Nebraska’s New Model Business Corporation Act – An Overview for Corporations
Nebraska has adopted a new corporations act, the Nebraska Model Business Corporation Act (the "New Act"), which will become effective on January 1, 2017 (the "New Act Effective Date"). Existing corporations do not need to make any elections to adopt the provisions of the New Act, as all corporations will be governed by the New Act effective as of the New Act Effective Date. This article highlights some of the material differences between the New Act and Nebraska’s existing Business Corporation Act (the "Current Act").
Shares and Distributions
The New Act provides Nebraska corporations greater flexibility regarding shares and distributions. For example, if a corporation’s articles of incorporation so provide, the New Act permits a board of directors, upon unanimous approval, to reclassify any unissued shares of any class or series of shares without shareholder approval. In addition, the New Act also allows a board of directors to authorize officers of the corporation to designate the recipients of equity compensation grants or awards and determine (within the amounts and other limits set forth by the board of directors) the number and terms of such awards and grants. Under the Current Act, shareholders holding at least 2/3 of the shares entitled to vote are needed to approve the issuance of a new class of shares as a dividend. The New Act lowers the threshold required to approve a share dividend to the approval of a simple majority of shares entitled to vote.
The New Act also adds a requirement for shareholder approval of share issuances in certain circumstances. If new shares are being issued for consideration other than cash and the voting power of the shares issued will comprise more than 20% of the voting power immediately before the share issuance, then shareholder approval is required for the share issuance.
In addition to greater flexibility regarding shares and distributions, the New Act gives shareholders greater flexibility regarding corporate participation. For instance, the Current Act requires that directors be elected at an annual meeting of the shareholders. The New Act allows the shareholders to elect directors by written consent at any time, provided that the shareholders act with unanimous written consent in order to elect directors. Both the New Act and the Current Act set a default threshold of 10% of a company’s voting shares required to call a special meeting of the shareholders. However, the New Act permits a corporation’s articles of incorporation to deviate from this 10% to a higher or lower percentage of votes required to call a special meeting, provided that such percentage cannot be greater than 25% of the votes entitled to be cast at such special meeting.
The New Act also provides some updates regarding electronic and digital participation of shareholders. The New Act specifically allows for the use of electronic signatures, and permits shareholders, upon their consent, to receive electronically communicated notices of corporate action. The New Act even allows a corporation to require that notices of meetings to directors be delivered electronically. However, there are certain formalities required in connection with these changes. For instance, if remote communication will be utilized at a shareholder or board meeting, the New Act requires the notice for the meeting to include a record date for determining whether a quorum participated, and requires the notice to indicate that participation by remote communication will occur at the meeting.
The New Act also governs conduct at shareholder meetings, requiring a chairperson to preside as appointed by the bylaws, or as appointed by the board in the absence of such a provision in the bylaws. Under the New Act, and in the absence of a provision in the bylaws to the contrary, a chairperson presiding at a meeting has wide authority to establish rules to conduct business at the meeting and govern conduct, as long as such rules are fair to the shareholders.
The New Act permits a corporation’s articles of incorporation to provide that the shareholders may take any action by written consent that could be taken at a shareholders meeting, so long as the holders of shares having not less than the number of votes that would be required to take that action at a meeting have signed such written consent. This is a significant deviation from the Current Act, which required unanimous shareholder consent for any action to be taken by written consent. However, in order to permit shareholders to act via written consent without unanimous shareholder approval, a corporation’s articles of incorporation will need to be amended to permit such action without unanimous shareholder consent. Additionally, as discussed above, if directors are to be elected via written consent, unanimous shareholder consent will still be required for such action. After the consent is effective, notice must be provided within 10 days to any shareholders who did not participate in the consent. Additionally, where the New Act requires that notice of an action be provided to non-voting shareholders, such notice must be provided within 10 days after the action, which is a change from the Current Act’s requirement that such notice be provided to non-voting shareholders 10 days before the action is taken.
Under the Current Act, voting trusts and shareholders agreements may not exceed 10 years in duration. However, under the New Act, a voting trust or shareholders agreement that takes effect after the New Act Effective Date may continue indefinitely. Voting trusts and shareholders agreements created prior to the New Act Effective Date will remain subject to the 10-year maximum limit.
The New Act continues the Current Act’s provisions that shareholders are not entitled to preemptive rights to acquire unissued shares of stock unless the shareholders are granted such rights in the articles of incorporation or another agreement between the corporation and its shareholders. However, under Nebraska corporate law existing prior to the adoption of the Current Act, shareholders of a Nebraska corporation organized prior to January 1, 1996, were entitled to preemptive rights. Recently adopted amendments to the New Act continue a provision from the Current Act that for Nebraska corporations organized prior to January 1, 1996, shareholders of such corporations will continue to have preemptive rights if the articles of incorporation in effect on or after January 1, 1996, did not expressly eliminate such preemptive rights. If your corporation was formed prior to January 1, 1996, and the corporation has determined that its shareholders should not have preemptive rights, the corporation’s articles of incorporation should be amended to specifically exclude preemptive rights of its shareholders.
