Pennsylvania Business Corporation Law Updates for 2023

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Annie: Hello, everyone, and welcome to today's webinar, "Pennsylvania Business Corporation Law Updates for 2023." My name is Annie Triboletti, and I will be your moderator.

Joining us today are guest speakers Doug Raymond and Christina Lidondici from Faegre Drinker Biddle & Reath. And with that, let's welcome Doug and Christina.

Doug: Good morning. Thank you for coming. My name is Doug Raymond. I am a corporate lawyer at Faegre Drinker Biddle & Reath, and I have been practicing corporate, M&A, governance, and capital markets law for over 30 years here and served on the Title 15 Committee that was involved in updating the Pennsylvania Business Corporation Law and other entity statutes in its most comprehensive revision in more than 20 years. And I'm presenting here today with my colleague Christina Lidondici, who will introduce herself.

Christina: Yes. Hello, everyone. Good morning. I'm Christina. I am an associate in the Corporate Group in our Philadelphia office. I often work with Pennsylvania corporations and other entities, so I was really excited when Doug had asked me to join him here today.

Doug: And with that, we will turn to it. We're going to take sort of a high-level pass at the changes. There are a lot of them. Some of them are more important than others. They've been building for, as I say, close to 20 years. And the Title 15 Committee that updated the Pennsylvania statute was informed by practice in our neighbor to the south, in Delaware, also by revisions to the Model Business Corporation Act, principles of the ALI, as well as a number of instances you will see in response to case law either by Pennsylvania courts or by other courts interpreting Pennsylvania law where we thought it was important to either reinforce and confirm what the court said or perhaps to clarify in some areas where we thought they might have gotten it wrong.

Well, I thought it would be useful to start with just a little bit of an overview on the impact of the revisions on directors and officers. As in Delaware, directors have fiduciary obligations. They are required, under Pennsylvania law, to perform their duties in good faith, in a manner they reasonably believe to be in the best interests of the company, and with such care, skill, and diligence as a person of ordinary prudence would use in similar circumstances. That's the hornbook definition.

The obligation of directors has been seen by courts and others as including an obligation of reasonable inquiry into matters that are affecting their deliberations. We modified the relevant section, Section 1712 of the BCL, in response to what we thought was an inappropriate judicial decision to make it clear that a director's obligation of inquiry extends only to those matters required by statutory law, either the BCL or another provision of law that the board and the directors are required to take into consideration and, of course, such other matters as the board may choose to consider.

So, for example, under Section 1551 of the BCL, which speaks to declaring dividends and distributions, the board is obligated to make an inquiry into the financial wherewithal and solvency of the company. That would be an example of a statutory law that the board needs to consider.

Also impacting the director's fiduciary duties, in response also to case law, the Cukor case, we recodified the business judgment rule, and you see it in your slide, that there's a very strong presumption that the directors acted properly and in accordance with their duty of care, if there is no self-dealing, if the director becomes informed with respect to the subject of the business judgment to the extent the director reasonably believes to be appropriate, and if the director rationally believes that the business judgment is in the best interests of the corporation.

"Rationally believes" is a change. It is intended to provide the directors with greater flexibility in action than the "reasonable belief" standard because the "reasonable belief" standard is subject to second-guessing as, you know, what a reasonable person can conclude. It's more of an objective standard than whether the director, him or herself had a rational belief that what they were doing was in the best interests of the company.

Another change we made or clarification, I should say, we made is that to make it very clear that the obligation of directors runs directly to the corporation, not to shareholders, creditors, or other stakeholders. And as a consequence, among other things, a shareholder may not directly enforce the fiduciary duties of directors.

Also, and this is a minor point, recognizing that many entities have directors with other business interests and maybe with some conflicting interests with the corporation, that the corporation may impose reasonable restrictions on the director's access to and use of corporate information.

With officers, the amendments move into a new section the standard of care for corporate officers, which is the same essentially as that of the directors. Although with officers, there's no specific mention of a limitation on their duty of inquiry to limit it to statutory matters. And we added a provision, which was recently adopted in Delaware, to make it clear that the articles or a shareholder adopted bylaw may eliminate the officers' liability for monetary damages unless the conduct breaches the officers' fiduciary duties under the Business Corporation Law and the breach constitutes self-dealing, willful misconduct, or recklessness.

