Annual Reports Coming to Pennsylvania, and Other Updates to the Pennsylvania Associations Code: Part 1—A Summary
On 3 November 2022, Governor Wolf signed House Bill 2057 into law as Act 122. The act made numerous amendments to Title 15 of the Pennsylvania Consolidated Statutes, known as the “Associations Code” (the Title 15 Update).1 The Title 15 Update went into effect on 2 January 2023,2 with certain key provisions going into effect at a later date.3 The main sponsor of the legislation, Representative Brad Roae, cited modernization of Pennsylvania’s corporation law as the purpose behind the legislation, with most of the amendments modeled after the Delaware General Corporation Law, the Model Business Corporation Act, or the Principles of Corporate Governance: Analysis and Recommendations.4 This multipart series will provide a summary of the key changes coming to Pennsylvania through the Title 15 Update. This Part 1 provides a high-level summary of the key changes.
Summary of Key Changes
The Title 15 Update Includes the Following Key Changes, Among Many:
The Title 15 Update adopts annual reports, replacing the previous decennial filing.5 All entities formed in Pennsylvania and all entities registered to do business in Pennsylvania must file annual reports with the Pennsylvania Department of State starting in 2024.6 The annual deadline is determined by the entity type: (a) corporations (both for profit and nonprofit) must file before 1 July; (b) limited liability companies must file before 1 October; and (c) all other entities7 must file on or before 31 December.8
Renunciation of Business Opportunities
A Pennsylvania corporation, both for profit and nonprofit, may renounce any interest it may have in a business opportunity, which eliminates the requirement that an interested director or officer first bring such opportunity to the corporation. The renunciation may be a blanket renunciation or limited to specific classes or categories. The renunciation may be included in the articles of incorporation or adopted by the board of directors.9
Fiduciary Duties; Business Judgment Rule; Officers
The Title 15 Update clarifies that a Pennsylvania director’s duty to conduct reasonable inquiry into potential issues does not extend beyond that required by statute.10 In addition, Section 1712(d) of the Title 15 Update adopts a statutory statement of the business judgment rule as it relates to directors. The treatment of officers’ duties is moved to a new Section 1734, which also adopts a statutory business judgment rule for officers. A new Section 1735 authorizes a bylaw adopted by shareholders (or a provision in the articles) to extend to officers protection from personal liability similar to that currently available to directors in Section 1713. Unlike the analogous new Delaware provision,11 the potential protection is available to all officers, not merely certain categories of officer, and does not deny potential protection for claims brought by or in the right of the corporation. The Title 15 Update also clarifies, in response to certain case law regarding alleged duties to creditors, that a director owes duties only to the corporation, expressly stating that duties are not owed to creditors.12 Analogous changes were made for nonprofit corporations.13
The update adds statutory procedures to ratify defective actions by Pennsylvania entities. Ratifications under the Title 15 Update require action by the board, or applicable governing body, of the entity. Approval by the interest holders of the entity will also be mandatory where such approval is required by any agreement, governing document, statute, or other applicable rule. If the defective act required a filing, the entity must also make a validation filing with the Pennsylvania Department of State.14
The bylaws or articles of incorporation of both for-profit and nonprofit Pennsylvania corporations may include a provision providing a forum for the adjudication of internal corporate claims. Any exclusive forum provision must include at least one Pennsylvania state court and may designate courts in other jurisdictions so long as the corporation has a reasonable relationship to the jurisdiction. For claims arising under the Federal Securities Act of 1933, the provision may provide for a federal court as the exclusive jurisdiction.15 The Title 15 Update states that such provisions do not confer personal nor subject matter jurisdiction on any specified courts.16
Further Details Will Be Provided in Future Alerts in Connection With This Multipart Series.
The Title 15 Update modernizes Pennsylvania’s Associations Code, particularly the Business Corporation Law, in many respects. While Pennsylvania and Pennsylvania-registered foreign entities must now file an annual report, the process is simple and intuitive. Where technical defects in authorization would otherwise preclude validation of certain entity actions, the update provides a clear path for ratification without the complications of voiding the action or an automatic bar on potential stale challenges to authorization. Expanding on the latitude already widely available under the Business Corporation Law to vary many statutory default rules, the update also codifies variations on some specific areas of flexibility afforded to entities under the Delaware General Corporation Law, such as renunciation of business opportunities and the authorization for corporations to limit liability of corporate officers. Finally, the update provides important clarifications on duties of directors following interpretations of the Associations Code by some courts.
