Corporate Governance

Drafters, Nota Bene: A Review of Recent Changes in New Jersey Corporate Law with Drafting Implications

In 2018, the New Jersey State Legislature enacted significant changes to corporate law that, in the aggregate, mirror Delaware corporate law in relevant areas and were intended to make New Jersey a more competitive, business-friendly landscape. In 2019, we can expect to see the effects of those changes, with legal practitioners and their corporate clients increasingly taking advantage of the revisions, which largely embrace the technological realities of our changing times and may afford companies more convenient, facile ways of conducting their corporate business.

Let’s review some of those changes that affect companies seeking to incorporate or maintain business operations in New Jersey, and look ahead to what should, and probably will, occur as a result of the new features of the New Jersey Business Corporation Act (NJBCA):

  • Corporate directors unable to transmit a signed written consent can now approve actions without a meeting by means of electronic transmission. See N.J.S.A. 14A:6-7.1(5). Previously, absent an alternate directive in a corporation’s certificate of incorporation or bylaws, directors could consent to an action, without voting at a meeting (whether in person or by teleconference), only by written consent signed by all directors. Now, directors can provide their consent by sending emails (among other forms of electronic transmission) to that effect. Recognizing that modern modes of communication compelled this change, New Jersey embraced what other states, including Delaware, had already acknowledged was a reality in the digital age.
  • Bylaws may now be drafted to explicitly include a forum selection clause providing that federal and state courts in New Jersey be the sole forums for certain actions enumerated under the statute involving the internal affairs of a corporation. See N.J.S.A. 14A:2-9(5)(a). Indeed, derivative suits brought on behalf of the corporation, and shareholder actions asserting breach of fiduciary duty claims, among other actions, may now bind the claimants to file those actions in New Jersey courts. This will likely curb attempts at forum-shopping and reduce pretrial wrangling over where to litigate, which, in turn, could spare corporate defendants the sizable litigation expenses connected with such actions.

N.J.S.A. 14A:2-9(5)(b) further specifies that, by virtue of an exclusive forum provision being inserted into the bylaws of the corporation, the current and former directors and officers will be deemed to have consented to the personal jurisdiction of New Jersey courts. The statute limits the reach of the forum selection clause in the event that the provision was adopted not in the corporation’s initial bylaws, but by a later amendment, requiring that the clause and its personal jurisdiction requirement apply only to actions initiated post-amendment that assert claims arising post-amendment. Finally, the statute provides relief for corporations subjected to actions filed outside of New Jersey courts in violation of the forum selection restriction in their bylaws; shareholders will be liable for reasonable costs incurred in enforcing the requirement, including, without limitation, the reasonable attorneys’ fees of the corporate defendants. See N.J.S.A. 14A:2-9(5)(b).

  • Bylaws may also now indicate conditions or restrictions under which a proxy statement may include information on shareholder-nominated individuals for election to the corporation’s board of directors. The statute contains a nonexclusive list of examples of such conditions, including, without limitation, a condition requiring the nominating shareholder to own a minimum level of beneficial ownership of shares, and a condition limiting the nomination of directors who were previously nominated.
  • Merger and consolidation transactions are also impacted by the recent changes. A plan of merger or consolidation may now include a force-the-vote provision. Under such a provision, in the context of a merger, for instance, the directors of a target company must submit the proposed transaction to a vote of the target’s shareholders even if the target’s board no longer recommends the transaction. Such a force-the-vote provision provides deal-protection generally favored by buyers concerned that the target will receive other offers, and gives the buyer an advantage over other bidders because forcing a shareholder vote triggers a lengthy process that includes, among other things, obtaining regulatory approvals and other third-party consents. The resulting delay can be a deterrent for potential bidders, and as a result, shareholders often vote for the deal in hand rather than wait for the mere prospect of a future deal, even at a potentially higher price.
  • Another change in the context of a merger or consolidation permits directors to amend a plan of merger or consolidation after the shareholders have formally approved and adopted the plan, except where the amendment would alter or change any of three factors: the amount or kind of consideration received by the shareholders; the terms of the certificate of incorporation of the surviving corporation; or any terms and conditions of the plan if the change would materially and adversely affect the shareholders of either corporation who are or were entitled to vote on the plan. If any of the aforementioned circumstances exist, the plan of merger or consolidation must be resubmitted for shareholder approval. In the event the plan of merger or consolidation is amended after the filing of a certificate of merger or consolidation is filed with the secretary of state, but prior to its becoming effective, a certificate of amendment of merger of consolidation must be filed.

Previously, the provisions of the NJBCA concerning derivative proceedings and shareholder class actions applied only if a corporation’s certificate of incorporation explicitly made them applicable. In an important shift, the statute now makes those provisions the default positions unless corporations indicate otherwise in their certificates of incorporation.

Legal practitioners and corporations should assess whether these recent changes warrant a revision to a corporation’s governing documents or a change to relevant transaction agreements.

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