The GAA Amendments Act of 2001 (the "Act"), signed by the Governor on June 22, 2001, included extensive amendments to the Pennsylvania Business Corporation Law (15 Pa.C.S. §§1101–4162) (the "BCL"). In this Bulletin, we summarize some of the highlights of the changes made by the Act to the BCL.
The Act, designated as Act 2001-34, is almost 200 pages long, representing the culmination of the 11-year efforts of the Title 15 Task Force of the Business Law Section of the Pennsylvania Bar Association since the 1990 amendments. The Task Force has amended and added to its "Committee Comments," originally published in 1988, to describe the purpose and to help the interpretation of the changes in the BCL made by the Act.
Certain amendments to Sections 135(e) and 1303(b) of Title 15 and to Title 54, relating to corporate names, which were made by the Act as well as by the Act of June 22, 2000 (P.L. 356, No. 43), are also described in paragraphs (1) and (20) below.
Part I – Amendments Relating to Electronic Communications
A number of provisions have been added to the BCL to authorize the use of e-mail or other electronic communication. The Committee Comments state that references throughout to electronic transmissions should be interpreted in a manner consistent with the definition of the term "electronic" in the Electronic Transactions Act of December 16, 1999 (P.L. 971, No. 69), which defines "electronic" as "[r]elating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic or similar capabilities."
Provisions relating to electronic communications are added with respect to financial reports to shareholders (§1554(a)), the manner of giving notice (§1702), the place of meetings of shareholders (§1704), meetings of incorporators, directors and shareholders (§1708), director action by consent (§1727), shareholder voting by proxy (§1759), and shareholder action by consent (§§1766 and 2524).
Part II – Other Amendments to the BCL
Title 15, Part I, Article B – Domestic Business Corporations Generally
Subchapter 13A – Incorporation Generally
1) Sec. 1303 – Corporate Name: (Section amended in 2000 by the Act of June 22, 2000 (P.L.356, No.43)): Prior to the amendment of this Section in 2000, the general test under Title 15 for name availability was that the name could not be "the same as or confusingly similar to" a name already on file. Act 2000-43 changed this standard to provide that the name must be "distinguishable upon the records of the Department [of State]" from other names. Subsection 135(e) was also added at the same time by Act 2000-43 to set forth certain rules for determining whether a name is "distinguishable" from another name: a name shall not be considered distinguishable solely because the names differ from each other in any of the following respects: (1) the use of punctuation marks, (2) the use of a definite or indefinite article, or (3) the use of terms of status such as corporation, company, incorporated, limited, etc., or any abbreviation of such terms.
Chapter 15 – Corporate Powers, Duties and Safeguards
2) Sec. 1508 – Corporate Records; Inspection by Shareholders: The amendment allows the share register of a corporation to be kept at any actual business office of the corporation, as well as at its registered office, its principal place of business, or the office of its registrar or transfer agent.
3) Sec. 1512 – Informational Rights of a Director: This is a new Section. It provides that a director has a broad right, either in person or by an attorney or other agent, to inspect and copy corporate books, records and documents, and to inspect and receive information regarding the assets, liabilities and operations of the corporation and any of its controlled subsidiaries that are organized under Pennsylvania law. A director may also require the corporation to exercise whatever rights it may have to obtain information regarding other subsidiaries.
Such rights are not unlimited, however; they exist only to the extent reasonably related to the performance of the duties of the director.
Subchapter 15B – Shares and Other Securities
4) Sec. 1521 – Authorized Shares: The Act deletes a provision in Subparagraph (b)(1)(i) that an amendment of the articles to add or amend a provision permitting redemption of any shares by a method that is not pro rata nor by lot nor otherwise equitable may be effected only pursuant to Section 1906 (Special treatment of holders of shares of same class or series). A related amendment adding Paragraph 1914(b)(5) grants a statutory class vote requirement for an articles amendment that would make outstanding shares redeemable by such a method.
Paragraph (b)(2), which provides that any of the terms of a class or series of shares may be made dependent upon facts ascertainable outside of the articles under certain circumstances, is amended to provide that such facts may include actions or events within the control of the corporation, or determinations made by the corporation or its representative. This sentence is intended to authorize, among other things, a provision in the terms of a class or series of shares under which the board or a committee periodically resets the dividend or interest rate of the shares pursuant to a described procedure, such as an auction. Comparable amendments are made in Sections 1912(c), 1922(e), 1931(i), 1932(b)(3), 1952(i) and 1962(d).
