During its 2024 session, the General Assembly of Maryland approved Senate Bill 400 and House Bill 749, amending several provisions of the Maryland General Corporation Law (the "MGCL") and the Maryland REIT Law (the "MRL"), which are now codified as Chapters 609 and 608 of the Laws of Maryland 2024, respectively. The General Assembly also approved House Bill 888 and Senate Bill 544, amending certain provisions of Title 2, Subtitle 7, of the MGCL relating to ratification of defective corporate acts, which are now codified as Chapters 605 and 604 of the Laws of Maryland 2024, respectively. The legislation will take effect October 1, 2024. Here are the key provisions (all section references are to the MGCL unless otherwise noted):
Senate Bill 400/House Bill 749
Definitions of Principal Office and Resident Agent. Section 1-101(w) is amended to provide that the principal office of a Maryland corporation, limited liability company ("LLC"), limited liability partnership ("LLP") or limited partnership ("LP") is the place in Maryland as filed with the State Department of Assessments and Taxation of Maryland (the "SDAT") or, if there is no place designated, "the main office" of the entity in Maryland "for the transaction of business." While a principal office in the State of Maryland is required for LLCs and LLPs, the current definition of principal office refers only to Maryland corporations and LPs. Section 1-101(x) is amended to permit a Maryland LP to serve as a resident agent. Maryland corporations, LLCs, LLPs and individuals residing in Maryland may also serve as resident agents under the current statute.
Emergency Bylaws. New Section 2-116 is added to permit a corporation, unless its charter provides otherwise, to adopt bylaw provisions that are effective only during an emergency. Emergency bylaw provisions, which must be adopted before an emergency, "may make all provisions necessary for managing the corporation during an emergency," including calling a board meeting, quorum requirements and designating substitute directors. Under Section 2-116, an emergency is "a situation in which a quorum of the board of directors cannot readily be assembled because of some catastrophic event." The term catastrophic event is not defined. All provisions of the bylaws not inconsistent with the emergency provisions remain effective during an emergency.
For those corporations that have not adopted emergency bylaw provisions, new Section 2-117 provides alternative notice procedures for a meeting of the board of directors during an emergency (as defined above), effectively overriding any generally applicable bylaw regarding notice of meetings of the board of directors.
Regarding meetings of stockholders, new Section 2-118 defines an emergency as "a situation in which it is impracticable to convene a meeting of stockholders in accordance with the [MGCL] or the bylaws or as specified in a notice for the meeting previously given, because of some catastrophic event." Section 2-118(b) provides that, unless the corporation's emergency bylaws provide otherwise, the board of directors may postpone a meeting of stockholders or authorize stockholder participation by remote communication as permitted by the MGCL (e.g., in the case where the meeting as originally noticed did not contemplate participation by remote communication). Section 2-118(c) provides alternative stockholder notice requirements for actions taken under this section, including notice in "any practicable manner given the circumstances."
Each of Sections 2-116(d), 2-117(c) and 2-118(d) provides that "[a]ny corporate act taken in good faith and in accordance with the emergency provisions" of the bylaws binds the corporation and "[m]ay not be used to impose liability on a director, an officer, an employee, or an agent of the corporation." With respect to directors, these new provisions limit the standard of conduct in Section 2-405.1(c) to only "good faith," thus dropping the "reasonable belief" and "ordinary care" requirements for acts of directors taken during emergencies. However, under Section 2-116(e), the emergency bylaws may provide that the standard of conduct of Section 2-405.1 applies to "the conduct of a director acting pursuant to the emergency provisions."
Section 8-601.1 of the MRL is amended to provide that Sections 2-116 through 2-118 also apply to Maryland real estate investment trusts. These statutory changes provide express authorization for the common practice to include emergency provisions in the bylaws of corporations and real estate investment trusts for meetings of directors or trustees. Emergency bylaws for meetings of stockholders are far less common in our experience.
Stock Called for Redemption or Repurchase. Section 2-310(a) is amended to add a new sub-subsection (4) clarifying that, unless the charter provides otherwise, stock called for redemption or repurchase ceases to be outstanding on the date of redemption or repurchase if the corporation (1) has given notice of redemption or repurchase as required in the charter or a repurchase plan binding on the stockholder and (2) "[p]aid or set apart sufficient funds for the benefit of" the stockholder whose stock is being called for redemption or repurchase. This provision clarifies the effective time of a redemption or repurchase of stock in a manner similar to that often expressly provided for in the terms of preferred stock.
House Bill 888/Senate Bill 544
Ratification of Defective Corporate Acts. Title 2, Subtitle 7 of the MGCL ("Subtitle 7") was originally adopted in 2022 and provides an express statutory procedure for ratification of defective corporate acts by the board of directors and, if the context requires, the stockholders of a Maryland corporation. Under Section 8-601.1 of the MRL, Subtitle 7 is also applicable to Maryland real estate investment trusts. Subtitle 7 is a statutory safe harbor only and is not the exclusive means to ratify or validate a defective corporate or trust act. The 2024 amendments to Subtitle 7 contain several clarifications and refinements but do not include any fundamental revisions. Many of these changes are for internal consistency within Subtitle 7 and the MGCL generally, and we will not itemize all of the changes here.
In Section 2-701(b), the definition of "corporate act" is deleted as unnecessary and potentially limiting, as the term is used in other MGCL sections without definition. The definition of "overissue" in Section 2-701(e) is also amended to add the word "purported," and the definition of "putative stock" in Section 2-701(f) is amended to add the word "purportedly," which is consistent with the notion that the issuance or other corporate action may have been defective.
Section 2-702 is amended to clarify the circumstances under which a proposal to ratify a defective corporate act must be submitted to stockholders in order to comply with Subtitle 7. Additional amendments clarify the applicable stockholder quorum and voting requirements when there has been a change in such requirements between the time of the defective corporate act and the time of ratification. In each case, the greater number or proportion of votes will be required to establish a quorum and approve the ratification proposal.
Amendments to Section 2-704 clarify notice requirements to stockholders. Among other changes, for corporations with a class of equity securities registered under the Securities Exchange Act of 1934, where ratification does not require stockholder approval, notice of ratification will be deemed given when publicly disclosed in a document furnished to the Securities and Exchange Commission, in addition to documents publicly filed with the Commission.
Section 2-705 is amended to clarify the required contents of articles of validation, which vary depending upon whether the ratification (1) requires a change to a charter document that was previously filed or (2) relates to a defective corporate act that would have required the filing of a charter document that was not filed.
Many corporations include ratification provisions in the charter or, more typically, the bylaws. As we have noted in the past, Subtitle 7 does not supplant those provisions and, assuming that they are otherwise consistent with principles of corporation law, existing charter and bylaws provisions regarding ratification remain valid. However, when confronted with a defective corporate act, a board of directors will want to carefully evaluate the steps to be taken in ratifying the defective corporate act under the procedures available under Subtitle 7.
