PA 17-108—sHB 7311
AN ACT CONCERNING LIMITED LIABILITY COMPANIES AND BUSINESS CORPORATIONS
SUMMARY: This act makes numerous changes to statutes governing business corporations and limited liability companies (LLCs). Principally, it (1) revises the Connecticut Business Corporation Act (§§ 1-24, 44 & 45) and (2) makes minor and technical changes to the Connecticut Uniform LLC Act, which was passed in 2016 and took effect July 1, 2017 (§§ 25-42).
With respect to corporations, the act does the following:
1. establishes standards for director liability that are separate from standards for director conduct (§§ 1 & 2),
2. establishes a statutory process for corporations to ratify and validate certain defective actions (§§ 3-10),
3. allows a corporation's certificate of incorporation to waive or limit a requirement that directors and officers disclose certain outside business opportunities (§§ 11-14),
4. establishes a process for a merger or share exchange to take place without shareholder approval (§§ 15-19),
5. allows the certificate of incorporation or bylaws to require that any or all internal corporate claims be brought exclusively in certain courts (§ 20), and
6. makes minor changes to certain definitions (§§ 21-24, 44 & 45).
The act also requires the secretary of the state (SOTS) to report to the Judiciary Committee, by January 1, 2018, on potential funding sources that may be available to modify and update, or replace, the CONCORD commercial records database in order to promote and enhance the implementation of business friendly initiatives (§ 43). Lastly, it makes numerous minor, technical, and conforming changes.
EFFECTIVE DATE: Upon passage for the SOTS report; July 1, 2017 for the Uniform LLC Act provisions; and October 1, 2017 for the corporation-related provisions.
§§ 1-24, 44 & 45 — CONNECTICUT BUSINESS CORPORATION ACT
Standards for Director Conduct and Liability (§§ 1 & 2)
Prior law prescribed standards of conduct that corporate directors had to follow and provided that a director was generally not liable for actions, or failure to take actions, if he or she acted in conformance with these standards. The act (1) instead establishes separate standards for director liability and (2) makes minor changes to the conduct standards (e.g., explicitly requiring a director, unless limited by confidentiality and professional ethics rules, to disclose certain material information to other board or committee members if the information is not known to them).
With respect to liability, the act requires that the party asserting liability against a director establish that no defense interposed by the director precludes liability. These defenses are based on the following:
1. provisions in the certificate of incorporation that (a) limit the amount of money damages a director may personally be liable for or (b) allow him or her to pursue outside business opportunities (see §§ 11-14 below) and
2. provisions in existing law that allow a director, under certain circumstances, to participate in a conflicting interest transaction or take advantage of a business opportunity.
The party asserting a director's liability must also establish that the challenged conduct consisted of or was the result of at least one of the following:
1. an action not in good faith;
2. a decision the director (a) did not reasonably believe to be in the corporation's best interests or (b) was not informed about to an extent he or she reasonably believed appropriate;
3. a lack of objectivity due to a relationship (e.g., familial or business) with, or lack of independence from, another person with a material interest in the challenged conduct, and the director did not establish that the challenged conduct was reasonably believed to be in the corporation's best interest;
4. the director's sustained failure to devote attention, or timely attention, to ongoing oversight of the corporation's business and affairs; or
5. the director receiving a financial benefit to which he or she was not entitled, or any other breach of his or her duties to deal fairly with the corporation and its shareholders.
The act also establishes additional burdens on the party asserting liability (e.g., proving harm) based on the type of damages sought.
The act specifies that it does not alter (1) a director's liability under provisions in existing law that provide for liability in specific instances, such as unlawful distributions or transactional interests, or (2) the burden of proving fairness or lack thereof in instances where fairness is at issue. Additionally, it does not affect any corporation or shareholder rights under the U.S. Code or other provisions in state law.
Ratifying and Validating Defective Corporate Actions (§§ 3-10)
The act establishes a statutory process under which corporations may ratify or validate defective corporate actions, including an overissue of shares. It specifies that these provisions are not the exclusive means for ratifying or validating defective actions and explicitly authorizes the Superior Court to declare defective actions valid.
Definitions. Table 1 lists the definitions of certain terms relevant to this process.
