A package of new laws aimed at making New Jersey more business-friendly will put stiff restrictions on shareholder derivative suits.
The legislation, comprised of three bills, became effective immediately when Gov. Chris Christie signed them Monday.
A-3123/S-2326 amends N.J.S.A. 14A:3-6, which governs actions by a single or minority shareholder against a corporation, directors or majority shareholders.
The statute previously allowed a shareholder or his successor in title to commence suit at the time of the allegedly adverse corporate act and see it through regardless of future shareholder status.
The amended law requires a plaintiff to remain a shareholder throughout the litigation and fairly and adequately represent the corporation’s interests.
The measure imposes other strictures:
• Before suing, a shareholder must submit a written demand for the corporation to "take suitable action" and must wait for a rejection, or 90 days to pass, "unless irreparable injury to the corporation would result by waiting."
• Actions must demonstrate that the decision was not made by "independent directors" — those with no material interest in the challenged act, beyond the economic interest common to all shareholders, and no "material, personal, or business relationships" with defendants who have a material interest. The director’s status as a defendant, a defendant’s nominee or the approver of the allegedly adverse act doesn’t automatically divest independence.
• Unless independence of directors is successfully challenged, the evidentiary burden to show bad faith falls on the plaintiff.
• A suit may be dismissed based upon a determination that it is not in the corporation’s best interests. That determination could be made by an independent director, a majority of independent directors, or a board- or court-appointed committee.
• The court also may base dismissal on a vote of the majority shareholders, excluding those who benefited from the allegedly adverse act or were otherwise influenced.
• The corporation can move for dismissal asserting the board’s independence and good faith, which the court must grant unless it determines otherwise or the plaintiff is able to rebut those facts.
• The court must stay discovery until ruling on the motion to dismiss, but can order limited discovery — excluding testimony of attorneys who advised the board’s determination — if the plaintiff shows a lack of independence or good faith.
• A derivative suit cannot be discontinued or settled without court approval.
• A plaintiff with less than 5 percent of shares — or shares with a market value of less than $250,000 — must, at the corporation’s request, post security for reasonable expenses, including attorney fees. The threshold had been $25,000 since 1968.
• The court can award expenses to the plaintiff if the proceedings result in a substantial benefit to the corporation, or to the defendant if the case was commenced or maintained without reasonable diligence or reasonable cause or for an improper purpose.
Also signed Monday was A-3049/S-2328, which amends the New Jersey Shareholder’s Protection Act by expanding the definition of a "resident domestic corporation" to include all those incorporated under New Jersey law — regardless of whether the business operates from elsewhere — thus affording them the act’s protections.
Among other changes, the legislation allows those corporations to engage in a business combination with an interested stockholder so long as the board approves the transaction before the acquisition. Corporations have 90 days to opt out of the new law if they wish to continue operating outside its purview.
The third piece of the legislative package, A-3050/S-2327, amends the New Jersey Business Corporation Act to allow remote participation in shareholder meetings and votes on authorization by the board.
The corporation must be able to verify those shareholders’ identities and ensure they can access the same materials as those physically at the meeting.
The amendment also makes dissenters’ rights — where shareholders demand payment of the fair market value of their shares — the exclusive remedy for shareholders who don’t consent to a merger or other business combination, except when the corporation files for Chapter 11 or acts fraudulently or illegally.
That change mirrors section 13.02(d) of the American Bar Association’s Model Business Corporation Act.
The Assembly unanimously approved the bills on Dec. 17, and the state Senate passed them on Feb. 7 with just one nay vote on each measure.
Assembly sponsor Patrick Diegnan Jr., D-Middlesex, did not return a call Tuesday but previously said derivative suits often are filed to thwart important changes and amount to money grabs.
He said the laws would make it easier for companies to stay in the state and "make New Jersey even more attractive for businesses looking to set up shop or expand their presence in the state."
Co-sponsor John Burzichelli, D-Cumberland, said in a statement: "These are technical changes that are easy to make that will hopefully have a big, positive impact on the businesses operating here."