Now I think many of us believe that the statute since 1988 permitted a corporation to include an exculpation provision of officers in the charter. But this has made that very clear that you can do this for officers, and so we are lined up with Delaware here on this point.

It's an important point to note that the exculpation is limited to matters that do not involve recklessness. And we added a definition of recklessness to the statute, which is modeled on the Pennsylvania Crime Code's term, which is a conscious disregard of a substantial and unjustifiable risk.

So again, as with the concept that the director and the officer must have a rational belief that their actions are in the best interests of the corporation in order to gain the protection of the business judgment rule, the limit on exculpation requires a conscious disregard and again involving not what some third party after the fact might conclude was inappropriate or reckless behavior, but did the officer him or herself consciously understand that what they were doing was a deviation from proper activity.

A couple of other points on fiduciary duties before I turn it over to Christina. Again, lining up with Delaware, a corporation can limit or eliminate the corporate opportunity doctrine for directors or for officers by including a provision in its articles or in its bylaws or by other action of the board of directors, which would include an agreement. And so if the board were to do this, then a sitting director or officer would not be obligated, subject to what other constraints the board put on this exception, they wouldn't be obligated to present corporate opportunities, business opportunities of whatever sort to the corporation before pursuing it on their own. And this is very important particularly for, I think, portfolio companies and private equity funds who may have a number of competing offers and opportunities being presented to them, and it's important for them to be able to understand when they would need to present those to the business and when they would be able to pursue them independently.

Another change that was made in response to some litigation in Delaware was to add a presumption that if the board establishes the compensation of the directors, that there's a presumption that that compensation is fair and that it does not have to be approved and vetted under the doctrine of entire fairness or approved by the shareholders to avoid being challenged under the entire fairness doctrine. But it is indeed presumed to be fair unless the plaintiff satisfies their burden to show that it's not fair.

And then just briefly, Section 1728 applies to transactions between a corporation and a shareholder, director, officer, or an entity in which a shareholder, director, or officer is involved. And this is, I think, intended to clarify what we believe is the existing law. It was patterned after the ALI, so that where there are common governors, this provides a safe harbor for approving transactions between the two different entities, either where it's a wholly-owned subsidiary or where the other entity is not wholly-owned by the corporation, and provides a procedure for these transactions to be approved without requiring a shareholder vote.

So you notice that this does not deal with a situation where the director or officer had a financial or other interest beyond the overlapping governance role. That's not to say that those would be invalid, but just that the safe harbor does not address that.

Moving on, new Section 1713 or Section 1713, we've added a provision to it that basically protects directors and officers against retroactive elimination or reduction of a provision that limits their personal liability, so that if somebody comes in and there's a changeover in the board, they can't retroactively eliminate the protection for a director or an officer unless the provision itself allowed that to happen before the amendment or repeal was attempted.

And then I think the last thing I'm going to talk about at the moment is a set of rules that addressed derivative litigation, also patterned on the ALI following the Supreme Court's decision in the Cukor case, from more than 20 years ago, to adopt into statutory form the principles of that case as well as to clear up some of the gaps that were left after the case came down.

There's a lot of details there, and if you are working in the world of derivative litigation, I commend them to you in this specific statutory provision, but two overarching points to be aware of. First, that if there is derivative litigation, the plaintiff must always first go to the board and ask that the board pursue the litigation before the plaintiff could pursue it independently. We do not have the concept of demand futility that would excuse going first to the board.

The only exception to that would be if the plaintiff goes to the court and says that there would be an immediate and irreparable injury to the corporation that would result if they were not allowed to proceed directly. And even then, the board would have an opportunity in the court proceeding to rebut that presumption, sorry, rebut that assertion, it's not a presumption, and to insist on demand.

The other change, it's again not a change, but the other point to make clear is that the named plaintiff in derivative litigation must own their shares continuously unless they're divested by some action that they didn't really have any control over, for example, if the corporation took some action with respect to its capital stock or a reverse stock split. There are some exceptions to that requirement.

