February 5, 2023

On November 3, 2022, Governor Wolf signed House Bill 2057 into Law 122. The law included numerous amendments to Title 15 of Pennsylvania’s Consolidated Statutes, known as the “Associations Code” (the Title 15 Update).1 This multi-part series provides a summary of the major changes coming to Pennsylvania with the Title 15 Update. Part 1 provided a general summary of the most important changes. Part 2 discussed the annual report requirements. This Part 3 discusses, among other things, the changes to the Business Judgment Rule, the extension of the Liability Protection Act provisions to officers, the forgoing of business opportunities and the choice of forum. The Title 15 Update went into effect on January 2, 20232 with some important provisions coming into force at a later date.3

The Title 15 updates discussed in this Part 3 generally provide more flexibility for businesses – by embodying the principle of freedom of contract – or were adopted in response to case law.

Forgoing business opportunities

A Pennsylvania corporation, both for-profit and not-for-profit, can waive any interest it may have in a business opportunity, eliminating the requirement that an interested director or officer bring that opportunity to the corporation first. The waiver may be blanket or limited to specific classes or categories. The waiver can be included in the articles of association or decided by the board of directors.4

fiduciary duties; BUSINESS JUDGMENT RULE; OFFICERS

In response to a case in the Southern District of New York interpreting the Associations Code,5 The Title 15 Update clarifies that a Pennsylvania director’s duty to conduct appropriate investigations into potential issues does not extend beyond the interests and factors required by law and those legally defined interests and factors that the director believes are appropriate.6 The Title 15 Update also adopts a statutory explanation of the business judgment rule relating to directors (new Section 1712(d)). The Statutory Statement provides that a director making a good faith business judgment is discharging the director’s duty when (a) the matter is not self-dealing, (b) the director is reasonably informed, and (c) the director is reasonable believes business judgment is in the best interest of the company.7

The Title 15 Update also clarifies in response to certain case law8th in relation to alleged duties to creditors, that a Director owes duties only to the Company, being expressly stated that duties to creditors are not owed.9

Analogous changes were made for non-profit corporations.10

Handling officers’ duties is moved to a new section 1734, which also adopts a statutory business judgment rule for officers. New Section 1734 allows officers, similar to directors, to legitimately rely on information obtained from or prepared by other officers, employees, legal advisers or other professionals. A new Section 1735 authorizes a charter (or a provision in the charter) adopted by stockholders to extend protections from personal liability to officers, similar to that currently available in Section 1713 for directors. Unlike the analogous new provision of Delaware,11 the potential protections are available to all officers, not just certain categories of officers, and do not deny potential protections for claims made by or in the Company’s law.

Analogous changes were made for non-profit corporations.12

In addition, he rejects another aspect of the New York decision interpreting the Associations Code,13 The Title 15 Update adds a new definition of “recklessness” to the Associations Code.14 The new definition clarifies that “recklessness” includes limitations on what “additional” compensation is allowedfifteen and directors’ (and now officers’) liability protection.16 are triggered only by a willful disregard for a significant and unjustified risk and not merely by disregard for facts of which the director or officer had “reasonable knowledge”.17

FORUM SELECTION

The articles of incorporation or bylaws of both for-profit and not-for-profit corporations may contain a provision that provides a forum for deciding internal corporate claims. Any exclusive venue determination must include at least one court in the State of Pennsylvania and may designate courts in other jurisdictions so long as Company has a reasonable relationship with that jurisdiction. For claims under the Securities Act of 1933, the provision may provide a federal court with exclusive jurisdiction.18 The Title 15 Update states that such provisions do not confer jurisdiction, personal or subject, on any particular court.19

OTHER CHANGES

The Title 15 update also includes the following changes:

  • No tax clearance certificate has to be submitted in connection with the voluntary dissolution of a non-profit corporation.20

  • A new Section 321(f) provides rules for when shareholder approval is not required for a merger or exchange of shares in connection with a two-stage transaction for publicly traded companies.21

  • The update includes timing rules for director resignations.22

  • When all directorships are vacant, any officer or shareholder may call a special meeting to elect directors.23

  • A consent of the Directors may become effective at a later date provided that any Director may withdraw his consent up to the Effective Time. Non-directors may sign such consents so long as they are directors at the effective date. Consent shall remain effective even if the directors who signed it are no longer directors at the time it becomes effective.24

