approval. In some cases, it may also be necessary to file valid statutes with the SDAT. The requirements set out in the law depend on the nature of the authorization or the corporate act that would have been required on its face for the act in question to be a valid corporate act. The periods during which the ratification is effective and binding on the company are variable depending on certain conditions listed.
The law also provides that compliance with the new procedure is not the exclusive means of ratifying a defective corporate act and that the absence of ratification through such a process does not in itself create a presumption that this act is effectively void or voidable. Thus, the existing common law procedures for ratification are still available. As a counterbalance to the formal ratification process designed to benefit corporations, the Act provides a process for aggrieved parties to challenge ratification after filing a petition in court.
2. Operating agreements and partnership agreements provide for the transfer of an interest in certain events
House Bill 342 / Senate Bill 261 (Chs. 294/ 295) Potter v. Potter, 250 Md. The application responds to a recent decision of the Maryland Special Court of Appeals 569 (2021). In Potter, the court held that where an individual is subject to Maryland law of a will and holds an interest in an LLC or partnership, the transfer of that interest on the death of the individual is subject to testamentary law. and probate of Maryland. Indeed, the ruling would invalidate a provision often found in operating agreements and partnership agreements that provides for the transfer of a deceased’s interest in a corporation to a non-shareholder, unless it is drafted and executed in accordance with the formalities required by Maryland law. is Will (e.g. attested by two credible witnesses). General Assembly legislation avoids this outcome by expressly allowing the inclusion of a transfer-on-death clause in an operating agreement or partnership agreement. The new law specifies that in the event of transmission after death, these provisions are not testamentary (and therefore not subject to estate review), thus preserving an important tool for business succession planning.
3. Miscellaneous changes
As it has done over the years, the General Assembly, through House Bill 999/Senate Bill 431 (Chs. 292/293), amended certain sections of the MGCL to improve the law or reflect advances in corporate governance. Here are some of the highlights of the bill:
The duration of existence of a company can now be limited to a specific period of time and/or conditional on the occurrence of a specific event or action (as opposed to a specific and fixed period of time). This will help asset managers, who have long preferred to use Maryland companies to structure some registered and non-registered funds, by allowing maximum flexibility in how long the fund exists. A director wishing to object to a proposed corporate action at any meeting of the board of directors at which the director is present may, along with other requirements now satisfied, submit his dissent in writing electronically after the adjournment of the meeting (this requirement previously satisfied by certified mail had to be). The effective time of dissolution of a company is the time determined not to be more than 30 days after receipt of the articles of dissolution for registration by the SDAT or no later than 30 days after receipt of the articles of dissolution (the earliest effective time is on the sole basis of receipt by the SDAT). Various provisions of the MGCL, where the existing language only applies to a specific entity, apply to entities, in general, or have been expanded to include a specific entity not otherwise covered by the existing language, such as: the indirect treatment by a company of its own shares; Ownership of a company, if owned by another company in which that company holds the majority of voting shares, has been extended to apply to other (unincorporated) entities in which that company holds the majority voting interest. The majority approval required for a proposed merger, consolidation or discontinuance of a stock exchange prior to the effective date is amended to include approval by the governing body of any party entity in the articles of association (instead of previously listing only a board of directors or board of directors). The list of types of entities, for which a company is authorized at the request of the company to obtain insurance for the persons employed in these entities, is expanded to include limited liability companies.
4. Use or Retention of Inappropriate or Outdated Address in Recorded Materials
In filings submitted to SDAT, business entities must include addresses for various purposes (for example, the address of a company’s principal office and resident agent). Existing law prohibits registering a incorporating document or charter document with SDAT using an address that the entity is not authorized to use for such purposes or that is otherwise inconsistent with Maryland law. . Despite this requirement, SDAT has limited grounds to investigate obsolete or inappropriate addresses or to enforce compliance. Similarly, in cases where a business sells, moves, or closes its ownership, on SDAT’s records, a new owner has little opportunity to separate ownership from the previous business entity. House Bill 390 / Senate Bill 447 (Chs. 287/288), sponsored by SDAT, would change this by allowing a homeowner to submit an affidavit to SDAT when they suspect their address is a filing in violation of Maryland law. business entities. Upon receipt of the affidavit, SDAT will notify the affected company of the alleged violation. Companies receiving such notice will have 45 days to reject the claim and, if not rejected, SDAT may revoke the governing document or charter document at issue. In addition to this 45-day response period, the law includes a business process to correct alleged violations. The law was designed to ease the administrative burden, as well as the inconvenience for landlords when, for example, process documents are served repeatedly at an old address. This relief requires business entities to monitor the status of all SDAT deposit addresses and promptly update them as necessary, or risk jeopardizing the validity of the deposit or the good reputation of the business with the state of the Maryland.
For many years, Miles & Stockbridge attorneys held senior positions on the Corporate Law Committee of the Business Law Section of the Maryland State Bar Association. This committee oversees laws affecting the Maryland General Corporations Act, as well as laws governing other Maryland business entities. If you have questions about the laws summarized above or how they may affect your business, please contact our Corporate, Securities and Tax practice group for assistance.
The opinions and conclusions in this article are solely those of the author, unless otherwise stated. The information in this blog is general in nature and is not offered and should not be considered legal advice for any particular situation. The author provides the links mentioned above for informational purposes only and, in doing so, does not adopt or incorporate the content. Any federal tax advice provided in this communication is not intended or intended for use by the author, and may not be used by the recipient, for the purpose of avoiding penalties that may be imposed on the recipient by the IRS . Please contact the author if you would like written advice in a format that complies with IRS rules and that you can rely on to avoid penalties.
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