Pennsylvania Act 122 of 2022: Updates to Title 15
Pennsylvania Act 122 became effective as of January 2, 2023, resulting in several amendments to Pennsylvania’s Title 15 Corporations and Unincorporated Associations. We previously discussed the repeal of the decennial filings in Pennsylvania in favor of an annual reporting regime similar to most other states.
This advisory discusses some of the other material changes to Title 15 made by Act 122, almost all of which relate to the Business Corporation Law (BCL) in its first significant update in years.
- Ratification of Defective Entity Actions (new Sections 221-229) Act 122 adopts a non-exclusive process for ratifying defective entity actions along the lines of the Delaware General Corporation Law (DGCL) and the Model Business Corporation Act (MBCA), but unlike them it applies ratification concepts to all entities under Title 15. The provisions cover both “failures of authorization” (for circumstances where the defective act is clear, such as purporting to issue shares in excess of the authorized amount in a business corporation’s articles of incorporation), as well as circumstances where it is less clear whether proper authorization occurred.
- The statutory process is similar to other ratification statutes, requiring approval by governors (board of directors, managers, etc.) and where appropriate, interest holders (shareholders, members, and so on), and notice to interest holders where their approval is not required. When properly ratified, the defective action is deemed to have been valid and effective when it was purported to have been originally approved, and has a ratifying effect on entity actions that would be considered defective solely because of the original defective action (such as director elections following an over issuance of shares in excess of authorized stock).
- Ratification is subject to equitable review; however, a general statute of repose of 21 years protects a defective entity action from being challenged after that time, though shorter periods apply when a registered corporation (publicly traded business corporation subject to Chapter 25) discloses a defective action in Securities and Exchange Commission (SEC) filings or in other specific ways.
- Two-step Transactions (new Section 321(f)) The Entity Transactions Law with respect to approval by corporations permits a two-step transaction (tender offer and back-end transaction such as merger or interest exchange) involving the acquisition of a registered corporation without shareholder approval. In step one, if a tender offer is made, upon consummation of which the offeror owns or has the right to acquire shares having adequate voting power to satisfy applicable shareholder approval required pursuant to the Entity Transactions Law for the plan or merger or interest exchange with respect to the second step, so long as it provides the same consideration for the shareholders as in the tender offer, the second step does not require shareholder approval so long as the requirements of Section 321(f) are satisfied (for instance, the board of directors must exercise its fiduciary duty in recommending that shareholders tender their shares pursuant to the offer). In effect, the act of sufficient shareholders tendering shares in the tender offer suffices for the shareholder approval.
- Forum Selection (new Section 1513) Corporations may specify an exclusive forum for internal corporate claims (which generally are derivative actions and claims arising under Title 15, the articles or bylaws, or by certain agreements regarding governance of the corporation) in its bylaws (or its articles, pursuant to Section 1504(c) of the BCL). At least one Pennsylvania state court must be specified, though non-state courts located in Pennsylvania may be included, as may additional courts outside of Pennsylvania if the corporation has a reasonable relationship in such jurisdiction, and the bylaws may further provide that claims under the Securities Act of 1933 against the corporation may be brought exclusively in federal courts.
- Director Standard of Care, Business Judgment Rule and Reliance (updates to Section 1712) Act 122 clarifies, contrary to In re: Nine West LBO Securities Litigation, Case No. 20-2941 (S.D.N.Y. Dec. 4, 2020), that directors’ obligations of reasonable inquiry only go to issues required by Pennsylvania statutory law to be considered, rather than an open-ended duty to inquire into matters beyond Pennsylvania statutory requirements.
- Personal Liability of Officers (new Section 1735) Similar to updates to the DGCL and MBCA, shareholders may adopt bylaws limiting the personal liability of officers for monetary damages except for failure to perform or breach of duties (which are also spelled out in new Section 1734, which expresses a statutory fiduciary duty for officers based on existing case law) where such breach or failure constitutes self-dealing, willful misconduct or recklessness (see new definition of “recklessness” at Section 102, pattered after existing Pennsylvania Crimes Code 18 Pa.C.S. § 302(b)(3)).
- Resignation of Directors (new Section 1724(c)) Directors may include in a notice of resignation a later effective time, or an effective time determined on the occurrence of an event or events specified in the notice.
- Director and Shareholder Consents (new Section 1727(c) and 1766(d)) Directors, or a person not yet a director, may provide a consent effective at a future time or subject to the occurrence of future events, and a person who is a director may provide a consent that becomes effective at a later time, even if he or she is then no longer a director. A similar rule applies to shareholders, or persons who become shareholders after providing a consent, which consent may also provide that it is irrevocable (the need to exercise fiduciary duty by a director prohibits a director consent from being made irrevocable).
- Class Vote Quorum (new Section 1756(a)(1)(ii)) Act 122 clarifies that at a shareholder meeting, a quorum with respect to a particular matter to be acted upon that requires a separate class vote is only present (with respect to that matter) if holders entitled to cast at least a majority of the votes of such class are present.
- Records and Distributed Ledger Technology (amendments to Section 107). Section 107, relating to entity Form of Records, has been amended by Act 122 to reference information “administered by or on behalf of” a corporation or association to make it clear that use of distributed ledger (blockchain) technology is permitted.
- Emergency Reflecting changes to the MBCA in light of recent natural disasters and the pandemic, the BCL has been updated to, among other matters (1) relax rules on shareholder meetings and payment of shareholder distributions during an emergency (Sections 1509(g) and (h), (2) address problems of registered corporation shareholder meetings solely via electronic technology (for example, loss of internet prior to convening a previously noticed meeting permits the presiding officer to postpone the meeting to a specified later time that same day or the following day (Section 2522(c)), or with respect to a meeting where loss of connectivity means an announcement of adjournment cannot be made, the corporation can give such notice via filing the SEC and (3) clarify the definition of “emergency” (Section 1509(i)).
- Effect of Bylaws, Rights of Inspection (Sections 1505, 1508) Act 122 confirms the prior understanding that bylaws are binding on shareholders, directors and officers whether or not they had actual knowledge of the bylaws (see also new Section 1732(g) for officers’ right to a copy of the bylaws to the extent reasonably related to the officer’s duties. Further, Act 122 clarifies Section 1508 regarding demands by shareholders for access to books and records.
- Notice and Access (new Section 2528(b)) Clarifies that if a registered corporation has given a shareholder notice of the internet availability of proxy materials that complies with the SEC’s notice and access rules (14a-16), notices required under the BCL may be posted to the internet website to which the proxy materials are posted.
- Qualifications of Directors of Registered Corporations (new Section 2530). While Section 1722 of the BCL addresses qualifications of directors generally, new Section 2530 prohibits qualification requirements for registered corporation directors that are based on a past, present or future action by a nominee or director in the discharge of the director’s powers or duties as a director. For instance, the bylaws could not include a disqualification for having voted to adopt a poison pill, or for failing in the future to adopt a particular kind of shareholder proposal.
Buchanan has for many years had a number of corporate attorneys participating in the Title 15 committee of the Pennsylvania Bar Association’s Business Law Section, the committee that drafts periodic improvements to Title 15 and the BCL, including Act 122. Our team is ready to help your business navigate the changes to BCL and other amendments to Title 15 Corporations and Unincorporated Associations.