Alert: New Laws Affecting Maryland Businesses October 1 | Miles & Stockbridge PC

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On May 12, 2022, Governor Hogan signed several bills into Maryland law that affect the formation, ownership, and operation of businesses. Below is a summary of the new rules. Very interesting It is to create a legal process to sanction corrupt corporate actions. All changes will be effective October 1, 2022.

1. Approval of broken corporate operations

During due diligence, it is not unusual for a corporation to issue more stock than is legally permitted by its charter or make other management mistakes. Early-stage corporations, often lacking the resources to engage sophisticated financial or legal professionals, can become preoccupied with growth plans or simple survival and neglect basic corporate housekeeping. This type of legal malpractice and others like it are commonly known as “Corporate Malpractice” and can go undetected in corporations for years, only to be discovered at the worst possible time. Examples include:

  • Unauthorized issuance of shares of stock;
  • Rejection of the bylaws of the board of directors;
  • Failure of the board of directors to properly elect the officers of the corporation;
  • Corporate action in the absence of board resolutions authorizing the action;
  • failure to obtain necessary shareholder approval for corporate action;
  • failure to file with the Maryland State Department of Assessment and Taxation (“SDAT”) the required charter document; And
  • Failure to maintain evidence of payment of consideration for shares of stock to the corporation.

Corrupt corporate practices can be avoided in a variety of ways, but not necessarily what third-party buyers, investors, or creditors would prefer.

House Bill 996 / Senate Bill 879 (Chs. 289/ 290) The Maryland General Corporation Law (“MGCL”) adds a due process and safe harbor that allows a Maryland corporation to approve defective corporate actions and prevents the action from becoming void or void if a defective action is approved. The nature of the deed. This change in law creates a process to eliminate uncertainty and, in turn, can be a useful tool for Maryland corporations that are the target of an acquisition, investment or financial transaction.

The process set forth in the Act specifies certain information that must be included in an approval decision, as well as certain approvals required for approval. In some cases, it may also be necessary to submit supporting documents through SDAT. The requirements set forth in the Act depend on the nature of the authorization or corporate action, which initially required the act to be a valid corporate action. The period during which the approval is effective and binding on the corporation is similarly variable based on certain circumstances.

The law provides that compliance with the new process is not the only way to justify a defective corporate action and that failure to do so does not in itself create a presumption that the action is void or invalid. Therefore, the current common law adoption approaches are still available. As a counterbalance to the formal approval process created for the benefit of corporations, the Act provides a process for adversely affected parties to challenge approval in court.

2. Operating Agreements and Partnership Agreements Providing for the Transfer of Equity Interests Upon Certain Events

House Bill 342 / Senate Bill 261 (Chs. 294/ 295) Recently, the Maryland Court of Special Appeals in Potter v. Potter, 250 Md. Responding to its decision in Case App 569 (2021) In Potter, the Court held that where a person is subject to Maryland law on wills and holds an equity interest in an LLC or partnership, the transfer of the equity interest upon the person’s death is subject to Maryland’s laws of wills and probate. In essence, the ruling invalidates provisions in employment agreements and partnership agreements that allow a decedent’s interest in a company to be transferred to a non-equitable entity unless the formalities required by Maryland law are drafted and executed. Affidavits (eg testimony of two credible witnesses). The General Assembly’s legislation would eliminate that effect by allowing transfer on death provisions to be included in an employment contract or partnership agreement. The new law, regarding transfers on death, states that such provisions are not probate (and therefore not subject to probate), thereby maintaining an important tool for business succession planning.

3. Various improvements

As in many years, the General Assembly, through House Bill 999 / Senate Bill 431 (Chs. 292/ 293), It has amended certain sections of the MGCL to amend the law or to reflect developments in corporate governance. Some of the highlights of the bill are:

  • The term of existence of a corporation may now be limited to a certain period and/or to the occurrence of a certain event or act (as opposed to a fixed period of time). This allows asset managers who have long chosen to use Maryland corporations to establish certain registered and unregistered funds, allowing for maximum flexibility in the duration of the fund’s holdings.
  • A director wishing to object to a corporate action proposed at any board meeting attended by the director can now, along with other requirements to be met, submit their written opinion by electronic submission following the adjournment of the meeting (this requirement previously had to be completed by certified mail).
  • The effective time for the dissolution of the corporation is after the SDAT has received the articles of dissolution for filing or for a period not exceeding 30 days (the earlier effective time will run only upon the acceptance of the SDAT).
  • Various provisions of the MGCL have been expanded to include existing language that applies only to a specific entity, generally, generally, or to a specific entity not covered by the existing language, such as:
  • If the corporation is owned by another corporation in which it owns a majority of the voting shares, the corporation’s treatment of its own stock as indirect property of the corporation is extended to other (non-corporate) entities in which the corporation owns a majority. Choice needs.
  • The majority vote approval is required to waive any consolidation, merger or stock exchange proposed prior to the Effective Date by any entity’s governing body in the merger’s articles of incorporation (as opposed to previously listing only the board of directors). or Board of Trustees).
  • The list of types of organizations that a corporation is authorized to obtain insurance for a person serving in such entity, at the request of the organization, includes limited liability companies.

4. Using or correcting inappropriate or outdated addresses in registered documents

In submissions to SDAT, businesses are required to include addresses for various purposes (for example, business head office and resident agent address). Existing law prohibits the filing of a purchase deed or charter document with SDAT using an address that the entity is not authorized to use for that purpose or using an address inconsistent with Maryland law. Despite these requirements, SDAT has a limited basis for investigating outdated or incorrect addresses or enforcing compliance. Similarly, when a business sells, moves or closes, the new owner of the property in SDAT records has little option to separate the property from the former business entity.House Bill 390 / Senate Bill 447 (Chs. 287/ 288)Sponsored by SDAT, when a property owner suspects that an address is being used in a business legal record in violation of Maryland law, it will change it by allowing the property owner to submit an affidavit to SDAT. Upon receipt of the certificate, SDAT will notify the affected business of the suspected violation. Businesses receiving such notices have 45 days to reject the claim and, if not rejected, SDAT may revoke the governing document or charter document in question. In addition to this 45-day response period, the Act includes business procedures for correcting the claimed violation. The law is designed to ease the administrative burden, as well as the inconvenience to property owners, for example, when the service of process expires when the address is repeatedly issued. This relief would place the burden on businesses to monitor the status of addresses in all SDAT records and promptly update them when necessary, or the validity of the application could be jeopardized, or the business’ good standing with the State of Maryland could be compromised.

For many years, the attorneys at Miles & Stockbridge have held leadership positions on the Corporate Law Committee of the Maryland State Bar Association’s Business Law Section. That committee oversees Maryland’s general corporation law and other laws governing business entities in Maryland. If you have questions about the above laws or how they may affect your business, please contact our Corporate, Securities and Tax practice group for further assistance.

Opinions and conclusions in this article are solely those of the author unless otherwise stated. The information in this blog is general in nature and is not provided and cannot be construed as legal advice for any particular situation. The author provides the above links for informational purposes only and does not endorse or endorse their content by doing so. Any federal tax advice provided in this communication is not intended or written by the author, and may not be relied upon by the recipient, to avoid possible penalties imposed on the recipient by the IRS. If you would like to receive written advice in a format that complies with IRS rules and can be relied upon to avoid penalties, please contact the author.

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