Massachusetts recently enacted a new Business Corporations Act, the first major overhaul of the law governing business since the statute was enacted over a century ago.

The newly created law, G.L. c. 156D, which will supercede existing Chapter 156B on July 1, brings a much-needed update to Massachusetts’ antiquated business corporation laws – which date back to 1903 and have been amended only on a piecemeal basis since an interim revision in 1964.

The act is based in part upon the Revised Model Business Corporation Act, a model act published and updated by the American Bar Association. (This act has inspired corporate statutes for more than 30 states, including all other New England states.)

At the same time, the statute preserves well-established Massachusetts policies, such as the protection of minority shareholders and anti-takeover measures.

The act’s significant changes are those that allow for greater flexibility in the areas of capital finance, streamline corporate procedures, provide clearer rules for shareholder action and codify standards for corporate governance.

Among its many provisions, the act notably:

eliminates distinctions between classes and series of shares, and grants directors greater flexibility to designate the terms of authorized “blank check stock”;

specifies the rights of shareholders in fundamental transactions;

details when corporations may issue dividends and distributions;

permits corporations to allow shareholders to act by written consent that is less than unanimous;

allows electronic communication between a corporation and its shareholders and directors; and

expressly addresses the treatment of derivative shareholder actions.

Robert L. Nutt of Boston suggested that the statute’s comments are particularly useful for guidance. Nutt is co-chairman of the voluntary task force of experienced corporate practitioners that conceived of and developed the legislation.

“The comments are typically an exposition of the law and are really important in terms of interpretation,” he explained. “We adapted the official comments [to the model act] – we did not adopt them – and created something similar in their level of specificity.”

While the comments have not been made an official part of the act, they are expected to be included in the first general publication of the statute, and Nutt anticipates that they will “substantially” affect how Chapter 156D will be implemented.

Overall Impact

“If you are a large, publicly traded corporation represented by a large firm, the provisions dealing with capital finance, and in particular the far more explicit rules about the sources from which distributions can be made will be important,” said Nutt.

By facilitating the conduct of business and delivering greater guidance, the statute is expected to provide greater predictability for corporations and those representing them. It also has the “higher-level” benefit of improving the state’s business climate, said Aaron C. von Staats, senior counsel to Parametric Technologies Corp., a software developer in Needham, Mass.

Robert W. Hesslein, vice president and chief corporate counsel for Genzyme Corp., added: “It shows an effort to work with businesses to modernize state law in a way required to attract and keep companies in Massachusetts. It gives us an increased flexibility and capacity to do business effectively around the world. All boats rise with this tide.”

The ABA’s model act was chosen as a basis because it is familiar to a large number of corporate practitioners throughout the country and is continuously kept current with new developments. Moreover, the advantage of the model act was the ability to use the developed jurisprudence of other states with the model law on its books.

“Other than in Delaware, there is a paucity of case law precedent on corporate law matters,” noted Stanley Keller of Boston, co-chairman of the task force. “By being able to look at 30 to 40 other states, you increase predictability in dealing with the statute because there is a larger body of relevant case law.”

To preserve such benefits of uniformity, Chapter 156D conforms in scope, structure and language to the model act, unless there was a well-established Massachusetts policy not to do so with respect to specific matters, Nutt said.

Flexible Capital Finance

Under the new act, a corporation’s board of directors is able to determine the fair value of the shares it proposes to issue – subject to its fiduciary duties it owes its shareholders – without regard to the concept of par value. Par value, frequently set at fractions of a penny, had become meaningless, particularly following the dot-com boom, Keller explained, and was consequently eliminated.

Directors are also free to determine the type of consideration to be received for the issued shares, such as a promise to perform services.

“You can give other value, like an in-kind exchange, rather than coming up with a fictitious par value,” von Staats said. “It gives you the flexibility to have something more meaningful to the shareholder.”

While the existing statute permits corporations to issue “blank check” stock and authorizes directors to set the terms of a series within a class of shares, it does not allow directors to fix the terms of new classes of stock. The new act disposes of the distinction between classes and series and gives directors the ability to specify the terms of any shares, provided this ability is authorized by the company’s charter.

“This will definitely streamline merger and acquisition activities,” said von Staats. He anticipates the change will also help companies raise capital, noting that business will be able to jump on opportunities faster and, when dealing with multiple venture capital firms and rounds of financing, will be able to designate differing rights for each investor without waiting for a shareholder’s authorization of a new class.