Also, if a demand is posed to a board of directors, they can either consider the demand themselves. They can appoint a special committee to consider the demand that may consist of directors or non-directors, lawyers or consultants or others. The non-directors acting on this committee would be entitled to the same rights and protections as the directors would have. And another point just to make is that merely because a director is named in a demand would not make them interested and disable them from acting on behalf of a special committee.

And with that, I will turn it over to Christina.

Christina: All right. Thanks, Doug. So just quickly a couple of changes to articles of incorporation that we wanted to flag. The first being that the initial articles do not need to include the address of the incorporators, which is really just consistent with the practice for other types of entities.

Then we want to talk about Section 1306(b). So articles of a Pennsylvania corporation can include provisions that relax or are inconsistent with otherwise applicable rules under Chapters 3, which relates to entity transactions, and 13 through 19, which deal with domestic business corporations generally, unless there's a provision in those chapters that says the articles cannot do so.

A 2022 amendment clarified that 1306 doesn't address shareholder agreements. So those would involve principles of contract law. But you should keep in mind that there are still some provisions of the BCL that do limit shareholder agreements. An example would be Section 1529.

And then the board can now direct the submission of a proposed amendment to shareholders without adopting that amendment first, letting them know that they may approve or reject ultimately that amendment.

Okay, fictitious names. This is an area where there has actually been a bit of confusion. So Section 414(d) was added in 2022 to clarify some existing law. The new section expressly states that a registered foreign association that's using a trade or assumed name, that's permitted under Title 15, has the same force and effect as doing business under its proper name. So this means a registered foreign association can sign agreements, other negotiable instruments using that trade name, and it's going to have the same effect as if it used its proper name.

All right. As a result of natural disasters recently and, of course, as you can imagine the COVID-19 pandemic, there were a number of amendments in 2022 regarding powers to act in an emergency. Section 1509 permits emergency bylaws to be adopted, and those can now be adopted either before or during an emergency. 1509(e) is going to govern the procedure when these bylaws are adopted during an emergency. And actions that are taken to further business affairs in accordance with the bylaws are valid and binding on the corporation.

During an emergency, under new section 1509(g), that tolls the required time for holding the annual meeting of shareholders. And a majority of directors that can be assembled at that time, they can take any practical or necessary action to address meetings of shareholders during that emergency, like postponing the meeting or changing an in-person meeting to be held remotely. For a registered corporation, a company would do this by filing an 8-K to give notice to its shareholders.

The board of directors can also change the record or payment date of a distribution that was declared if the record date has not occurred yet.

And under Section 1509(i), we have a more modern definition of what constitutes an emergency. So it permits emergency bylaws to be used in situations where a quorum of the board cannot be assembled, and that things like a pandemic, hurricane, earthquake, or other natural disasters.

Now we're going to talk about a brand-new section, Section 1513, which deals with the fact that a corporation can include and exclude this forum provision in its bylaws or its articles for the adjudication of internal corporate claims or claims under the Federal Securities Act of 1933, which are treated differently. And this is going to be tracking Delaware law.

So a corporation can provide that claims arising under the Securities of Act of 1933 must be brought in a federal court. If a corporation chooses to establish an exclusive forum for internal corporate claims, then at least one Pennsylvania court must identified as an available forum. Other courts from other jurisdictions can be specified as long as the company has a reasonable relationship with those. And then the provision can prioritize amongst these courts where an internal claim can be brought.

So what is an internal corporate claim? We're talking about actions based on alleged violations and duties owed by a director, an officer, or a shareholder. Under Pennsylvania law, it could be a derivative action, an action asserting a claim under Title 15 itself, articles, bylaws, other internal governing agreements, like shareholder agreements so long as those are entered into after the adoption of the exclusive forum bylaw. It could also be other actions asserting a claim that relates to the internal affairs of the corporation.

Really quickly, I think going back, we would just note that if none of the courts identified and no Pennsylvania court has requisite jurisdiction, then an internal corporate claim can be brought in any court that does. So when you are thinking about including one of these bylaws, you want to think about what courts would be able to take on a claim.

