Corporate Law Monitor : Corporate Lawyer & Attorney : Cole, Schotz, Meisel, Forman & Leonard Law Firm : NJ, Mid-Atlantic Business Transactions & Finance Law

On March 1, 2011, New Jersey became the third state to enact legislation authorizing the creation of “benefit corporations”.  A benefit corporation is a corporation designed to generate profits while promoting public benefits.  The legislation is designed to promote performance, accountability and transparency with respect to achieving public benefits, while providing legal protection to directors and officers for considering the interests of its employees and customers, the communities in which the company operates and the environment, as well as the interests of its shareholders, in making corporate decisions.  Maryland, Vermont and Virginia have enacted similar legislation, and a number of states are considering similar bills.

A benefit corporation is formed in the same manner as any other for-profit corporation, except that the certificate of incorporation of a benefit corporation must include a statement that the corporation is a benefit corporation.  N.J.S.A. 14A:18-2.  An existing corporation can become a benefit corporation by amending its certificate of incorporation to include such a statement.  N.J.S.A. 14A:18-3.

A benefit corporation must have as its purpose the creation of a general public benefit, which purpose may be in addition to any other purpose or specific public benefit set forth in its certificate of incorporation.  N.J.S.A. 14A:18-5.  A “general public benefit” is defined as “a material positive impact on society and the environment by the operations of a benefit corporation through activities that promote some combination of specific public benefits.”  N.J.S.A. 14A:18-1.  “Specific public benefits” include “(1) providing low-income individuals or communities with beneficial products or services; (2) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (3) preserving the environment; (4) improving human health; (5) promoting the arts, sciences or advancement of knowledge; (6) increasing the flow of capital to entities with a public benefit purpose; and (7) the accomplishment of any other particular benefit for society or the environment.”  Id.

By statute, the achievement of general and specific public benefits are deemed to be in the best interest of a benefit corporation and directors of a benefit corporation are required to consider the effects of any action on various stakeholders when considering the best interests of a benefit corporation.  N.J.S.A. 14A:18-5; 14A:18-6.  Specifically, directors of a benefit corporation are required to consider the effects of a corporate action upon its shareholders, as well as upon the employees of the benefit corporation, its subsidiaries and suppliers; its customers, as beneficiaries of the public benefit purpose of the corporation; the community, including communities in which the benefit corporation or its suppliers are located; the environment; and the short-term and long-term interests of the benefit corporation, including benefits that may accrue from the company’s short term and long-term plans.  Moreover, directors are not required to give priority to the interests of any one group of stakeholders, including shareholders.  N.J.S.A. 14A:18-6.  Officers of benefit corporations are also required to consider these factors in connection with any action within the officer’s discretion that reasonably appears to potentially have a material effect on the creation of a general or specific public benefit or the above-referenced factors.  N.J.S.A. 14A:18-8.

In addition, a benefit corporation is required to elect an independent director, designated as the “benefit director”, who shall prepare an annual statement as to whether, in the opinion of the benefit director, the benefit corporation acted, in all material respects, in accordance with its stated general and specific public benefit purposes and whether the directors and officers of the corporation complied with their obligations to consider the impact of corporate actions upon its various stakeholders, including its shareholders.  N.J.S.A. 14A:18-7.  A benefit corporation may designate a “benefit officer”, whose management duties shall relate to the creation of general or specific public benefits.  N.J.S.A. 14A:18-9.

The public benefit purpose of a benefit corporation and the duties of directors and officers of a benefit corporation are enforceable in a “benefit enforcement proceeding”, in which a claim is brought against an officer or director for failing to pursue the general or specific public benefit purpose of the company or for violating a duty or standard of conduct of an officer or director of a benefit corporation.  N.J.S.A. 14A:18-1; 14A:18-10.  Benefit enforcement proceedings may be commenced directly by the benefit corporation or derivatively by a shareholder, director, the holders of ten percent or more of the equity of the benefit corporation’s parent entity or any other person specified in the company’s certificate of incorporation.  N.J.S.A. 14A:18-10.  Benefit directors are protected from personal liability for their actions or omissions in that capacity, unless a benefit director engaged in self-dealing or his actions or omissions constituted willful misconduct or a knowing violation of law.  N.J.S.A. 14A:18-7.  In addition, officers or directors of benefit corporations are not personally liable for money damages if a benefit corporation fails to create general or specific public benefits.  N.J.S.A. 14A:18-6; 14A:18-8.

