Amendments to the Indiana Business Corporation Law

On May 12, 2009, Indiana Governor Mitch Daniels signed into law Senate Enrolled Act 450, which made several changes to Indiana corporate law effective July 1, 2009. Most notable was the change mandating that publicly-held corporations stagger the terms of their board members into two or three groups, elected for two or three year terms, respectively, unless the corporation takes action by July 31, 2009 to opt out of this requirement (as further described below). The following discussion highlights several of the substantive changes made by this legislation:

Staggered Board Terms for Public Companies

To opt out of having mandatory staggered board terms, a public corporation has until July 31, 2009 to adopt a bylaw expressly electing not to be governed by this requirement. Inaction (whether the organization's current bylaws provide for some form of a classified board or are silent as to staggered terms) will cause board members' terms to be staggered. The statutory default classification rule specifies that directors of a public corporation that has not opted out by July 31, 2009, and that has not, by board action, adopted some other permissible board classification structure, shall be divided alphabetically by last name into three groups for election purposes and elected for three year terms.

Importantly, an election before July 31, 2009, by the board of directors of a public corporation not to be governed by the law's new rule as to staggering of the terms of directors may be rescinded by the board, unless the original articles of incorporation contain a provision expressly electing not to be governed by this default provision.

Control Share Acquisitions

The definition of "issuing public corporation" was amended to extend the coverage of Indiana's Control Share Acquisition Act. For purposes of Control Share Acquisitions, an issuing public corporation is any corporation that has:

1. one hundred or more shareholders;

2. its principal place of business or its principal office in Indiana, or owns or controls assets within Indiana having a fair market value of more than $1,000,000; and

3. either:

a. more than 10 percent of its shareholders resident in Indiana;

b. more than 10 percent of its shares owned of record or owned beneficially by Indiana residents; or

c. one thousand shareholders resident in Indiana.

Expanded Definition of "Beneficial Owner" and Inclusion of Definition of "Derivative Instrument"

The definition of beneficial owner was expanded to include owners of derivative instruments. Under the new definition, a "beneficial owner" can be an individual who directly or indirectly owns a derivative instrument that includes the opportunity, directly or indirectly, to profit from an increase in value of the shares; or can also be an individual who, directly or indirectly:

A. owns shares of the company;

B. has the right to vote or acquire shares under any agreement, arrangement or understanding, to the extent that the right does not arise under a tender offer; or

C. has an agreement, arrangement, or understanding for the purpose of acquiring, holding, voting, or disposing of the shares of any other person that beneficially owns the shares.

This expanded definition impacts existing statutory provisions for the establishment of a recognition procedure or a disclosure procedure for beneficial owners under the "Voting by beneficial owners" statute. It also impacts the "Change of Control" statute, and the "Business Combinations" statute.

Rights, Options and Warrants as "Poison Pills"

A corporation, acting through its board of directors, may create or issue rights, options or warrants for the purchase of shares (or other securities) of the corporation. The board determines the terms, form and content of the rights, options or warrants as well as the consideration to be received by the corporation upon exercise. The board is authorized to include terms and conditions that:

A. restrict or preclude the exercise, transfer or receipt of the rights, options or warrants by a person who owns a specified number or percentage of the outstanding shares or other securities of the corporation; or

B. invalidate or void the rights, options or warrants held by a person owning or offering to acquire a specified number or percentage of the outstanding shares or other securities of the corporation.

Election of Directors

Non-public corporations that do not have cumulative voting may elect, in the corporation's bylaws, to be governed by a new provision regarding the election of directors. This optional provision structures director elections (other than certain contested elections) such that shareholders are entitled to vote "against" a nominee's election in addition to abstaining from voting or voting "for," as authorized by prior law, except that a shareholder may vote only with respect to a number of candidates equal to the number of directors to be elected. As before, in order for a nominee to be elected, the nominee must have received a plurality of the votes cast. However, if a nominee is elected but receives more votes against his or her election than he or she received in favor of election, that nominee shall serve as a director for a term that ends on the earlier of either 90 days after the election results are determined or the date on which a replacement is selected by the board of directors.

Liability of Directors

The amendment clarifies that directors are not liable for any action taken as a director, or failure to take any action as a director, regardless of the nature of the alleged breach of duty, including alleged breaches of the duty of care, the duty of loyalty, and the duty of good faith, unless the director willfully or recklessly breached or failed to perform his or her statutory duties. In addition, the change clarifies the ability of a director to take advantage of a business opportunity so long as the opportunity has been disclosed and the board and/or the shareholders have disclaimed the corporation's interest in the opportunity (assuming all material facts about the opportunity known to the director were shared with the board and/or shareholders).

