Senate Bill 206 (Enrolled)

Contact: Office of Policy and Legislative Affairs

Agency: Licensing and Regulatory Affairs

Analysis

Topic: Corporation Law
Sponsor: Senator Bullard
Date Introduced: February 13, 2001
Date Ordered Enrolled: July 10, 2001
Date of Analysis: July 2, 2001

Position: The Department of Consumer and Industry Services supports the bill.

Background: A corporation is a legal entity created through the laws of its state of incorporation. There are several advantages to the corporate form of organization. The law treats a corporation as a legal "person" that has standing to sue and be sued. As a result, the corporation's owners, or shareholders, are not personally liable for corporate debts. A corporation has continuity in that it does not cease to exist if one or more owners die. Stock in the corporation is also easily transferable.

In Michigan, the corporate form of organization is governed by the Business Corporation Act. The act was passed in 1972 and replaced a 1931 statute. There are currently over 300,000 corporations in Michigan.

The act has been the subject of frequent amendment in recent years. There were significant changes in 1989 and 1997.

Administratively, responsibility for the filing of corporate papers has resided in several state agencies over the years. These include the Departments of State, Treasury, Commerce, and Consumer and Industry Services. Recently, an internal reorganization in the Department of Consumer and Industry Services moved this function to the Bureau of Commercial Services. The Bureau of Corporations, Securities, and Land Development was abolished.

Bill Content: The bill makes a number of significant changes in the Business Corporation Act, including:

• Permit electronic transmission of certain documents.
• Permit corporation financial reports to be distributed electronically.
• Permit a shareholders' meeting to be conducted solely by remote communication and permit a shareholder or board member to participate in a meeting by means of remote communication.
• Allow a board to impose certain restrictions on the exercise, transfer, or receipt of share purchase rights.
• Limit certain shareholder actions.
• Remove mandatory indemnification of an employee or agent who was sued.
• Prohibit a class or series of shareholders from voting as a class in a merger or share exchange under certain circumstances.
• Clarify that a corporation would not have disposed of substantially all its property and assets if it retained a significant business activity. The bill defines "significant business activity" as at least 25% of total assets and 25% of either income or revenue from continuing operations for the corporation and its subsidiaries.
• Specify that the Act applies to professional service corporations. This provision is related to Enrolled Senate Bill 216 which amends the Professional Service Corporations Act.
• Changes references to the Bureau of Corporations, Securities and Land Development to the Department of Consumer and Industry Services.

Arguments For: The amendments would modernize the Business Corporations Act and provide needed clarification of certain provisions of the act. The bill would also provide for more flexibility and certainty in business combination transactions. The changes made by the bill reflect recent amendments in Delaware, which has been an attractive state for business incorporations.

Corporations would be authorized to use electronic transmission to file documents with the Department of Consumer and Industry Services. When the department's Michigan Electronic Filing (Mich-ELF) was initiated in 1997 it was immediately very popular. Mich-ELF is a paperless corporate record filing system that uses a fax gateway to display the document on a computer screen throughout the filing process. The new system won a 1998 Achievement Award for excellent customer service from the International Association of Corporation Administrators. Amending the act to allow electronic filing will give the department the flexibility to modify its corporate records filing system in response to new technologies.

Hostile takeovers of corporations by another company can be devastating to shareholders and the Michigan communities and workers who depend on the corporation. The bills would protect shareholders' interests and Michigan jobs by clarifying that shareholder rights plans are permitted in Michigan.

Revisions to Section 489 of the act address potential problems arising out of the Michigan Court of Appeals decision in Baks v Moroun (227 Mich. App. 472). In this case the Court did not recognize a separate cause of action under Section 489 and instead relied on another section of law. This decision created confusion regarding available causes of action and the appropriate statute of limitations. The bill resolves these issues by creating a specific 3-year statute of limitations for claims seeking monetary relief under Section 489. The bill will also limit claims under Section 489 somewhat by defining "willfully unfair and oppressive conduct". By restoring the cause of action under Section 489 and defining "willfully unfair and oppressive conduct" the bills will provide the basis for a much more consistent interpretation of the law in this area.

Arguments Against: There is no need for the shareholder rights provision. Federal case law has already confirmed their legality in Michigan.

The 6-year statute of limitations in the Revised Judicature Act would have been preferable. This is the statute of limitations that would continue to apply to claims for non-monetary relief and was the period established by the original introduced bill.

Supporters/Opponents: The bill was based on recommendations of the Business Law Section of the State Bar of Michigan.

Fiscal Impact: The bill will have no fiscal impact on the Department of Consumer and Industry Services.

Administrative Rule Impact: No new or revised administrative rules are anticipated as a result of this bill.