Table 1: Related Definitions
Any action taken by or on behalf of the corporation
Defective corporate action
(1) A corporate action purportedly taken that is within the corporation's power (and was within its power at the time it was purportedly taken) but is void or voidable because of a failure of authorization or
(2) an overissue (see below)
Failure of authorization
Failure to authorize, approve, or otherwise effect a corporate action in accordance with state corporation laws, the corporation's certificate of incorporation or bylaws, a corporate resolution, or any plan or agreement to which the corporation is a party, if and to the extent the failure would render the corporate action void or voidable
The purported issuance of shares of a class or series (1) exceeding the number of shares the corporation had the power to issue at the time of the issuance or (2) not then authorized for issuance by the certificate of incorporation
Shares of any class or series created or issued as a result of a defective corporate action that (1) would be valid but for the failure of authorization or (2) cannot be determined by the board of directors to be valid shares
Process. To ratify a defective corporate action, the board of directors must take an action that states the following:
1. the defective action to be ratified and, if applicable, the number and type of putative shares purportedly issued;
2. the date of the defective action and nature of the authorization failure; and
3. that the board of directors approves the ratification of the defective action.
Under the act, the quorum and voting requirements that apply to the directors' ratifying action are the same as those that apply to the action to be ratified. The act also specifies the conditions under which the board may abandon ratification.
The act establishes a separate process for ratifying the election of the corporation's initial board of directors. Under this process, a majority of the persons exercising directors' powers at the time of ratification may take an action that states the following:
1. the name of the person or persons that first acted in the corporation's name as its initial board of directors;
2. the date on which they first took such action or were purported to have been elected as the initial board, whichever is earlier; and
3. that the ratification of the election of the initial board of directors is approved.
Shareholder Approval. The act requires shareholder approval for the ratification of all defective corporate actions if such approval would have been required for the initial action. It establishes notice, quorum, voting, and other procedural requirements for shareholders' approval of the ratification (e.g., notice of the timeframes for bringing claims related to the validation).
If the ratification of a defective action does not require shareholder approval, the act requires the corporation to notify all holders of valid and putative shares of the ratification. The act specifies the notice's required contents.
Ratification Resulting in an Overissue. Under the act, if ratifying putative shares would result in an overissue, the corporation must also amend its certificate of incorporation to (1) increase the number of shares of a class or series or (2) create a new class or series.
Filings. Under the act, if a defective corporate action would have required a filing under state corporation laws, then the corporation must file a certificate of validation with SOTS, regardless of whether a filing was previously made. The certificate must identify:
1. the defective action and the date it was taken, including information about any putative shares issued;
2. the nature of the failure of authorization;
3. a statement that the defective action was ratified under the act's provisions, including the date of ratification and shareholder approval, if applicable; and
4. information about any previous filings relating to the action.
If a filing was not previously made but would have been required to effect the defective action, then such a filing must be attached to the certificate. The act specifies that the certificate of validation amends or substitutes for any other required filing with respect to the defective action.
Effect of Ratification. Under the act, ratification becomes effective upon the later of (1) shareholder approval or, if shareholder approval is not required, when notice to the shareholders becomes effective and (2) the time at which the certificate of validation becomes effective. The act refers to this as the “validation effective time.” Unless ordered by the court, the validation effective time is not affected by pending judicial proceedings.
A defective corporate action ratified under the act is deemed a valid corporate action as of the date of the defective action. Putative shares are deemed identical shares or fractions of valid shares as of the time they were purportedly issued. The act makes actions taken in reliance on the defective action, as well as subsequent defective actions resulting directly or indirectly from the original defective action, valid as of the time taken.
Court Action. The act allows the Superior Court to (1) determine the validity and effectiveness of any corporate action or defective corporate action, or ratification of a defective action; (2) determine the validity of any putative shares; and (3) modify or waive the act's procedures for ratifying defective corporate actions. It requires that any action challenging the ratification of a defective action or putative shares be brought within 120 days after the validation's effective date.
Notice of Directors' and Officers' Business Opportunities (§§ 11-14)
Existing law provides a safe harbor for a director considering possible involvement (whether directly or indirectly) with a prospective business opportunity that might constitute a “corporate opportunity.” It allows a director to present a business opportunity to the board or its shareholders for consideration. A director who receives a disclaimer of the corporation's interest in the matter may pursue the opportunity on his or her own behalf with protection from damages or other remedies in a lawsuit brought by the corporation or its shareholders. (Under the common law corporate opportunity doctrine, a corporation has a right to act before its director does on certain business opportunities that come to the director's attention.)
