Updated Corporate Statutes Make New Jersey More Attractive to

Updated Corporate Statutes Make
New Jersey More Attractive to Businesses
An Analysis of the Recently Enacted Derivative Action Statute
by Edward T. Kole and Risa M. Chalfin
S
igned into law in 1968, New Jersey’s statute govern-
ment of a derivative action, a shareholder must provide writ-
ing shareholder derivative actions remained virtu-
ten demand to the corporation, allowing the corporate board
ally unchanged for more than 40 years.1 As corpo-
an opportunity to correct its actions outside of the scope of lit-
rate structures and governance mechanisms
igation.7 The purpose of the written demand is to encourage
evolved, New Jersey’s laws did not keep pace, and
the shareholder to exhaust all options within the corporate
the consequences were severe. In April 2013, New
structure before involving the courts and to relieve the court of
Jersey’s legislators finalized amendments to the state’s corporate
unnecessary intrusions into matters of corporate governance.
statutes to restrict unfounded shareholder derivative actions.
Largely based upon language within the American Bar Asso-
The much-needed amendments align New Jersey with sur-
ciation’s Model Business Corporation Act, this adaptation pro-
rounding jurisdictions, and should clear the courts of certain
vides the corporation and all of its shareholders with several
frivolous suits, streamline operations for existing companies
advantages.8 First, it protects the corporation from the harass-
and render the state fertile ground for emerging businesses.2
ment of frivolous lawsuits. Second, if issues exist the corporate
governing board may be able to resolve the problem without
Commencing a Derivative Action
costly litigation. By virtue of this, it also lessens the burden on
A shareholder derivative action allows a shareholder to bring
an already overburdened Judiciary. Finally, if litigation is nec-
a lawsuit against a corporation in order to stop or remedy a per-
essary, the corporation may be in an advantageous position to
ceived wrong by the corporation. The action allows a sharehold-
assume the suit with greater financial resources and increased
er to protect the interests of the corporation and compels the
knowledge of the alleged wrongdoing.
wrongdoer to compensate the corporation for any injury
caused.3 While protecting these essential rights of shareholders to
identify and address wrongdoing, New Jersey’s former statutes
Meeting Demands: The Role of Independent Directors
A corporation is required to have independent directors
left corporations susceptible to frivolous litigation initiated by
evaluate and respond to the shareholder’s demand. Indeed, the
opportunistic shareholders.4
amended statutes provide that once demand has been made,
Under the new statutes, to commence a derivative action an
the board has the right to reject it within 90 days to prevent the
individual must have been a shareholder of the corporation at
filing of a derivative suit. If the corporation rejects the demand
the time the alleged act or omission occurred, and throughout
and the shareholder still opts to move forward, the complaint
the derivative proceeding.5 Thus, the shareholder must be
must establish that the board or committee was not independ-
interested at the time of the wrongdoing, and must remain
ent and must allege the specific directors or board members
interested in order to bring a derivative action.6
who were not independent at the time of the decision.9 Therefore, maintaining independent directors is essential.10
The Demand Requirement: Opportunity to Cure
The test is straightforward: A director is independent only if he
The new provisions require that the shareholder provide
or she does not have a material economic interest in the chal-
the business entity with an opportunity to address the alleged
lenged act or transaction and does not have a close relationship
misconduct in anticipation of filing suit. Prior to commence-
with the directors or officers who have material interest in the act
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NEW JERSEY LAWYER | April 2014
53
or transaction in dispute.11 If, after a
the corporation’s principal office was in
overhaul to the corporate laws creates a
demand has been rejected, a proceeding is
New Jersey and significant business was
more equitable environment for corpo-
commenced, the corporation may move
conducted in the state at the time of
rations and shareholders alike. These
for dismissal asserting the board’s inde-
incorporation.
changes champion collaboration and
15
pendence and good faith. The court is
Additionally, the act now allows cor-
cooperation. They establish a critical
obligated to rule for a dismissal unless the
porations to engage in a business combi-
balance of power through reasonable
plaintiff can show the corporation’s deci-
nation with an interested stockholder if
thresholds, which is good for the busi-
sion was made in bad faith.
the board approves the transaction. An
ness community, public policy and judi-
interested stockholder is an owner of 10
cial efficiency.