Moving on, back to bylaws, this time we're going to talk about access to corporate records. Before the amendments, Pennsylvania law provided that bylaws operate only as regulations among the shareholders, directors, and officers. That language was changed to read "are binding on shareholders, directors, and officers of the corporation." These changes address a concern from the opinion in Kirleis, a case coming out of the Third Circuit, which could be misread to suggest that a bylaw was not actually binding on a shareholder unless the shareholder has notice.

Just a really brief background, if you're not familiar, is here on the slide that the Kirleis decision, the Third Circuit found a bylaw requiring any dispute under the bylaws be arbitrated did not apply to a civil rights claim by shareholders against the corporation because the shareholder had never received a copy of the bylaws.

In order to deal with this issue, Subchapter 15A was also amended to give shareholders, directors, and officers a right to receive a copy on demand, subject to certain limitations as you can see here.

We'd also note that Section 1764 was amended to limit the use of voting lists. Those can only be used for purposes related to the shareholder meeting, and not surprisingly the information must be kept confidential.

And then Section 1508 addresses shareholder access to corporate records, and it's going to permit a corporation to impose reasonable restrictions and conditions on their access.

Ratification of defective entity actions. This is also under a brand-new section. This is Subchapter 2B. It adds a procedure to ratify actions previously taken by an entity that are later discovered to be defective. The most common scenario that we're talking about here is the over-issuance of shares, so in those cases where shares of the corporation are issued in excess of the authorized shares at the time. It could also deal with things like the failure to appoint directors properly.

But most importantly, if you disclose a defective entity action, the amendments establish a basic statute of repose. So after 21 years it protects the defective entity action from being challenged after that time. And there are other shorter periods available. It's two years for public companies, when they've appropriately disclosed the action, and six years for private companies.

What is a defective entity action? It's an action that was supposedly effective but, as you imagine, void or voidable, cannot be determined to be void or voidable by the governors, and otherwise does not appear to operate fully in the manner intended.

So how do we ratify defective entity actions? Section 223 addresses this. No matter what, there needs to be approval by the appropriate governing body. So the governors of the ratifying entity at the time of ratification must act to approve the ratification. So even if an entity action would have required only approval of the entity interest holders, the defective entity action has to be approved by the governors before submitting it to the interest holders for validation.

There are special rules that we should note for over-issuance of public companies. So you want to take a look at those.

If you look at Section 224, that's going to set forth the steps to ratify a defective entity action, like establishing a quorum, notice to interest holders, and requirements for ratifying election of governors specifically.

We should also flag that a ratification is subject to judicial review. And if the defective entity action is ratified in accordance with all of the rules under this new subchapter, the action is not going to be void or voidable and it won't be deprived of full effect as a result of its failure of authorization, unless the court determines that the ratification was not valid.

These new provisions are not going to provide the exclusive method for ratification. It's just meant to be a supplement to common law. And these rules are also coming from the Model Business Corporation Act.

Doug: So let me just stop here and pick up a couple of the questions, that have been asked, before we move on into the next phase here. One question is that we mentioned the provision of the Business Corporation Law is something that can't be modified by a shareholder agreement in the discussion about shareholder agreements that could modify the provisions of the BCL even if they might not necessarily be allowed to be permitted in the charter itself.

The reference there was to Section 1529, which is a provision of the statute referring to transfer restrictions on securities. And there, there's a limitation that you cannot impose transfer restrictions on securities that would be manifestly unreasonable or against public policy. An example on that they decided in the committee comments to be transfer restrictions on the basis of race or nationality. So that's the reference for that.

The second question had to do with how the new corporate law changes affect foreign corporations and nonprofits. Christina talked about the qualification to do business, which I think clears up some confusion that existed in Pennsylvania whether a foreign corporation who had been qualified to do business in Pennsylvania under a fictitious name could do business under the fictitious name or had to sign contracts under its corporate name. That's now been clarified. The other significant change impacting foreign corporations in Pennsylvania we will get to in just 30 seconds.

As to other entities, not necessarily business entities, nonprofits, limited liability companies, there are a number of conforming amendments in the changes to Title 15 that generally have similar impacts on them as do for the business corporations, but that's really beyond the scope of this discussion.