Finally, a benefit corporation is required to deliver an annual benefit report to its shareholders containing a narrative describing the ways in which the benefit corporation pursued general or specific public benefits, the extent to which such public benefits were created, and any circumstances hindering the creation of such public benefits.  In addition, the annual benefit report is to contain an “assessment of the social and environmental performance of the benefit corporation, prepared in accordance with a third-party standard . . . .”, as well as the statement of the benefit director as to whether the company acted in accordance with its general and specific public benefit purposes.  N.J.S.A. 14A:18-11.  A “third-party standard” is defined as a “recognized standard for defining, reporting and assessing corporate social and environmental performance” which is prepared by an independent person and is “transparent” because the factors considered in applying the standard, the weighting of those factors and the identity of the person who developed and controls any changes made to the standard is publically available.  N.J.S.A. 14A:18-1.  Finally, a benefit corporation is required to list in its annual benefit report the names and contact address for the company’s benefit director and benefit officer (if any), the compensation paid to each of its directors and the names of each person owning, beneficially or of record, five percent or more of the outstanding shares of the benefit corporation.  N.J.S.A. 14A:18-11.  The annual benefit report must be posted on the company’s website and be filed with the Department of Treasury, provided that the benefit corporation may omit references to compensation of its directors, as well as financial and proprietary information, from the publically posted and filed version of the annual benefit report.  Id.

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The Frank-Dodd Wall Street Reform and Consumer Protection Act (the “Act”) amended the definition of “accredited investor” under the Securities Act of 1933, as amended, by requiring that any natural person who is intending, with or without that person’s spouse, to be deemed an “accredited investor” based on the $1 million dollar net worth test, exclude the value of the primary residence of the natural person in the calculation. The Act authorizes the Securities and Exchange Commission to review the definition of “accredited investor” as such term applies to natural persons, to determine whether other requirements of the definition should be modified for the protection of investors, in the public interest and in light of the economy and, thereafter, make such adjustments as the SEC deems appropriate. While the SEC has not issued amendments to its rules to reflect this change, this amendment to the calculation of net worth in the definition of accredited investor was effective upon adoption of the Act on July 21, 2010.

Offering documents and purchase/subscription agreements (and, in some cases, operating or governing agreements) currently being used or in the process of being prepared should be revised to reflect these amendments to the definition of “accredited investor”.

The Act contains numerous other changes in or proposed changes to current laws which are not summarized herein. A copy of the Act is available at http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf.

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On August 13, 2010, New York State laws were amended to clarify that powers of attorney executed by individuals in New York primarily for a business or commercial purpose need not comply with the onerous requirements that went into effect on September 1, 2009. Following the 2009 amendments, the New York General Obligations Laws technically required all powers of attorney executed by individuals within the State of New York (including those used in corporate transactions and securities filings) to comply with mandatory notice, acknowledgement and notarization provisions and certain other technical matters.

The 2010 amendments expressly provide that the requirements for powers of attorney set forth in the 2009 amendments will not apply to:

1. a power of attorney given primarily for a business or commercial purpose, including without limitation:
   1. a power to the extent it is coupled with an interest in the subject of the power;
   2. a power given to or for the benefit of a creditor in connection with a loan or other credit transaction;
   3. a power given to facilitate the transfer or disposition of one or more specific stocks, bonds or other assets, whether real, personal, tangible or intangible;
2. a proxy or other delegation to exercise voting rights or management rights with respect to an entity;
3. a power created on a form prescribed by a government or governmental subdivision, agency or instrumentality for a governmental purpose;
4. a power authorizing a third party to prepare, execute, deliver, submit and/or file a document or instrument with a government or governmental subdivision, agency or instrumentality or other third party;
5. a power authorizing a financial institution or employee of a financial institution to take action relating to an account in which the financial institution holds cash, securities, commodities or other financial assets on behalf of the person giving the power;
6. a power given by an individual who is or is seeking to become a director, officer, shareholder, employee, partner, limited partner, member, unit owner or manager of a corporation, partnership, limited liability company, condominium or other legal or commercial entity in his or her capacity as such;
7. a power contained in a partnership agreement, limited liability company operating agreement, declaration of trust, declaration of condominium, condominium bylaws, condominium offering plan or other agreement or instrument governing the internal affairs of an entity authorizing a director, officer, shareholder, employee, partner, limited partner, member, unit owner, manager or other person to take lawful action relating to such entity;
8. a power given to a condominium managing agent to take action in connection with the use, management and operation of a condominium unit;
9. a power given to a licensed real estate broker to take action in connection with a listing of real property, mortgage loan, lease or management agreement;
10. a power authorizing acceptance of service of process on behalf of the principal; and
11. a power created pursuant to authorization provided by a federal or state statute, other than this title, that specifically contemplates creation of the power, including without limitation a power to make health care decisions or decisions involving the disposition of remains.
    The 2010 amendments are effective on September 12, 2010, and will apply retroactively to September 1, 2009.

The 2010 amendments contain other modifications to the New York power of attorney laws which are not all summarized herein.  A copy of the 2010 amendments is available at http://assembly.state.ny.us/leg/?default_fld=&bn=A08392%09%09&Summary=Y&Text=Y.
 