In addition to these changes, the Title 15 Update changes the Associations Code in several other important aspects. For example, it amends and adds provisions on the conduct of meetings and voting, and modifies some of the provisions governing “incorporated” (ie, public) corporations.25 Other critical changes include acceptable methods of retaining corporate records,26 company emergency response,27 restrictions on the rights of dissidents,28 and provisions for compensation and exculpation in statutes of corporations.29

CONCLUSION

The Title 15 Update modernizes Pennsylvania’s Associations Code, most notably the Business Corporation Law, in a number of ways. It extends the latitude already widely available under Corporate Corporation Law to vary many standard statutory rules, and also codifies variations in some specific areas of flexibility afforded corporations under Delaware General Corporation Law, embodying the principle of freedom of contract. Examples include forgoing business opportunities and empowering corporations to limit the liability of directors. The update also includes important clarifications on the duties of directors under some court interpretations of the Associations Code. Companies will also be given more time leeway, with more flexibility for the effectiveness of board resignations and approvals.

FOOTNOTES

1 HB 2057, General Assembly, Reg. Meeting. (Pa. 2022). Law 122 also made corresponding changes to Title 54 (Names).

2 1 pa. DISADVANTAGES STAT. § 1701(a)(5); see also HB 2057, § 112.

3 See egHB 2057, § 5 (supplement of § 146 (h) to the association rules).

4 ID. in § 45 (supplement of § 1719 to the association rules); I would. in § 83 (supplement to § 5719 of the association rules).

5 ref Nine West LBO Securities Litigation, 505 F. Supp. 3d 292, 310–12 (SDNY 2020) (noting that directors of an LBO target company might have a fiduciary duty to investigate subsequent events that would occur after they left office).

6 HB 2057, § 42 (amending § 1712(a) of the Bylaws).

7 ID. at § 42 (amendment of § 1712 of the association rules).

8th ref Lemington Home for Aged, 659 F.3d 282 (3d Cir. 2011); Eddystone Rail Company, LLC v. Bridger Logistics, LLC, Case No. 17-495, 2020 WL 1233557, at *4 (ED Pa. March 12, 2020); To Bruno, 553 BR 280, 286 (Bankr. WD Pa. 2016).

9 HB 2057, §§ 42, 44, 51 (amendment of §§ 1712 and 1717 of the association rules or addition of §§ 1734 and 1735 of the association rules).

10 ID. in § 80 (amendment of § 5712 of the association rules); I would. at § 82 (amendment of § 5717 of the association rules)

11 Deletion code Tit. 8 § 102(b)(7).

12 See HB 2057, § 87 (addition of § 5733.1(b)-(d) to the Union Code); I would. at § 87 (supplement of § 5733.2 to the association rules).

13 ref Nine West LBO Securities Litigation, 505 F. Supp. 3d 292, 310–12 (SDNY 2020) (noting that directors of an LBO target company might have a fiduciary duty to investigate subsequent events that would occur after they left office).

14 HB 2057, § 1 (amendment of § 102 of the association rules).

fifteen 15PA. DISADVANTAGES STAT. § 1746(b).

16 HB 2057, §§ 43, 50 (amendment of § 1713 of the association rules or addition of § 1735 of the association rules)

17 See Nine West, 505 F. Supp. 3d at 814.

18 HB 2057, §§ 37, 79 (adding §§ 1513(a) and 5513(a) respectively to the Associations Act).

19 ID. at § 37 (supplement to § 1513(b) of the Club Code).

20 ID. at § 4 (amendment of § 139(c)(2) of the Club Rules).

21 ID. at § 15 (supplement of § 321(f) to the association rules).

22 ID. at § 47 (amendment of § 1724 of the association rules).

23 ID. at § 48 (Adding § 1725(b)(3) to the Club Code).

24 ID. in § 49 (amendment of § 1727 of the association rules).

25 id. in § 40 (amendment of §§ 1704, 1708, 1709 of the association rules); I would. in § 53 (amendment of § 1755 of the association rules); I would. in § 54 (amendment of §§ 1758, 1763 of the association rules); I would. in § 60 (amendment of §§ 2522, 2528 of the association rules); I would. in § 61 (supplement of § 2530 to the association rules); I would. § 65 (amendment of § 2561 of the association rules).

26 ID. in § 2 (amendment of § 107 (a) of the Club Code to allow record keeping through blockchain technology).

27 ID. § 34 (amendment of § 1509 of the association rules).

28 ID. at Section 40 (amendment of Section 1571(f) of the Club Code); I would. at § 16 (amendment of § 363(c) of the Bylaws).

29 ID. in § 52 (amendment of § 1743 of the association rules).

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