Dissecting the New Montana Business Corporation Act

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By Devin O’Donnell and Jeff Heutmaker

On June 1st, 2020, the Montana Business Corporation Act, codified at Montana Code Annotated Section 35-1-112 et seq. (the “Old Act”) will be repealed and replaced by the new Montana Business Corporation Act, codified at Montana Code Annotated Section 35-14-101 et seq. (the “New Act”).  This marks the first time Montana has made significant modifications to its Business Corporation Act since 1992.  Below is an overview of the changes contained in the new act.

Default Voting Percentages
(e.g. 35-14-1003; 35-14-1104)

Under the Old Act, if the Articles of Incorporation did not provide for a majority in interest of the shareholders to approve significant corporate actions, such as amendments to the Articles of Incorporation, mergers, share exchanges, asset dispositions, or dissolution of the corporation, the default voting percentages for shareholder approval was two-thirds.  The New Act changes the default position so that shareholder approval of significant corporate actions can be accomplished by a simple majority unless the Articles of Incorporation provide for a higher percentage.

Action without a Meeting
(Mont. Code Ann. § 35-14-704)

The Old Act allowed shareholder approval of corporate actions by written consent without a meeting only if all shareholders entitled to vote on the action approved it.  Thus, if even one relatively minor shareholder would not sign a consent to take the action, then the corporation would be required to hold a meeting to obtain shareholder approval of such action.  Shareholder meetings require a minimum of ten days’ notice and can be costly and time-consuming to hold.  The New Act, like most other states’ corporate statutes, has been modernized to allow for shareholders to approve corporate actions by majority consent instead of unanimous consent, thus saving corporations involved in time-sensitive transactions the time and expense of holding a meeting when the result of any particular vote is already a foregone conclusion.  To take advantage of this more flexible voting method, however, corporations must include a provision in their Articles of Incorporation authorizing shareholder consent to corporate action by less than unanimous consent.

Preemptive Rights and Cumulative Voting
(Mont. Code Ann. § 35-14-630; 35-14-728)

Preemptive rights are rights for shareholders to retain their relative ownership percentage in a corporation that issues new stock.  Cumulative voting allows shareholders to cast all of their votes for a single nominee for the board of directors when the company has multiple openings on its board.  In contrast, regular voting does not allow shareholders to give more than one vote per share to any single nominee.  Under the Old Act, shareholders had preemptive rights and the right to cumulate their votes for directors unless these rights were specifically denied in the Articles of Incorporation.  The New Act reversed this default rule. Under the New Act, shareholders only have preemptive rights and the right to cumulate votes for directors if specifically granted in the Articles of Incorporation.

Domestication and Conversion
(Mont. Code Ann. § 35-14-920; 35-14-930)

Under the Old Act, if a corporation wanted to change its state of incorporation to Montana, it would need to go through a fairly complex merger in order to accomplish that goal.  The New Act introduces the concepts of “domestication” and “conversion” to the statutory framework with provisions that allow a domestic corporation to become a foreign corporation, and a foreign corporation to become a domestic corporation, if permitted by the laws governing the foreign corporation.  Additionally, the New Act allows a domestic or foreign entity to convert from a corporation to an unincorporated entity, such as a limited liability company, or from an unincorporated entity to a corporation, if permitted by the laws governing the foreign corporation. 

Mergers
(Mont. Code Ann. § 35-14-1102)

The Old Act permitted a business corporation to merge with another corporation but did not allow for mergers with unincorporated entities.  Under the New Act, one or more corporations may merge with one or more domestic or foreign business corporations or unincorporated entities.

Defective Corporate Actions
(Mont. Code Ann. § 35-14-147)

The New Act provides steps for ratifying defective corporate actions, which the Old Act did not contain.  As defined in the New Act, a defective corporate action is an overissue of shares or any corporate action that was within the power of the corporation but is void or voidable due to a failure of authorization.

Electronic Filing
(Mon. Code Ann. §35-14-120)

Under the New Act all filings should be submitted to the Secretary of State electronically unless an exception applies. Prior to the New Act online filing was standard for most business documents, with the exception of merger-related documents.

Conclusion

The new Montana Business Corporation Act is not so much a revision of the Old Act but is really an entirely new act.  Thus, it is essential for corporations incorporated under Montana law to ensure that they remain compliant with the New Act.  Perhaps most importantly, however, it is important that corporations consider amendments to their Articles of Incorporation to take advantage of some of the flexibility and time-saving provisions of the New Act. 

If you would like to consult with an attorney to determine if it makes sense to opt into some or all of the New Act’s provisions, please give the attorneys at Gravis Law a call and we will be happy to schedule a consultation.