Directors and Officers
Although the New Act eliminates the requirement that all shareholders must consent to action without a meeting, the New Act retains the obligation that if the board of directors is to act without a meeting, all directors must consent to such action. Accordingly, if certain directors are unsure whether all directors will support a proposed action, holding a special or regular meeting of the board of directors is recommended.
One revision adopted by the New Act impacts the duty of an officer of the corporation. The New Act creates affirmative duties of an officer to: 1) inform his/her superior officer or the board about information known to the officer within his/her functions and known to the officer to be material to his/her superior officer or the board; and 2) inform his/her superior officer, the board or another appropriate person within the corporation of an actual or probable material violation of law involving the corporation or a material breach of duty to the corporation by another officer, employee or agent of the corporation.
The New Act also provides that the right to indemnification or advances for expenses for directors and officers that is in effect at the time of an event cannot be eliminated or impaired by a later amendment to the articles of incorporation or bylaws or by a resolution adopted after the event occurs.
Many corporations organized under the laws of another state (such as Delaware) choose to domesticate in Nebraska rather than qualify to conduct business as a foreign corporation in the State of Nebraska. Often, the primary reason for choosing to domesticate rather than simply qualify as a foreign corporation within the State of Nebraska is to decrease the Nebraska occupation tax paid by the foreign corporation. Pursuant to amendments to the New Act that were recently passed, a corporation domesticated prior to the New Act Effective Date will retain its status as a domesticated corporation for all purposes. Also, a foreign corporation which has not previously domesticated in Nebraska will still have the right to become a domesticated corporation under the provisions of the New Act.
Amendments to Articles of Incorporation
The New Act reduces the minimum voting threshold by which an amendment to the articles of incorporation may create dissenters’ rights. The Current Act requires the approval of 2/3 of the shares entitled to vote in order to approve an amendment to the articles of incorporation to create dissenters’ rights. Under the New Act, regardless of whether an amendment will create dissenters’ rights, a simple majority of the shares entitled to vote may approve an amendment to the articles of incorporation. However, under the New Act, a greater threshold of approval votes than that required by statute to amend the articles of incorporation may be provided for in either the articles of incorporation or the board of directors conditioning submission of a proposed amendment to the shareholders.
Mergers and Acquisitions
Under the Current Act, a sale of all or substantially all of a corporation’s property other than in the usual and regular course of business required shareholder approval. The shareholder approval under the Current Act to approve such a sale is 2/3 of all shares entitled to vote. However, the Current Act does not define what constitutes a sale of "all or substantially all" of a corporation’s assets, leaving such a decision to judicial interpretation. If a corporation decides to sell its assets, the New Act provides an objective test to replace the Current Act’s standard, and the New Act also decreases the shareholder vote threshold to approve such an action. Under the New Act, a sale of assets not in the usual and regular course of business requires approval of the shareholders if such sale would leave the corporation without a significant business activity. If the corporation retains a business activity that represented at least 25% of its total assets as of the end of the most recent fiscal year and 25% of income from continuing operations before taxes or revenue for that fiscal year, then the corporation will be deemed to have retained a significant business activity such that a shareholder vote is not required for the sale. Additionally, the New Act provides that if a shareholder vote for a sale of assets is required, such approval only needs to consist of a majority of shares at a meeting at which a quorum exists rather than 2/3 of the shares entitled to vote under the Current Act.
The New Act changes several provisions from the Current Act with respect corporations that voluntarily dissolve. The shareholder approval required for dissolution under the New Act consists of approval by only a majority of shares at a meeting at which a quorum exists, rather than the Current Act’s requirement of 2/3 of the shares entitled to vote. The New Act also decreases the time period during which unknown claims against the dissolved corporation must be made before they are barred. Under the Current Act, after notice of dissolution has been published, a claimant has up to 5 years to bring an action against the dissolved corporation before the claimant’s action is barred. Under the New Act, this time period has been decreased to 3 years after publication of dissolution by the corporation.
Although the New Act does not require a corporation to make any amendments to its articles of incorporation or bylaws, directors and shareholders of corporations should consider whether to make any revisions to their articles of incorporation or bylaws based on the provisions of the New Act. Please contact any member of our Business and Transactions Practice Group to discuss the provisions of the New Act and its possible impact upon your corporation.
by Helmut E. Brugman and Grant Mullin