CHANGES TO OHIO S GENERAL CORPORATION LAW, NONPROFIT CORPORATION LAW, AND LLC CODE: A MIXED BAG. by James B. Rosenthal Cohen Rosenthal & Kramer LLP

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1 CHANGES TO OHIO S GENERAL CORPORATION LAW, NONPROFIT CORPORATION LAW, AND LLC CODE: A MIXED BAG by James B. Rosenthal Cohen Rosenthal & Kramer LLP 2012 James B. Rosenthal The Ohio legislature has passed H.B. 48, a bill containing significant revisions to Ohio s general corporation law, nonprofit corporation law, and limited liability company code. It was signed into law by Governor Kasich and is slated to become effective May 4, The revisions were initiated by the Corporation Law Section of the Ohio State Bar Association, whose intent was to bring Ohio into conformity with the law of jurisdictions deemed to be more business friendly. As a result, the substantive changes, for the most part, tend to clarify and limit the duties of corporate fiduciaries and enhance a corporation s ability to defend against potential liability to shareholders and third-parties in the context of major transactions, such as a merger, asset sale, or dissolution. The most notable departures from current law concern dissenting shareholder rights, the procedures for voluntary dissolution, and the right to indemnification or advancement of expenses for directors of both for-profit and nonprofit corporations involved in any civil, criminal, administrative, or investigative suit or proceeding. This article will summarize the significant aspects of the new law in the order in which the revisions appear in the Ohio Revised Code. GENERAL FOR-PROFIT CORPORATION LAW Section now provides that any right to indemnification or advancement of expenses for a corporate officer or director provided for in a corporation s articles cannot be eliminated by an amendment to that article after an occurrence or omission becomes the subject of a legal proceeding or investigative action unless the original article explicitly authorizes the elimination or impairment of the right after the act or omission has occurred. Page 1 of 6

2 Section now clarifies that there can be a single director of a corporation and that a director must be at least eighteen years of age. Section now clarifies that a director serving on a committee of the board is nonetheless considered to be acting in all respects as a director. Section , a highly specific provision, contains various changes applicable only to mortgages made by electric cooperatives, including requirements as to where the mortgage is to be recorded and what fees the Secretary of State shall charge for recording such mortgages. Sections , , , and all apply to dissenters rights and represent a major change in the law. Historically, a shareholder dissatisfied with the proposed terms of a merger or sale of substantially all of a corporation s assets could dissent from the transaction and sue to recover the fair cash value of his or her shares in an appraisal action. That right has now been radically restricted in Ohio and will no longer apply to shares of stock in a publicly traded corporation or to transactions in which the consideration a shareholder in an otherwise privately held entity will receive consists of shares in a publicly held corporation. This so-called market exception has long been part of the Model Business Corporation Act. According to the Official Comment to the Model Act, this provision is predicated on the theory that where an efficient market exists, the market price will be an adequate proxy for the fair value of the corporation's shares, thus making appraisal unnecessary. A further change to the rights of dissenting shareholders seeking an appraisal deals with how fair cash value is to be computed. The statute continues to provide that fair cash value is the amount that a willing seller who is under no compulsion to sell would be willing to accept and that a willing buyer who is under no compulsion to purchase would be willing to pay, but the statute now expressly excludes from that calculation any appreciation or depreciation in market value resulting from the proposed transaction, and any premium associated with control of the corporation or any discount for lack of marketability or minority status. See R.C (C)(1). Perhaps the most far-reaching changes to the corporation code involve new laws governing the voluntary dissolution of a corporation. In Sections , the legislature has changed the mandatory contents of the resolution a corporation must adopt. In Section and new Section , there are detailed new procedures, including dispositive deadlines, that a corporation must follow in providing notice to each known creditor and to each person that has a claim against the Page 2 of 6

3 corporation, including claims that are conditional, unmatured, or contingent upon the occurrence or nonoccurrence of future events. If the proper notice is provided, a claim procedure is instituted whereby the corporation can reject, in whole or in part, any matured claim, and may offer security to any claimant whose claim is otherwise contingent or conditional. A claim against the corporation is then barred if a rejected claimant does not file suit within thirty days after the corporation mails the notice of rejection. If a contingent claimant is offered security, the claimant must reject it within thirty days of its receipt or be deemed to accept it as the sole source from which to satisfy the claimant s claim against the corporation. If the corporation has provided the required notice, it may apply to a court for a determination that the amount and form of insurance or other security satisfies certain statutory requirements as to its sufficiency. In new Section , the legislature requires a dissolving corporation to follow all of the determinations it makes concerning claims and affords a safe-harbor to directors who approve such actions in the absence of fraud. New Section confirms the vitality of Ohio s so-called trust fund doctrine, albeit in limited fashion. The trust fund doctrine holds that a creditor of a dissolved corporation may satisfy its claim by pursuing corporate assets into the hands of shareholders. This principle has long been the common law of Ohio, and is recognized in the Ohio Revised Code (see, e.g., R.C (G)), but is not subject to any specific statutory limitations. The new law changes that. Now, a shareholder who receives a distribution of assets from a dissolving corporation is only liable to a creditor for the shareholder s pro-rata share of the creditor s claim, or the amount distributed to the shareholder, whichever is less. In keeping with the common law, it is now a statutory provision that the shareholder can never be liable in an amount in excess of that individual shareholder s distributed share. Moreover, the shareholder of a dissolved corporation can only be liable to a creditor if the claim against the corporation is commenced within the new time periods set forth in Section Practically speaking, that means the shorter of 5 years from dissolution, or within 30 days after the corporation rejects the claim, providing the corporation followed the new procedures for notifying claimants. Section addresses the authority of the Common Pleas Court to adjudicate and control various aspects of a corporate dissolution, Page 3 of 6