Limitation on the Right to Dissent and Receive Payment for Preferred Shares

Under the amendment, a non-public corporation may amend its articles of incorporation to limit or eliminate the right to dissent and obtain payment for any class or series of preferred shares. However, if a corporation elects to make such an amendment, it does not apply to any corporate action taken within one year of the amendment that effects the right to dissent and obtain payment for any shares that are either outstanding immediately before the effective date of that amendment or that the corporation is or may be required to issue or sell after the effective date pursuant to a transaction.

Shareholder Meetings, Consents and Notices

A non-public corporation may take action typically conducted at a shareholders meeting through written consents that are signed, dated and delivered to the corporation. The amendment adds the additional requirement that the written consent bear the date of each signature. To conduct business through written consents, the consents must be executed by the holders of outstanding shares having at least the minimum number of votes that would be required to authorize or take the action at a meeting at which all shares entitled to vote on the action were present and voted. Prior notice is no longer required. The written consents must be executed by the requisite number of shareholders within 60 days from the date the first signature is obtained.

If directors are elected by written consent, a corporation may elect to forego an annual shareholder meeting. Note, however, that if a corporation's articles of incorporation authorize cumulative voting for director elections, directors may only be elected at a meeting or by unanimous written consent.

In a new provision concerning "householding," whenever a corporation must deliver notices, reports or statements to shareholders who share a common address, the corporation may choose to deliver only one copy of the notice, report or statement to the common address, addressed to the shareholders as a group (or in a form they have consented to) if each of the shareholders consents to delivery of a single copy of the notice, report or statement to the common address of the shareholders. A shareholder who fails to object to a corporation's written notice of its intent to make consolidated mailings, as described above, within 60 days after receipt of such notice is considered to have consented.

A corporation is no longer required to report:

A. the indemnification of directors or the advancement of expenses to a director when the indemnification or advancement of expenses is related to a proceeding by or in the right of the corporation; or

B. whether shares were authorized to be issued for promissory notes or for promises to render services in the future.

Previously, such action had to be reported to shareholders at or before the next shareholder's meeting.

Disposition of Assets

Under the amendment, a corporation must generally seek shareholder approval for a "sale, lease, exchange, or other disposition of assets…if the disposition would leave the corporation without a significant continuing business activity." A corporation retains a "significant continuing business activity" if, on a consolidated basis, a corporation retains a business activity that represented at least 25 percent of total assets at the end of the most recent fiscal year and at least 25 percent of either income from continuing operations before taxes or revenues from continuing operations for the fiscal year. Previously, a corporation was required to seek shareholder approval for a disposition of "all or substantially all" of the assets of the corporation, other than in the usual and regular course of business.

Incorporation by Reference in Filing a Plan of Merger and Certain Other Plans

Filings with the Indiana Secretary of State in connection with a plan of merger, share exchange, domestication or conversion may now incorporate, by reference, facts "objectively ascertainable outside the plan" such as terms of an agreement or other document or notice which was given to affected shareholders. This provision makes it clear that certain provisions among the parties need not be placed in the public record if those facts are available outside the filing.

Electronic Transactions, Records, Writings, Signatures and Notices

The new legislation, together with amendments in 2008 to the Uniform Electronic Transactions Act, recognizes modern means of communication, including e-mail and other electronic transmissions. The definition of "signature" (or to "sign") now includes electronic signatures, and certain requirements that a notice or document be in "writing" now includes an electronic transmission. The Uniform Electronic Transmissions Act includes detailed provisions concerning when notice to or from shareholders can be made by electronic transmissions.

Under the Uniform Electronic Transactions Act, a constituent of a business entity (such as a shareholder of a corporation) and the business entity are presumed to have agreed to conduct actions, such as notices, consents, signatures and other actions, electronically unless:

A. the governing documents of the entity limit or prohibit the use of electronic signatures or electronic records; or

B. the entity expressly states the method, means, or requirement by which a shareholder or other constituent may respond to or participate in the organizational action. This may include, for example, a requirement of a specific form or writing, record or signature.

Among other things, the Uniform Electronic Transactions Act also describes when electronic notices are effective when sent either by a corporation to a shareholder or by a shareholder to a corporation. Business entities might wish to consider adopting a policy on electronic transactions.

For further information, or to discuss the implications of this new law, please contact Joseph DeGroff, Stephen Hackman, Richard Thrapp or any of the attorneys in Ice Miller's Business Group.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.