The Title 15 Update amends the Associations Code in several other important aspects. For example, it changes or adds provisions regarding the conduct of meetings and voting, and modifies some of the provisions governing “registered” (i.e., public) corporations.17 Other critical changes include rules related to two-step transactions,18 permissible methods of entity record retention,19 emergency actions of entities,20 limitations on dissenters’ rights,21 limiting the statutory mandated indemnification for successful defense to cover only directors and officers, rather than all representatives,22 director resignation,23 and delayed effectiveness of director consent.24
Please contact the authors of this client alert or your primary contact at the firm for further insight with respect to the Title 15 Update. The next part in this multipart series will discuss the annual report requirements.
1 H.B. 2057, Gen. Assemb., Reg. Sess. (Pa. 2022). Act 122 also made conforming changes to Title 54 (Names).
2 1 PA. CONS. STAT. § 1701(a)(5); see also H.B. 2057, § 112.
3 See, e.g., H.B. 2057, § 5 (adding § 146(h) to the Associations Code).
4 Memorandum from Representative Brad Roae, Pa. H.R. Reg. Sess. (Oct. 26, 2021), https://www.legis.state.pa.us/cfdocs/Legis/CSM/showMemoPublic.cfm?chamber=H&SPick=20210&cosponId=36409.
5 H.B. 2057, § 5 (adding § 146(a) to the Associations Code).
6 Id. (adding § 146(h) to the Associations Code).
7 This includes limited liability partnerships, limited partnerships, electing partnerships, professional associations, and business trusts. See 15 PA. CONS. STAT. § 102(a).
8 H.B. 2057, § 5 (adding § 146(c) to the Associations Code).
9 Id. at § 45 (adding § 1719 to the Associations Code).
10 Id. at § 42 (amending § 1712(a) of the Associations Code) (adopted in response to In re Nine West LBO Securities Litigation, 505 F. Supp. 3d 292, 310-12 (S.D.N.Y. 2020) (interpreting the Associations Code)).
11 DEL. CODE tit. 8, § 102(b)(7).
12 H.B. 2057, §§ 42, 44, 51 (amending §§ 1712 and 1717 of the Associations Code and adding §§ 1734 and 1735 to the Associations Code, respectively).
13 See id. at § 80 (amending § 5712 of the Associations Code); id. at § 82 (amending § 5717 of the Associations Code); id. at § 87 (adding § 5733.1(b)–(d) to the Associations Code); id. at § 87 (adding § 5733.2 to the Associations Code).
14 Id. at § 11 (adding §§ 221–29 to the Associations Code).
15 Id. at §§ 37, 79 (adding §§ 1513(a) and 5513(a) to the Associations Code, respectively).
16 Id. at § 37 (adding § 1513(b) to the Associations Code).
17 E.g., id. at § 40 (amending §§ 1704, 1708, 1709 of the Associations Code); id. at § 53 (amending § 1755 of the Associations Code); id. at § 54 (amending §§ 1758, 1763 of the Associations Code); id. at § 60 (amending §§ 2522, 2528 of the Associations Code); id. at § 61 (adding § 2530 to the Associations Code); id. at § 65 (amending § 2561 of the Associations Code).
18 Id. at § 15 (adding § 321(f) to the Associations Code).
19 Id. at § 2 (amending § 107(a) of the Associations Code to permit record retention through blockchain technology).
20 Id. at § 34 (amending § 1509 of the Associations Code).
21 Id. at § 40 (amending § 1571(f) of the Associations Code); id. at § 16 (amending § 363(c) of the Associations Code).
22 Id. at § 52 (amending § 1743 of the Associations Code).
23 Id. at § 47 (amending § 1724 of the Associations Code).
24 Id. at § 49 (amending § 1727 of the Associations Code).
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. Any views expressed herein are those of the author(s) and not necessarily those of the law firm's clients.