Subchapter 15D – Dissenters’ Rights
5) Sec. 1571 – Application and Effect of Subchapter: The Section is amended to allow a beneficial owner as well as a registered owner of shares to assert the right to dissent.
The provision in Paragraph (b)(1) regarding the elimination of dissenters’ rights with respect to certain matters for listed or widely held shares—the so-called "market-out" exception—is continued, but with some modifications, including:
An addition to the market-out exception has been added for shares designated as a national market system security on an interdealer quotation system by the NASD.
The exception for widely held shares now covers shares held beneficially or of record by more than 2,000 persons; and for this purpose, shares that are held beneficially as joint tenants, tenants by the entireties, tenants in common or in trust by two or more persons, as fiduciaries or otherwise, shall be deemed to be held beneficially by one person.
The Act repeals Subparagraph (b)(2)(i), which provided that the market-out exception was not applicable where shares would not be converted by a plan solely into shares of the acquiring, surviving, new or other corporation (and money for fractional shares).
Chapter 17 – Officers, Directors and Shareholders, Subchapter A – Notice and Meetings Generally
6) Sec. 1709 – Conduct of Shareholders Meeting: This Section is new, patterned after Section 7.08 of the Revised Model Business Corporation Act. It contains provisions relating to the appointment of the presiding officer, his or her authority to determine the order of business and to establish rules for the conduct of the meeting, a requirement that such actions "be fair to the shareholders," and the closing of the polls. If no announcement is made at the meeting when the polls close, they shall be deemed to have closed upon the final adjournment of the meeting.
The Committee Comment states that complicated parliamentary rules, such as Robert’s Rulers of Order, are ordinarily not appropriate for shareholder meetings, and that the rules adopted by the presiding officer may cover such subjects as the proper means for obtaining the floor, who shall have the right to address the meeting, time limits per speaker, the number of times a shareholder may address the meeting, and the person to whom questions should be addressed. The Committee Comment expressly states that the pamphlet, The Modern Rules of Order, written by Harrisburg lawyer Donald A. Tortorice and published by the Pennsylvania Bar Institute, satisfies the statutory fairness test.
7) Sec. 1721 – Board of Directors: This Section provides that the board of directors shall exercise all the powers of a business corporation, unless otherwise provided in the articles or in a bylaw adopted by the shareholders. The effect of the "unless" clause was ignored by the District Court in AMP Incorporated v. Allied Signal Inc, which held that the powers of the board under Sec. 2513 (which in effect validates the adoption of shareholder rights plans or "poison pills") could not be assigned to a committee of three designated persons by a bylaw adopted by the shareholders. Since the Court in AMP did not refer to Section 1721 in its decision, it was decided not to amend this Section, but to enact a new Section 2527 which in effect makes the AMP decision the law for registered corporations. (See Paragraph (17) below.) As to all other business corporations, the Committee Comment states that Section 1721 should be held to authorize the shareholders to adopt a bylaw transferring any corporate powers to any designated group of persons whether or not they are directors.
Subchapter 17E – Shareholders
8) Sec. 1756 – Quorum: A new Paragraph (4) has been added to Subsection (a) to provide that if a proxy casts a vote on any issue considered at a meeting other than a procedural motion, the shareholder shall be deemed to be present during the entire meeting for purposes of determining whether a quorum is present for consideration of any other issue. The provision is intended to resolve the uncertainty created by so-called "broker non-votes." Thus, where a nominee holds shares in street name and votes the shares on certain issues but not on others because it has no instructions from the beneficial owner, the shares will be considered present at the meeting for all purposes.
9) Sec. 1758 – Voting Rights of Shareholders: New Subsection (e) authorizes the bylaws to provide (i) a procedure for the nomination of candidates for election as directors, and (ii) advance notice requirements for proposals to be made by a shareholder at the annual meeting. Such requirements must be "fair and reasonable"; the Committee Comment amplifies this requirement, stating that advance notice bylaws are permitted if there is reasonable opportunity for shareholders to comply with them in a timely fashion, and if they "are reasonable in relationship to corporate needs" such as preparing and publishing a proxy statement or verifying that a director nominee meets any established qualifications for director and is willing to serve.