And then also I'll just briefly speak to if there's a . . . The question is transactions between a Pennsylvania corporation and a not wholly-owned subsidiary, where there are overlapping directors. The statute does provide a safe harbor for approving these if the overlapping directors or officers do not have a significant involvement in the transaction and do not otherwise have a personal interest in the transaction that would take it out of the safe harbor. But there is a process for dealing with this in the amended statute.

And with that, we've got some other questions. We'll just postpone them, but wanted to move on. This is where we are?

Christina: Yes, this is where we are. Really important. So if there is something to take away, we want to note the new annual report requirements. These are going to be effective as of January 2024. So yes, there is time, but listen up to what we have to look forward to.

All domestic filing entities and registered foreign associations must file annual reports to the Department of State, which replaces the previous decennial filing system. Most or some of you may know Pennsylvania was actually the only state to have a decennial system, so really catching up with the times on this one.

Let's talk about some of the logistics. The report must be filed each year, and the first filing is going to be due on or before July 1, 2024 for domestic or foreign corporations for-profit or not-for-profit, before October 1, 2024 for domestic or foreign LLCs, and on or before December 31, 2024 for any other form of domestic or foreign association.

We can talk briefly about the information that's going to have to be included that you can see here on the slide. A lot of it is somewhat fairly basic information, but we would note that the name of at least one governor needs to be included. Names and titles of principal officers, if any, will also need to be included. It does not, at the moment, require any shareholder information. But with the Corporate Transparency Act, it may have implications for these filings down the road.

Under the new rule, the Department must deliver notice to each entity that's required to file the annual report at least two months before the report is due. But if the Department doesn't deliver the notice or say the entity says they haven't received the notice, that, of course, is not going to excuse the obligation to make the filing. Which brings us to what might happen if you do fail to file. If there's a failure to file the annual report within six months of the deadline, the entity will lose the right to use its name and will be subject to administrative dissolution, administrative cancellation, or administrative termination as those apply here on this slide. Those are going to be applicable as of a later date, so beginning in 2027 and 2026. If an annual report is rejected under Section 146(d), you can file a corrected report.

And we would note that if you're dissolved administratively, you will still have your liability shield, but won't be able to conduct any activities other than those to wind up the business. You will have the right to reinstate, but you may lose your name. So if that name is taken by the time you do try to reinstate, you will no longer be able to have it. So that being said, this is probably going to free up some names also in Pennsylvania.

We also have a number of amendments around shareholder meetings. So Section 1755(d), that was added in 2022, and now the board may postpone or delegate to an officer the authority to postpone the annual or other regular shareholder meeting that's subject already to Section 1755(a), which requires a meeting in each calendar year unless otherwise provided in the articles.

There's also clarification that the determination of whether a quorum is present must be made with respect to each separate matter to be considered at the meeting and also if any shareholders are entitled to vote as a class on any matter, with respect to each class vote. That's unless it's otherwise provided for in the bylaws.

A shareholder can adopt a bylaw to change the vote required to elect directors. So in many circumstances that might look like changing a plurality to a majority. And this change is retroactive. So such a provision would be valid if adopted before the 2022 amendment but after January 1, 2000.

And now we are going to talk about just the fact that under new Section 2522(c), the presiding officer for an exclusively virtual meeting can postpone the meeting for up to a day if they reasonably believe it cannot be convened for any reason outside the control of the corporation. And that's just for public companies.

We also had some changes regarding record dates. So Section 1763(a) is going to allow a corporation to set different record dates for determining shareholders entitled to notice and the shareholders entitled to vote at that same meeting. If there's only one record date set, it's going to apply to both.

The record date can't come before the date that the board asked to fix it. To eliminate some confusion, the shareholders of record will be determined as of the close of business on the record date unless the board fixes a different time of day for that determination. And the amendments also streamline the procedure and requirements for authorization by a nominee for communications directly between the corporation and beneficial owner.

Okay. I think before I turn it back to Doug, we're going to talk about clarification regarding rules on action by consent of the director, which are based on Delaware law. Changes to 1727(b) allow a consent to be signed with a delayed effective time or effectiveness by all of the directors at the effective time and by a person who is not actually a director at the time when the consent is executed so long as that person is a director when the consent becomes effective.