4 including claims of creditors, and has received some technical revisions to clarify the Court s jurisdiction and authority. Section , which touches upon the powers of a receiver appointed in connection with the dissolution of a corporation, has been amended to incorporate the new claims procedures set forth in Section Section changes some of the circumstances for judicially dissolving a corporation, including removal of the requirement that dissolution be necessary to protect the shareholders, and requiring a 2/3 supermajority of voting power in order to petition a court for judicial dissolution. The statute previously empowered a simple majority of votes to seek judicial dissolution of a corporation. Section makes minor changes to the process for seeking judicial appointment of a provisional director. NON-PROFT CORPORATION LAW Like the for-profit corporation statute, Ohio s non-profit corporation law has been changed to provide that any right to indemnification or advancement of expenses for a corporate officer or director provided for in a corporation s articles cannot be eliminated by an amendment to that article after an occurrence or omission becomes the subject of a legal proceeding or investigative action unless the provision explicitly authorizes the elimination or impairment of the right after the act or omission has occurred. See, R.C (E)(6). LIMITED LIABILITY COMPANY LAW Ohio s Limited Liability Company statute has also received significant additions. New Section confirms that the operating agreement governs relations among and between members, managers and the limited liability company, but forbids the operating agreement from: varying any rights and duties otherwise pertaining to professional service providers under Section ; unreasonably restricting the right of access to books and records; unreasonably eliminating the duties of loyalty or care; unreasonably eliminating or defining the standard of good faith and fair dealing applicable to members; unreasonably eliminating or defining the standards by which a manager must measure the execution of its duties; alter the statutory requirements concerning winding up; restricting the rights of third parties under the Code. Page 4 of 6

5 Section now clarifies that a substitute member of a limited liability company is bound by the operating agreement whether or not he substitute member or assignee executes the agreement. Section , consistent with the changes to the for-profit corporation law, now clarifies, if not restricts, the rights of creditors. It is now explicit in the Code that an order charging the membership interest of a member of a limited liability company is the sole and exclusive remedy that a judgment creditor may seek to satisfy a judgment against the membership interest of a member. It is now also explicit that no creditor of a member the member s assignee shall have any right to possession of the property of the limited liability company. Under new Section (D), the limited liability or one or more members who are not subject to a charging order may pay the judgment creditor the full amount still due under the judgment, and thereby succeed to the rights of the judgment creditor. New Section is likely to be a featured player in litigation for years to come. This statute provides that the only fiduciary duties a member owes to the limited liability company or to other members are the duty of loyalty and the duty of care, and it then defines both. The duty of loyalty is limited to: accounting to the company for any property, profit, or benefit derived in the conduct of the business or from the company s property, or from a company opportunity; refraining from dealing with the company on behalf of any party with an adverse interest; and refraining from competing with the company at any time prior to its dissolution. The duty of care consists of refraining from conduct that is grossly negligent, reckless, intentional misconduct, or knowingly illegal. The statute now contains an express covenant of good faith and fair dealing, but tempers that by providing that a member does not violate any duty or obligation under the statute merely because the member s conduct furthers the member s own interest. New Section clarifies the duties of manager-members. It provides that a manager of a limited liability company serving as manager pursuant to a written appointment and written management agreement, but who is also a member, owes the company and its members only the duties of a manager, while a manager who is a member but is not serving pursuant to such writings owes the company and other members only the duties of a member. Section sets forth new standards for the judicial dissolution of a limited liability company. A court is now required to declare a Page 5 of 6

6 dissolution and winding upon the occurrence of any event that makes it unlawful for all or substantially all of the business of the company to be continued, unless the illegality can be cured within 90 days after notice, or upon a finding that the economic purpose of the limited liability company is likely to be unreasonably frustrated, a member has engaged in conduct that makes it reasonably impractical to carry on the business with that member, or it is otherwise reasonably impractical to carry on the limited liability company s business in conformity with the operating agreement. Section has received a technical change so that, unless otherwise agreed, a person providing goods or services to a member or group of members of an limited liability company incurs no liability or obligation to, and is not in privity with, the company, its members, or its creditors by reason of providing such goods and services to the member or group of members of the LLC. # # # Page 6 of 6