Subchapter 19B – Amendment of Articles
10) Sec. 1914 – Adoption of Amendments: An amendment to Subsection (b) provides for statutory class voting rights if an amendment would make the outstanding shares of a class or series redeemable by a method that is not pro rata, by lot or otherwise equitable.
An amendment to Paragraph (c)(2) authorizes adoption by the board of directors of an amendment to the articles which would add, change or eliminate the par value of any class or series of shares if the par value does not have any substantive effect under the terms of that or any other class or series.
Paragraph (c)(3), relating to director adoption of an amendment increasing the number of authorized shares to accomplish a stock dividend or split of voting shares, is amended to be applicable only if the corporation has only one class or series of voting shares outstanding and does not have any class or series of shares outstanding that is convertible into or junior to those voting shares or entitled to participate with those voting shares on any basis in distributions.
Chapter 19C – Merger, Consolidation, Share Exchanges and Sale of Assets
11) Sec. 1924 – Adoption of Plan: The clause in Subparagraph (b)(1)(ii) providing that a plan of merger or consolidation shall not require shareholder approval if another corporation owns 80% or more of its shares is amended to apply where such other corporation is a party to the plan, not to the merger. This applies to a triangular merger, where a parent corporation causes its 80% subsidiary to merge with itself or with another corporation; and in case of a merger of an 80% subsidiary with its parent, neither approval of the plan by the subsidiary’s board nor execution of the articles of merger or consolidation by the subsidiary is necessary.
A new Paragraph (b)(4) (patterned in general after Del.G.C.L §251(g)) authorizes the board (without requiring shareholder approval) to effect a merger with a wholly owned indirect subsidiary that in effect converts the corporation into a subsidiary of a holding company, and converts the shares owned by the shareholders into identical shares of the holding company, in a tax-free reorganization. Section 1930 is amended to provide that in such a merger, shareholders are not entitled to dissenters’ rights.
12) Sec. 1929 – Effect of Merger: In describing the effect of the merger on the property of the constituent corporations, the words "shall be deemed to be transferred to and vested in" the surviving or new corporation are changed to "shall be deemed to be vested in and shall belong to" the surviving or new corporation. The change reflects Pennsylvania case law to the effect that the surviving or new corporation simply succeeds to the assets, and that those assets are neither assigned nor transferred to the successor corporation.
13) Sec. 1932 – Voluntary Transfer of Corporate Assets: Paragraph (b)(2) is amended to provide that a merger by a subsidiary in which a third party acquires direct or indirect ownership of the property of the subsidiary constitutes a "disposition" of property of the parent corporation, for purposes of deciding whether "all or substantially all" of the property of the parent has been disposed of, thus involving shareholder approval and dissenters rights.
A new Subsection (g), patterned after Model Business Corporation Act §12.02(a), provides that a corporation shall be deemed not to have disposed of all or substantially all of its assets if it retains a business activity that represented at least (1) 25% of its total assets or (2) 25% of either (i) income from continuing operations before taxes or (ii) revenues from continuing operations.
14) Sec. 1952 – Proposal and Adoption of Plan of Division: The existing Subsection (g) ("Rights of holders of indebtedness") is deleted; thus if a corporation effecting a division fails to obtain a necessary consent of holders of indebtedness, the division will nonetheless be valid, but the creditor may have a claim against the corporation for breach of contract.
As a transitional rule, to protect persons who lent money to a corporation before the effective date of the Act without considering the effect of a division, the new Subsection (g) overrides any plan of division apportioning the liabilities of the dividing corporation and gives such creditors a remedy against each of the resulting corporations as joint and several obligors. That rule does not apply, however, where a loan agreement is made or amended after the effective date of the Act; in that case it will be necessary to provide contractually for specific protection in the case of a division.
15) Sec. 1957 – Effect of Division: Amendments are made in Paragraphs (b)(1) and (b)(4) in a manner analogous to the rule on the effects of a merger in Sec. 1929, viz., that the successor corporation simply succeeds to the assets and liabilities of the dividing corporation as provided in the plan of division, and that the assets and liabilities shall not be deemed to have been assigned or transferred to the successor corporation.