So to try and put it another way, if a corporation is trying to implement a decision, it can implement a written consent that's going to be effective at a later time as long as all of the directors, who are directors at that time, sign it, which means that a person who is not actually a director at the time the consent is signed can still sign it. And it makes clear that even if one or more of the directors who signed the consent are no longer the directors at that time, the consent will still be effective.

Doug: There's a little bit of a confusion here I have to admit. This is intended, in large part, to help with the circumstance where say a corporation is being acquired and the target corporation needs financing for the transaction, but the selling corporation, the directors on the sell side are interested in adopting resolutions that would be applicable to the company after the closing. This permits, and it's a provision that's in Delaware, individuals who are not directors on the day they sign the consent to authorize the action provided that at the effective date, effective time of the action that they are directors so that they could sign a consent and you have the deal close, and then the action is effective immediately upon that, which facilitates finance of M&A transactions in particular.

But there's also a rule which permits a director to sign a consent and have it effective at a later date, even if they're not a director at the later date.

Now, if you put both of these rules together at the same time, you don't necessarily know whether you have a consent signed by all the directors because the directors on the signing date, if that's the measuring point, would not include the buyer's director who is appointed effective immediately after the closing. But if you do it as of the effective date of the matter, the director who signed the consent before the effective time, but is no longer a director, is not a director at that time. So when you say, well, we have all the directors signing this, there is a little bit of gray there which needs to be sort of worked through in the circumstance.

So in 2022, we added language that I think was intended as a clarification that provides that a director may submit a resignation that is a conditional resignation, that it would be effective only upon certain events happening. For example, if that director of a company that had plurality voting for the board, but if that director was not reelected by a majority vote, that his or her resignation would be effective at that time, or it could be conditioned on other subsequent events. And then a decision by the board to accept or reject a director's resignation in that or some other circumstance, unless there's an impact on the duty of loyalty, self-dealing, or something, it would be protected by the business judgment rule and therefore protected from challenge.

A couple of other questions that came up in the meantime, in the slide we presented on the codification of the fiduciary duties of officers, that they have generally the same fiduciary obligations as directors, directors are allowed to rely on others, third parties as to matters that they reasonably conclude are within their confidence. So they can rely on lawyers, investment bankers, accountants, their own officers. And officers have a similar right to rely on others. But there's a reference in the committee comment, which is why it's on the slide, which is I think why the question was asked as to whether the scope of reliance by an officer may be as extensive as that of a director because if it's a matter that is within the officer's specific area of expertise or focus or attention, they can't necessarily go to them and say, "Well, I'm going to just rely on a subordinate or rely on this third party for matters that are really my own job to do."

So that's a little bit of an open question as to the limits of that reliance. I think it's a much broader ability on the directors to rely on third parties than it potentially is for the officers.

And then I think that Christina had mentioned this. But if a corporation fails to file the annual report and after the notice from the Department still fails to correct it and is therefore administratively dissolved, do the shareholders take on the liability of a general partnership? And the answer to that is no. The entity will continue in the form that it was. So if it's a corporation, it would still have the corporate shield subject to the usual doctrines that might pierce the corporate veil, but that it is limited in the activities it can take to only those that are related to its winding up its affairs or leaving the jurisdiction if it's a foreign . . . sorry, leaving the jurisdiction doesn't apply for this. So if it's a domestic corporation, it's limited to just winding up its affairs.

So moving on, the BCL has caught up to the blockchain. And we've just gotten to email. We now are also incorporating the ability to maintain corporate records using distributed technology, so that, under Section 107, corporate records may be kept in "record form," which includes information administered by or on behalf of a corporation. And the committee comment makes this clear that you can use distributed ledger or blockchain technology. And this reinforces another provision of the statute that makes it clear that any reference to a writing or written provision or written notice may be satisfied by using record form.

