The “Bite” of the New Jersey Shareholders Protection Act is Loosened - Business Friendlier Legislation is Enacted
Corporate & Finance Alert
April 19, 2013
As one component of a package of amendments to New Jersey’s corporation statute, the Legislature has lessened the impediment of the New Jersey Shareholders Protection Act to business combinations involving New Jersey corporations and “interested stockholders” (a stockholder beneficially owning, directly or indirectly, 10% or more of the corporation’s voting stock).
The Shareholders Protection Act, codified at N.J.S.A. 14A:10A-1 et seq., originally enacted in 1986, was intended to protect corporation’s employees, customers and suppliers, and the economy of New Jersey, from certain hostile takeovers. It’s reach has always been limited to “resident domestic corporations” which have a class of voting stock traded on a national securities exchange or registered with the United States Securities and Exchange Commission. See, N.J.S.A. 14A:10A-6(a).
“Resident domestic corporations” were defined as corporations organized under New Jersey law which either had its principal executive offices in New Jersey or significant business operations in New Jersey. Thus, the Act did not apply if, on a trigger date, the subject corporation (i) was not a public corporation, (ii) was not a New Jersey corporation or (iii) did not have nexus to the State either through an executive office or business operations. Notably, corporations organized under the laws of any jurisdiction other than New Jersey, even with a significant presence in New Jersey, have never been subject to the Act.
P.L. 2013, c.40, enacted on April 1, 2013, amends the definition of “resident domestic corporations” to eliminate the requirement that the New Jersey corporation have a further nexus to the State either through an executive office or business operations. However, existing New Jersey corporations not having the additional nexus to the State on the date of enactment are afforded the option to elect, within 90 days, not to be subject to the Shareholder Protection Act through the adoption by the board of directors of an amendment to the corporation’s by-laws.
After the 90 day election period which expires on June 30, 2013, the Act will apply to any New Jersey publicly-traded corporation, other than those which were eligible to opt-out and exercised the right to opt-out, regardless of the nexus to New Jersey through a principal executive office or significant business operations.
While the breadth of the corporations potentially subject to the Act may increase as a result of the amendments, the Act will also permit the closure of additional business combinations.
Prior to the recent amendments, the Act prohibited a business combination between a resident domestic corporation and an interested stockholder for a period of five years following the interested stockholder’s stock acquisition date (the date the person first becomes a 10% owner) unless the board of directors had approved the business combination prior to the applicable stock acquisition date. After the five year black-out period, business combinations between resident domestic corporations and an interested stockholder continued to be prohibited unless other conditions were met, such as approval by two-thirds of the shareholders or the payment of consideration meeting specified price criteria.
As amended, business combinations during the five year black-out period are permitted if the transaction or series of transactions which caused a person to become an interested stockholder was approved by the board of directors of the corporation prior to the applicable stock acquisition date and a subsequent business combination is approved by (i) wholly independent directors and (ii) a majority of the shareholders (excluding the shares owned by the interested stockholder).
Similarly, the scope of permissible business combinations after the five year period has been expanded to include a business combination approved by (i) wholly independent directors and (ii) a majority of the shareholders (excluding the shares owned by the interested stockholder), if the transaction or series of transactions which caused the person to become an interested stockholder was approved by the board of directors of the resident domestic corporation prior to the consummation of such transaction or series of transactions.
Finally, the Act has also been amended to provide that it will not apply to any stockholder who was the beneficial owner of 5% or more of the voting power of outstanding stock on its effective date (June 30, 2013), if the resident domestic corporation did not on such date have its principal executive offices or significant business operations located in New Jersey.
Dissenter’s Rights Exclusive Remedy When Applicable
In P.L. 2013, c.41, the Legislature also amended the dissenters’ rights provision of the New Jersey Business Corporation Act, N.J.S.A. 14A:-11-1, to provide that if a shareholder is entitled to dissent, a shareholder will not be entitled to challenge a corporate action regardless of whether the shareholder actually exercised the right to dissent. The foregoing will not preclude a shareholder from challenging a corporate action not effectuated in accordance with law or procured as a result of fraud or deception.
Dissenters rights apply to mergers and consolidations involving New Jersey corporations, other than corporations whose shares are publicly-traded or held by not less than 1,000 holders, where the consideration to paid in the merger is other than (i) cash, (ii) publicly-traded securities or (iii) a combination of the foregoing.