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NASDAQ Requires 10-Minute Notification Prior to Release of Material Information

Effective December 7, 2009, The Nasdaq Stock Market LLC (“Nasdaq”) requires Nasdaq-listed companies to provide Nasdaq’s Market Watch Department with at least 10 minutes prior notification when releasing material information. See Nasdaq Listing Rule 5250(b)(1). Previously, Nasdaq merely recommended such advance notice. Notification is required to be made through the Nasdaq electronic submission system available at www.nasdaq.net, except in emergency situations. This notice requirement is intended to provide Nasdaq with information to assess whether a trading halt is appropriate to permit full dissemination of the news to the public and to maintain an orderly trading market. The New York Stock Exchange contains similar notification requirements. See NYSE Listed Company Manual Section 202.06(B). Nasdaq also clarified that, consistent with the Securities and Exchange Commission (“SEC”) guidance, the posting of information on a company website by itself, would not satisfy the public disclosure requirements of Regulation FD. The final SEC Release No. 34-61008 (November 16, 2009) containing the amendments to the Nasdaq Listing Rules is available here.

SEC Proposes Amendments to Rules Regarding Internet Availability of Proxy Materials

In an effort to improve notice of and access to proxy materials and increase participation by shareholders in proxy voting, the SEC proposed amendments to the proxy rules under the Securities Exchange Act of 1934 (the “Exchange Act”). The proposed amendments would provide issuers and other soliciting persons with additional flexibility in formatting and drafting the Notice of Internet Availability of Proxy Materials (the “Notice”). If adopted, the Notice: (1) would be required to address specified topics, in lieu of the mandatory boiler-plate legend currently required in the Notice; (2) would not be required to mirror the proxy card so long as the Notice identified each matter being considered at the meeting; and (3) would be permitted to be accompanied by an explanation of the process of receiving or reviewing the proxy materials and voting. The proposed amendments would also modify the filing deadlines for a non-issuer soliciting person utilizing the notice-only option for delivery of proxy materials. Comments to the proposed amendments were due by November 20, 2009. If adopted, the final rules could be effective for the upcoming proxy season.

The proposing SEC Release No. 34-60825 (October 14, 2009) is available here. The final SEC adopting release with respect to the notice and access proxy rules is SEC Release 34-55146 (January 22, 2007) and is available here.

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On September 15, 2008, the New Jersey Assembly and Economic Development Committee released a package of seven bills aimed at improving New Jersey’s corporate governance statutes. Since that date, all of the bills have been passed by the entire Assembly, and four of the proposed bills have been signed into law. The remaining bills, have been reported on favorably by the Senate Commerce Committee, but have not yet signed into law.

The bills are modeled on Delaware General Corporation Law, a historically corporation-friendly statute. Supporters of the bills believe that if and when these bills are passed into law, that New Jersey will become a more attractive state to incorporate in and do business. Among other things, the bills will make it easier for corporations to act quickly by using email and other progressive tools to conduct corporate business.

The new bills that have been signed into law:

• Allow corporate directors to provide the corporation with notice of resignation that would only be effective upon the occurrence of a particular event. This creates greater flexibility by allowing directors to submit resignations prior to the conclusion of an event. This bill was approved and signed by the Governor on January 27, 2009 and can be found at N.J.S. 14A:6-3.
• Permit a corporation to eliminate plurality voting for the election of directors in the bylaws of the corporation. Prior New Jersey law provided that a corporation may only eliminate plurality voting in its certificate of incorporation. The new bill gives corporations more freedom to adopt different voting methods for the election of directors after its incorporation. This bill was approved and signed by the Governor on January 27, 2009 and can be found at N.J.S. 14A:5-24.
• Update the definition of “foreign corporation” to mirror similar definitions used in the New Jersey Limited Liability Company Act and the Uniform Limited Partnership Law. The bill provides New Jersey corporations the option to merge with and acquire or consolidate with unincorporated entities, in addition to the limited liability companies and partnership previously permitted. In addition, the bill allows domestic corporations to create partnerships with foreign businesses. This bill was approved and signed by the Governor on November 20, 2009 and can be found at N.J.S. 14A:1-2.1.
• Provide that corporations may grant different types of equities from those traditionally used by corporations, thus recognizing the trend of granting more restricted stock grants in lieu of stock options. This bill was approved and signed by the Governor on November 20, 2009 and can be found at N.J.S. 14A:8-1.

The new bills that have not yet been signed into law but have been passed by the State Senate:

• Permit any corporate notice required under the New Jersey Business Corporations Act to be filed electronically. Electronic filing not only saves corporations time and money, but also grants more direct access to the corporation’s shareholders and directors. This bill was unanimously passed in the Senate on December 10, 2009.
• Improve the speed at which corporate transactions can take place by providing one- and two-hour services for expedited over the counter corporate service requests. Currently, the fastest filing service takes up to 8.5 hours from when the request is received. This bill was unanimously passed in the Senate on December 10, 2009.
• The passage of the proposed bills is the first step towards what Assemblyman Joseph Vas, a sponsor of these bills, desires “…a stimulation of economy, a boost in the private sector job growth, and help reverse the state’s reputation as being business unfriendly.”

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