Similarly as most or many corporations learned in 2020, when it becomes difficult to hold an annual meeting and if your bylaws require that the meeting be held in the city of Philadelphia or the city of Pittsburgh on the third Tuesday in April, that you have to amend your bylaws, even if you couldn't get your full board together, to say that, "We're not going to have a physical meeting. We'll have an electronic only meeting." 1704 now clarifies that when the bylaws refer to holding a meeting, even if it's in a physical place due to this reference of a physical place, unless the bylaws clearly provide otherwise, that that includes the authority to hold a meeting solely by electronic technology so that that has been clarified for corporations that are moving to that.

And just as a reminder for people, that under 1708, you can have a meeting held entirely by electronic technology, so long as the corporation provides shareholders with sufficient rights that it would give them the important rights that they would have in a physical meeting, which is to say the ability to participate in the meeting, the ability to vote, the ability to hear the meetings contemporaneously as they occur, and to ask questions, and subject to the rules of conduct of the committee to make appropriate motions.

The next provision is one that we picked up as well from the ALI and Delaware, which eliminates the requirement to have a shareholder in an acquisition context if a bidder makes a tender offer for a corporation and acquires control of the corporation but not enough so they can do a short-form merger. It used to be that you would then have to call a shareholder meeting, which at that point was a fait accompli because the controlling shareholder controlled the vote to approve the merger. And we've now eliminated that obligation to have a second step.

But if a shareholder has acquired a majority of the voting securities, they can proceed to close a merger without having the intervening shareholder vote approving the merger, provided that the original tender offer had been made to all shareholders and that all shareholders who did not accept the initial tender offer would receive the same consideration in the back-end merger as was offered to their class in the tender offer and that the closing of the back-end be done promptly. It's worth noting that this can only be done in the context of a friendly transaction.

So now I'd like to talk a little bit about corporate divisions, which was a relatively novel proposition when it was introduced now some 30 years ago, but it's become increasingly popular and commonplace. But there are a couple of areas where it was thought to be useful to add a little bit of clarity.

Sorry, I skipped. Let me do corporate division and I'll come back to this. Sorry.

So in Section 364, a plan of division does not require shareholder approval if the requirements of 364 are met. The theory is you don't need a shareholder vote if you don't change the substantive rights of the shareholders. And in that circumstance, there's no necessity to have a dissenter's rights either. So for this to apply to a division without shareholder approval, the articles and bylaws or the organic rules of the new association have to not change the rights of the shareholders of the dividing corporation. And if that's satisfied, then you don't need to have a separate provision for a shareholder vote and therefore not for dissenters' rights.

Also on the allocation of liabilities in a division, there has been some confusion here as to how to allocate the liabilities of a dividing corporation among three or four different entities. And the answer is that you can allocate the liabilities of a dividing entity among the surviving entities as the governors choose. But if there are liabilities that have not been allocated, then the resulting associations are all jointly and severally liable for anything that is not specifically allocated. And you can imagine that is really intended to address the area where there is a contingent liability, which was somehow not addressed in the division.

The other thing is that we made this clear that the allocation of liabilities to the dividing corporations does not trump the Uniform Transfer Act provisions. So that if it is concluded that the Uniform Voidable Transactions Act is violated, then the remedy again would be that the liability would become that joint and several obligation of all of the resulting entities.

There are some more nuanced provisions in these sections on division, but just to give you that broad overview that that's there is worthwhile.

And then to go back to the slide that I skipped, in the situation where a corporation is selling all or substantially all of its assets, you need to have a shareholder vote, just as you do in a merger or dissolution. There's a safe harbor that has been in the statute, that if you are retaining at least 25% of the revenues or income from continuing operations or assets, that then you're deemed not to be having conveyed all or substantially all of your assets, and you can do that by a vote of the directors without a shareholder vote. This provides clarity in Pennsylvania that does not exist in Delaware.

And then we added, in 1932, a provision which is similar to the provision that speaks to making a judgment over values in authorizing a corporate dividend or distribution, that the board may rely on financial statements and other items in order to make this determination as to the 25%. So you can use your financial statements. You can use book value. You could use an valuation of a third party. And again, if you use a valuation of a third party, the board can rely on that valuation if the person has been chosen reasonably, and you can use any other reasonable method under the circumstances to support the valuation.