Operational Changes

In the area of corporate procedure, the new act permits all available means of electronic communication, including e-mail, between directors, shareholders and the state. Notices of meetings, waiver of notices and proxies that previously had to be put down on paper and sent by mail will be able to be delivered electronically, von Staats pointed out.

Hesslein of Genzyme, based in Cambridge, Mass., said he plans to take advantage of the use of electronic transmission, noting that large companies with hundreds of thousands of shareholders are subject to the same rules to which the smallest enterprise must adhere.

While the Securities and Exchange Commission already allows for electronic filings and many companies already file their quarterly reports electronically, it had not been clear how those practices reconciled with Massachusetts law, said von Staats, and companies making use of electronic communication had to take additional measures to ensure there was express consent from the shareholders.

Under Chapter 156D, a corporation can take action without a meeting with less than unanimous written consent of its shareholders. The current requirement of unanimity can result in some difficulties when prompt action is called for, according to Julia K. O’Neill, a Boston business and securities attorney and member of the task force.

The new provision contemplates obtaining the written consent of only that percentage of outstanding shares that would be required to approve the action at a meeting and will be most helpful to smaller, closely held companies, estimated von Staats.

A Massachusetts corporation wishing to convert to another entity in order to address its needs, such as its tax treatment, will be able to do so without the inconvenience and disruption of conveying its assets or ceasing to exist. The filing of the shareholder’s vote to convert makes the change effective by operation of law, Keller explained.

Similarly, Chapter 156D allows for the domestication of a foreign corporation simply by the company declaring itself to be a Massachusetts corporation, he added.

Shareholder Action

Chapter 156D allows corporations greater flexibility in determining, at the time of issuance, when a class or series of shares is entitled to a separate class vote in a merger. Moreover, it limits the circumstances under which separate shareholder class votes are required.

Says Keller: “We tried to define that more clearly and to narrow it to those situations where shareholder rights are being fundamentally affected so as to be entitled to veto protection.”

Shareholder approval will not be required for sales of assets in the regular course of business, transfers to wholly-owned subsidiaries or pro rata distributions to stockholders, according to members of the task force. In addition, a shareholder vote will not be needed for a downstream merger of a corporation into its 90-percent-owned subsidiary.

While the current statute grants appraisal rights to shareholders entitled to a separate class or series vote, the new act decouples the two concepts.

“Appraisal rights are an economic remedy when the nature of the bargain the shareholders agreed to is so changed that they are entitled to be cashed out,” Keller explains. “We have limited the circumstances under which shareholders can ask to be cashed out and have been more careful to make that right more meaningful.”

Appraisal rights are also eliminated in mergers, share exchanges and sales of assets if shareholders will receive only cash in an amount they would have received on dissolution, or if they hold publicly traded securities and will receive cash or marketable securities and insiders do not have a conflict of interest.

Derivative Suits

The new act retains Massachusetts’ definition of the duties and responsibilities of directors and the standards to which they are to be held.

“It parallels what is often included in the charters of Massachusetts corporations to define their own ground rules,” Keller observed, “but looks to the common law definition of what constitutes fairness.”

The governance mechanism of derivative litigation, which previously was based on scattered case law, is dealt with explicitly in Chapter 156D.

“The baseline process and pre-suit procedures and requirements are outlined,” said von Staats. “It’s like knowing what the rules are for doing a zoning appeal — there are some specific steps that need to be followed, and having them set down in a statute instead of 10 cases is helpful.”

Chapter 156D removes the “burdensome” requirement, imposed by case law, of making a demand on shareholders after directors fail to act upon the demand made on them, Keller reported. “It’s in line with the current perspective of empowering shareholders to make sure directors are properly performing,” he said.

On the other hand, von Staats explained, the statute also affords protection against frivolous derivative litigation by recognizing the ability of an independent committee of directors to review the demand and dismiss the proceedings if warranted. It specifies the procedures for the evaluation, the criteria for dismissal and the standards for judicial review of a committee’s dismissal of derivative proceedings.

(A version of this article originally appeared in the Jan. 26 issue of Massachusetts Lawyers Weekly, a sister publication of New England In-House.)

Questions or comments may be directed to the writer at [email protected].