New Jersey Adopts Significant Changes Affecting Shareholder Derivative Lawsuits and Shareholder Rights

By Sean Mack, Esq.
smack@pashmanstein.com

On April 1, 2013, Governor Christie signed into law three bills designed to impose greater restrictions on shareholder derivative suits and to make New Jersey’s corporate governance law more business-friendly.

The new legislation permits companies to opt-in or out of certain provisions.   Company’s should therefore quickly review and understand these changes, and if desirable, adopt and file an appropriate amendment to their certificate of incorporation or bylaws.

The new legislation, which amends N.J.S.A. 14A:3-6, governs derivative lawsuits brought by minority shareholder(s) against the corporation, its directors and officers.

Under the new legislation, prior to the initiation of a derivative lawsuit, the complaining shareholder must make a written demand on the corporation for action.  Absent a demonstrable “irreparable injury to the corporation,” no lawsuit can be filed until the earlier of, the shareholder receiving a written rejection of the demand, or the passing of ninety days from the date of the written demand.  If the shareholder commences litigation after demand has been rejected, the complaint must meet a heightened pleading standard showing particular facts establishing that a majority of the board of directors, or all members of a committee, who determined the matter, did not consist of independent directors at the time the decision was made.

The new legislation provides additional grounds for moving to dismiss a derivative suit.  A court must dismiss a derivative lawsuit if the court finds that independent directors or a majority of independent shareholders have determined that the suit is not in the best interests of the corporation.  Specifically, the law permits the establishment of an independent committee of 1 or more directors, and a court shall dismiss a derivative complaint if the majority of the independent committee has determined in good faith, after reasonable inquiry, that the derivative proceeding is not in the best interests of the corporation.  A corporation also may request that the Court appoint an independent panel of one or more individuals to determine whether the maintenance of the lawsuit is in the best interests of the corporation, and provides that the plaintiff shall have the burden to demonstrate to the panel that the suit is in the best interests of the corporation.

To help ensure that the plaintiff shareholder fairly and adequately represents the interests of the corporation, in addition to being a shareholder at the time of the complained of conduct or having received the shares by operation of law from someone who held them at the time, the new legislation requires that a suing shareholder continue to be a shareholder during the course of the litigation.

The legislation also expressly mandates that the shareholder pay the corporation’s reasonable expenses if the court determines that the proceeding was brought without reasonable cause or for an improper purpose.  Also, for any shareholder holding less than 5% of the corporation’s stock, which is worth less than $250,000, the plaintiff shareholder must post a bond to cover the reasonable expenses of the corporation, including attorney’s fees.

For these new provisions to apply, existing corporations must amend their certificate of incorporation to adopt these provisions.

Another newly enacted piece of legislation amends the New Jersey Shareholder Protection Act, N.J.S.A. 14A:10A-1, et seq., which applies to all “resident domestic corporations.”  The new legislation revises the definition of “resident domestic corporations” to now include all corporations organized under New Jersey law.  However, a New Jersey corporation that does not have its principal executive offices located in New Jersey and does not have significant business operations in New Jersey as of April 1, 2013, may opt out of this new legislation by adopting an amendment to its bylaws opting out of this legislation before September 28, 2013.  Additional changes now permit a resident domestic corporation to engage in a business combination with an interested stockholder if the transaction that caused the holder to become an interested stockholder was approved by the corporation’s board of directors prior to the stock acquisition date.

The third piece of legislation also now permits shareholders to participate in shareholder meetings by means of remote communications.  What constitutes remote communications will be determined by guidelines and procedures established by the board, so long as each shareholder can participate in and have access to the same information and materials as those present for the meeting.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s