The act expands this safe harbor protection to cover a corporation's officers, not only its directors. It also allows corporations to include in the certificate of incorporation a provision that limits or eliminates a director's, officer's, or other person's duty to offer the corporation potential business opportunities before these persons pursue the opportunity themselves. In order to apply such a provision to an officer or person related to the officer, the board of directors must approve the application, after the provision's effective date, by action of qualified directors following existing procedures for authorizing conflict of interest transactions. The board may also limit any application to officers or persons related to them.
Existing law generally defines “qualified directors” as those who, with respect to certain actions, are disinterested and independent (i.e., have no conflict of interest). For purposes of limiting or eliminating an officer or related person's corporate opportunity duties, the act defines “qualified director” as one (1) to whom the limitation or elimination of an officer's duties to offer potential business opportunities would not apply and (2) who does not have a material relationship with any other person to whom the limitation or elimination would apply.
Existing law defines a “director's conflicting interest transaction” as, among other things, one in which the director knew that a related person was a party or had a material financial interest. The act makes various changes to the law's definition of “related person” for purposes of conflicting interest transactions and corporate opportunities. First, it expands the definition to include people related to officers and other individuals, not just people related to directors as under prior law. It also adds the following familial relations with respect to the individual or individual's spouse: stepchild, stepparent, grandparent, stepsibling, half-sibling, aunt, uncle, niece, or nephew, or the spouse of any such individual. Finally, it removes a reference to trusts or estates to which a related person is a substantial beneficiary.
The act also makes various minor and technical changes (e.g., requiring that the certificate of incorporation include the mailing address, not just the street address, of the corporation's initial registered office).
Shareholder Approval of Two-Step Mergers (§§ 15-19)
Generally, a two-step merger is one in which the buyer first makes a tender offer to acquire the target company's stock. In the second step, the buyer commences a “back-end” merger to acquire the target company's stock not acquired under the tender offer. Under prior law, the plan for such a merger or share exchange was generally subject to shareholder approval.
The act establishes a process under which a plan of merger or share exchange may be effectuated without shareholder approval unless the certificate of incorporation provides otherwise.
Definitions. Table 2 lists the definitions of certain terms relevant to this process.
Table 2: Related Definitions
A person that owns, directly or indirectly, through one or more wholly owned subsidiaries, all of a corporation's outstanding shares
With respect to shares tendered in response to an offer, “purchase” means that the offeror has irrevocably accepted them for payment and (1) if the shares are represented by certificates, the offeror or agent has physically received the certificates, or (2) if the shares do not have certificates, the shares have been transferred to the offeror's or agent's account, or the offeror or agent has received an agent's message relating to the shares
Wholly owned subsidiary
With respect to a person, a wholly owned subsidiary is an entity of or in which that person owns, directly or indirectly, through one or more wholly owned subsidiaries, all of the outstanding shares or interests
Process. Under the act, each of the following requirements in the process must be met.
1. The plan must expressly permit or require that it be effected under the act's provisions as soon as practicable after the tender offer (see Tender Offer below).
2. Another party to the merger, the acquiring corporation in the share exchange, or a parent of such entities, must offer to purchase any and all outstanding shares that, absent the act's provisions, would be entitled to vote on the merger or exchange. The offer may exclude shares owned at the commencement of the offer by (a) the corporation; (b) the offeror or offeror's parent; or (c) a wholly owned subsidiary.
3. The offer must disclose that shares of the corporation not tendered in response to the offer will be acquired for the same consideration set forth in the tender offer (see Outstanding Shares below).
4. The offer must remain open for at least 10 days.
5. The offeror must purchase all shares properly tendered and not properly withdrawn.
6. After the tender offer closes, the buyer must own enough shares to cast at least the minimum number of votes on the merger or exchange that would otherwise be required for approval under existing law and the certificate of incorporation (see Tender Offer below).
7. The offeror or wholly owned subsidiary merges with or into the corporation, or effects an exchange in which it acquires shares of the corporation.
8. Shares of the corporation not tendered in response to the offer must be acquired for the same consideration set forth in the tender offer (see Outstanding Shares below).