12
The court may also dismiss a matter if
it is determined that maintaining a deriv-
percent or more of the outstanding vot-
ative proceeding “is not in the best inter-
ing stock. Pursuant to the new statute,
Endnotes
ests of the corporation” based upon a
business combinations are allowed with-
1.
determination in good faith by a majori-
in five years if approved by the board of
tive action statute, N.J.S.A. 14A:3-6,
ty of independent directors, a majority of
directors, or a committee of the board
had previously been amended once
a committee appointed by the board, or
not associated with the interested stock-
in 1973.
2.
The New Jersey shareholder deriva-
Governor Chris Christie signed three
a court-appointed panel. The court may
holder, and a vote of the majority of the
also base its dismissal on a vote of the
voting stock not owned by the interest-
majority shareholders, excluding those
ed stockholder. The purpose is to pro-
sey’s corporate governance more busi-
who benefited from the alleged adverse
mote a more open and free exchange.
ness-friendly: P.L. 2013, c.40, c.41, and
laws on April 1, 2013, to make New Jer-
16
act. These avenues for relief make clear
Amendments to the New Jersey Busi-
c.42, subsequently codified at N.J.S.A.
that the new statutes impose a higher
ness Corporation Act were also made to
14A:10A-1, et seq.; N.J.S.A. 14A:11-1, et
burden on the plaintiff to demonstrate
ease the ability of shareholders to partici-
the viability of the claim.13
pate in meetings. Pursuant to the new lan-
Additional Changes Benefit the
Corporation
seq.; and N.J.S.A. 14A:3-6.1 to 6.9.
3.
In re PSE&G Shareholder Litigation,
guage, shareholders can now participate in
173 N.J. 258, 277-78 (2002); Kamen
shareholder meetings and vote remotely.
v. Kemper Financial Svcs., Inc., 500
Finally, the remedy for a dissenting
U.S. 90, 95 (1991).
The new legislation has other note-
shareholder, or a shareholder refusing to
4.
See, N.J.S.A. 14A:3-6.
worthy changes making New Jersey a
consent to a merger or other business
5.
See, N.J.S.A. 14A:3-6.1, et seq.
more corporation-friendly state. Share-
combination, is to demand fair market
6.
See, N.J.S.A. 14A:3-6.2.
holders holding less than five percent of
value for his or her shares. Shareholders
7.
N.J.S.A. 14A:3-6.3.
the outstanding shares must post a secu-
may only bring an action if the corpora-
8.
Model Business Corporation Act
rity bond for the possible award of litiga-
tion has not complied with the amended
tion expenses, including attorney’s fees
rules, or if the corporation has engaged in
9.
that may be incurred by the corporation.
fraud or material misrepresentation. Thus,
10. N.J.S.A. 14A: 3-6.5.
Previously, if the value of a minority
shareholders’
11. N.J.S.A. 14A:3-6.5(7).
remedies
are
limited,
Section 7.40-7.4.
N.J.S.A. 14A:3-6.5.
shareholder’s shares was greater than
empowering the corporation to engage in
12. N.J.S.A. 14A:3-6.5.
$25,000 the shareholder could avoid
business decisions without the fear of
13. N.J.S.A. 14A:3-6.5(b)(3).
posting a bond. That value has been
superfluous litigation from shareholders.
14. N.J.S.A. 14A:3-6.8.
17
15. N.J.S.A. 14A:10A-1, et seq.
raised to $250,000, the first such change
since 1968, to be more in line with the
Conclusion
Model Business Corporation Act. In
The long-awaited amendments to New
16. N.J.S.A. 14A:10A-5.
17. N.J.S.A. 14A:11-1 et seq.
updating this value, the Legislature has
Jersey’s corporate laws are a strong nod to
again imposed a more reasonable stan-
the state’s existing corporations, which
Edward T. Kole is a shareholder at the
dard on the interested shareholder.
must revise their certificate of incorpora-
firm of Wilentz, Goldman & Spitzer, P.A.
tion in order to elect these new statutory
and chair of the business litigation depart-
also amended to change the definition
guidelines. Equally important, the Legisla-
ment, where he practices complex corporate
of “resident domestic corporation.” The
ture has opened the door to corporations
and commercial litigation. Risa M.
definition now includes all corporations
that previously shied away from New Jer-
Chalfin is an associate at Wilentz, Gold-
incorporated in New Jersey regardless of
sey due to less favorable corporate laws.
man & Spitzer P.A. practicing in the area of
14
The Shareholder’s Protection Act was
the location of operation, provided both
54
NEW JERSEY LAWYER | April 2014
Beyond the specific amendments, the
commercial litigation.
This article was originally published in the April 2014 issue of New Jersey Lawyer Magazine,
a publication of the New Jersey State Bar Association, and is reprinted here with permission.
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