Subparagraph (b)(1)(iv) is amended to provide that liabilities of the dividing corporation may be allocated among the resulting corporations as specified in the plan of division, if (A) no fraud on minority shareholders or shareholders without voting rights is effected thereby, and (B) the plan does not constitute a fraudulent transfer. Those conditions shall be deemed to have been satisfied if the Department of Banking, the Insurance Department or the Public Utility Commission has approved the plan in a final order.
Article C, Domestic Business Corporation Ancillaries
Chapter 25 – Registered Corporations
16) Sec. 2526 – Voting Rights of Directors: This new Section provides a different rule for registered corporations than that for nonregistered corporations. This Section allows unequal voting rights for directors in publicly traded corporations but only if set forth in the articles. However, it grandfathers the validity of a bylaw adopted by the shareholders providing for unequal voting by directors of registered corporations if adopted on or before the effective date of the Act, or if adopted by the shareholders at a time when the corporation was not a registered corporation.
17) Sec. 2527 – Authority of Board of Directors: This new Section is intended to provide a different rule for registered corporations than that for nonregistered corporations in Section 1721 (described in paragraph (7) above), which provides that a bylaw adopted by the shareholders can transfer the powers and authority of the board to another body. Section 2527 provides that the shareholders of a registered corporation cannot adopt such a bylaw unless adopted with the approval of the board; but it grandfathers such a bylaw if adopted (i) before the effective date of the Act, or (ii) at a time when the corporation was not a registered corporation.
The Section provides the same limitation upon the authority of the shareholders of a registered corporation to adopt a bylaw establishing a committee of the board.
Subchapter 29A – Professional Corporations
18) Sec. 2904 – Election of an Existing Business Corporation to Become a Professional Corporation: This Section formerly required unanimous approval by all the shareholders of an amendment of the articles to elect professional corporation status. Now, no special vote is required, but shareholders have dissenters rights.
19) Sec. 2922 – Stated Purposes: Subsection (b) is revised to allow a professional corporation to be an "equity owner" in various associations, viz., a partner in a partnership, a member in a limited liability company, a shareholder in a corporation, or a person in a similar position or owning a similar type of interest in any other form of association, that is engaged in the business of rendering the professional services for which the professional corporation was incorporated.
Part III – Amendments to Title 54 (Names)
20) Act 2000-43: In addition to the amendments to Sections 135 and 1303 of Title 15 described in paragraph (1) above, relating to "distinguishable" names, the Act of June 22, 2000, No. 43, amended a number of Sections in Chapter 3 (Fictitious Names) and Chapter 5 (Corporate and Other Association Names) as well as other Chapters of Title 54. Of particular interest are the following:
- Paragraph 303(b)(2) was amended to require that a limited partnership, an electing partnership, a limited liability company, a registered limited liability partnership and a business trust (as well as a corporation) carrying on any business in the Commonwealth under a fictitious name must register the fictitious name.
- Section 321, which required decennial filings with respect to fictitious names, was deleted.
- Section 503 was amended to require decennial filings to be made in 2001 (rather than 2000) and every tenth year thereafter.
- Subsection 503(b) had provided that a decennial filing was not required if during the preceding ten years an entity had made any of certain filings in the department, identified as any filing "a permanent record of which is retained by the department." Act 2000-43 deleted the quoted words and provided instead an exception to the filing requirement if any filing had been made during the preceding ten years other than filings relating to names made pursuant to specified provisions in Title 15.
21) Amendments made by the Act: The Act further amends Section 302 (Fictitious Names—Definitions) and Section 503 (Corporate and Other Association Names—Decennial Filings Required) of Title 54. Among other things, Subsection (b.1) of Section 503, which sets forth exemptions from the 2001 decennial filing requirement if certain filings had been made in 1990 under Titles 15 or 54, is rewritten as Subsection (c), in part to clarify its meaning, but also (i) to expand the exemption period for having made an exemptive filing to both 1990 and 1991, and (ii) to add an exemption from the 2001 filing requirement if a decennial filing was made in the year 2000.