Legislature Enacts Changes to Business Corporations Law
Just before the end of its Spring 2017 term, the Connecticut General Assembly passed HB7311. After the Governor signed HB7311, it became Public Act 17-108 (“P.A. 17-108” or the “Act”). Among other things, P.A. 17-108 enacted several significant changes to the Connecticut Business Corporation Act. These changes will go into effect on October 1, 2017.
Director Conduct and Liability Standards
Section 33-756 of the Connecticut General Statutes, currently prescribes standards for director conduct and generally limits director liability. The new Act repeals Section 33-756 and: (1) replaces it with new provisions that include changes to the director conduct standards; and (2) provide standards for director liability and requirements for lawsuits asserting liability against a director. A plaintiff suing a director for liability must: (1) establish that no defenses asserted by the director would preclude the director’s liability; (2) prove that the challenged conduct fit into one of five categories of wrongdoing set forth by the Act; and (3) overcome several other burdens, such as proving the plaintiff was harmed. The changes to director conduct standards include a new requirement that a director who has information that is material to the duties of the other directors and who knows that the other directors are not aware of the information must disclose it to the other directors, with certain exceptions for confidentiality and legal obligations.
Usurpation of Corporate Opportunity
Under common law, where a director becomes aware of a business opportunity, that director is obligated to make a corporation aware of such opportunity and must give that corporation the right to act before the director takes personal action with respect to that opportunity. The current statute, at Section 33-785, provides a safe harbor for a director to take advantage of an opportunity even if it would have been of interest to the corporation if the director first notifies the board of directors of the corporation about the opportunity and the board or shareholders disclaim the corporation’s interest in the opportunity. The new Act repeals §33-785 and replaces it with language that expands the safe harbor by: (1) applying it to officers of the corporation and persons related to officers as well as to directors; and (2) allowing the certificate of incorporation to limit or eliminate a director or officer’s duty to offer a business opportunity to the corporation, provided that, if an officer or a related person seeks to invoke such a provision of a certificate of incorporation in order to take advantage of a business opportunity, the “qualified directors” on the board must first approve the application of that provision. “Qualified directors” are disinterested, independent directors, as more specifically described in the statute.
Ratifying Defective Corporate Action
P.A. 17-108 establishes a process for ratifying and validating actions by a corporation that were not properly approved at the time they were taken. The Act explains that the process is not the only way to correct such actions. However, following the process set forth in the Act can assure a corporation that it has properly ratified or validated an action.
A “defective corporate action” is defined by the Act as (i) an action taken by or on behalf of a corporation that is, or was when taken, within its power but is void or voidable because it was not properly authorized by the corporation or (ii) an overissue (that is, more shares of stock were issued than were authorized by the certificate of incorporation, or were issued without corporate authorization). The Act describes the process to be followed and also requires that the corporation file a Certificate of Validation with the Secretary of State after the action is ratified or validated and, if any filing should have been made with the Secretary of State at the time of the original action or issuance of shares, that form should also be filed after the action is ratified or validated.
Shareholder Approval of Two-Step Merger
The Act provides a process by which a corporation may bypass shareholder approval in the case of a “two-step merger,” which occurs when a buyer first makes a tender offer of a corporation’s stock and then effects a merger with the corporation in order to acquire the remainder of the stock. Under current law (§33-817 of the C.G.S.), the plan of merger would require shareholder approval. P.A. 17-108 repeals §33-817 and replaces it with a new section that provides that if, as a result of the tender offer, the buyer acquires enough stock that it could approve the merger if there were a vote, the shareholders need not vote on the plan of merger. Specific requirements for the tender offer and merger process are set forth in the new section. The provision requires that shareholders be notified if there is no vote.