Tender Offer. Under the act, the shares identified below must be collectively entitled to cast at least the minimum number of votes on the merger or exchange that would otherwise be required for approval under existing law and the certificate of incorporation. These include the following shares:
1. shares purchased by the offeror in accordance with the offer;
2. shares otherwise owned by the offeror or offeror's parent or wholly owned subsidiary; and
3. shares subject to an agreement that are to be transferred, contributed, or delivered to the offeror, parent, or subsidiary in exchange for shares in the offeror, parent, or subsidiary.
Outstanding Shares. Under the act, each share of each class or series of shares that the offeror offers to purchase, but does not purchase, must be converted into the same amount and kind of securities, interests, obligations, rights, cash, or other property to be paid or exchanged in accordance with the offer for each share of the class or series tendered in response to the offer. The act specifies that certain types of shares (e.g., those owned by the offeror) do not need to be converted into, or exchanged for, consideration.
Other Provisions. The act allows a certificate of incorporation to limit or eliminate, for a merger or share exchange, the separate voting rights possessed by certain classes or series of shares. This provision does not apply if the merger or exchange (1) includes what is or would be in effect an amendment to the certificate of incorporation and (2) does not effect a substantive business combination.
Lastly, the act makes numerous minor, technical, and conforming changes governing mergers and share exchanges. For example, it specifies (1) that shareholders are entitled to appraisal rights (i.e., a judicial determination of a share's fair value) in connection with the mergers and exchanges authorized under the act and (2) how shareholders must assert their appraisal rights. It also specifies that a certificate of incorporation cannot limit or eliminate appraisal rights if the class or series does not have the right to vote separately on the action as a voting group alone or as part of a group.
Forum for Internal Corporate Claims (§ 20)
The act allows a corporation's certificate of incorporation or bylaws to require that any or all internal corporate claims be brought exclusively in one or more Connecticut courts or any additional courts in Connecticut or other jurisdictions with which the corporation has a reasonable relationship.
The act specifies that such a provision does not apply if the specified courts do not have the requisite personal and subject matter jurisdiction. It allows a claim to be brought in a state court not specified in the provision if (1) the court has personal and subject matter jurisdiction and (2) none of the specified state courts has such jurisdiction. The act prohibits the certificate of incorporation or bylaws from barring the use of Connecticut courts for internal corporate claims or requiring that they be determined by arbitration.
The act defines an internal corporate claim as follows:
1. a claim based on a violation of a duty under state law by a current or former director, officer, or shareholder in such capacity;
2. a derivative action or proceeding brought on behalf of the corporation;
3. an action that asserts a claim under the state's corporation laws or the certificate of incorporation or bylaws; or
4. any other action asserting a claim governed by the internal affairs doctrine.
Definitions (§§ 21-24, 44 & 45)
The act makes several minor and technical changes to definitions used in the Connecticut Business Corporation Act. For example, it adds definitions to conform to other changes made by the act (e.g., “acquired” and “acquiring” corporation). It also makes certain definitions (e.g., “merger” and “share exchange”) applicable to the entire act, rather than just a specific group of statutes as under prior law.
§§ 25-42 — CONNECTICUT UNIFORM LLC ACT
In 2016, the legislature enacted the Connecticut Uniform LLC Act (PA 16-97), which became effective July 1, 2017, and replaced prior state law governing LLCs. This act makes several minor and technical changes to the uniform act, including the following:
1. replacing the phrase “certificate of good standing” with “certificate of legal existence” and eliminating provisions that specify the certificate's required contents;
2. replacing several references to “statement” with references to “certificate”;
3. specifying that the fee for a certificate of legal existence for a foreign LLC is the same as the fee for a certificate for a domestic LLC ($50);
4. requiring a foreign LLC to disclose, in its annual report filed with SOTS, the street and mailing address it uses in its home jurisdiction (it must already disclose this information in its registration certificate);
5. eliminating a requirement for a foreign LLC to file an amendment to its registration certificate with SOTS if its address, registered agent, or agent's address changes (under existing law, these changes are disclosed using other forms, such as a change of agent certificate);
6. specifying that the deadline for a merging LLC to amend or abandon the merger is when the certificate of merger becomes effective, rather than when it is delivered to SOTS; and
7. requiring only the surviving LLC, rather than each merging LLC, to deliver a certificate of merger to SOTS.
Additionally, prior law required a foreign LLC to apply to SOTS for a registration transfer if it merged into a foreign entity that is not registered to transact business in Connecticut or converted to a foreign entity required to register with the secretary. The act limits the use of a registration transfer to mergers in which the foreign LLC merges into another foreign LLC.