Summary of Recently Adopted Changes to the Florida Business Corporation Act and Harmonizing Changes to Other Florida Entity Statutes, Part I
This is the first of two articles that will address key changes to the Florida Business Corporation Act (Ch. 607 or FBCA) and to certain other Florida entity statutes. This first article is a condensed version of two out of four more extensive articles about the revised act that have been or will be posted on the web page of the Business Law Section’s Chapter 607 Drafting Subcommittee at http://www.flabizlaw.org/committees-task-force/task-forces/chapter-607-subcommittee/.
The revised act (designated F.S. Ch. 2019-90) will become effective on January 1, 2020.
Florida’s corporate statute (Part I of the FBCA) is largely modeled on the Revised Model Business Corporation Act. The Model Act is promulgated by the Corporate Laws Committee of the Business Law Section of the American Bar Association. Although the Model Act has changed extensively over the past 35 years, the FBCA has been overhauled only once (in 1989) and otherwise has endured patchwork amendments.
The revised act is the work of the Chapter 607 Drafting Subcommittee of the Corporations, Securities and Financial Services Committee of The Florida Bar’s Business Law Section. The subcommittee’s mission statement was to comprehensively study Florida’s business corporation statute and to propose a more cohesive revision and set of amendments.
The revised act includes 1) changes based on the 2016 version of the Model Act; 2) language changes that make the statutory provisions more understandable and usable by those who have to work with the statute (including judges), including fixing existing statutory language; 3) changes that borrow parallel language and approaches from the Florida Revised Limited Liability Company Act (FRLLCA) for purposes of harmonizing the two statutes on issues where harmonization was considered appropriate; and 4) necessary corrections to cross references. It also retains certain non-Model Act provisions already contained in existing Ch. 607 and continues, in certain cases, to borrow language from the Delaware General Corporation Law (DGCL).
During the course of drafting the revised act, extensive input was secured from representatives of the Florida Department of State, Division of Corporations.
This revised act uses the term “chapter” to refer to Ch. 607, Parts I, II and III, and eliminates the use of the term “act.”
As part of its work, the subcommittee has written an extensive commentary. A full version of Ch. 607, annotated with the changes made in the revised act and the commentary, is available for download at http://flabizlaw.org.
The following highlights the most significant changes to the FBCA. The discussions below are grouped together by article of Ch. 607, and references to sections are to sections of the Florida Statutes.
Article 1: General Provisions
• Filings with the Department Generally — With respect to the process for filing documents with the department, as a general matter no substantive changes have been made.
• Correcting Filed Documents — Although the provisions in §607.0124 are largely the same as under existing law, the language contained in subsection (1) of the existing statute, which provides that a document can only be corrected within 30 days of the date of filing, has been removed from the statute, thus allowing a correction to be made at any time — even many years after the fact. Of course, as under existing law, any such correction will not be retroactively effective against those persons relying on the uncorrected document and adversely affected by the correction.
• New Definitions (Including “Qualified Director”) — There are many changes in the definitions provisions of Ch. 607. Most definitions appear in §607.01401. Some of the new definitions come from the Model Act, others are derived from definitions already contained in FRLLCA, and a few are peculiar to Florida law.
A definition of “applicable county” in §607.01401(3) has been added to make clear where proceedings must be brought by or against a corporation under various circumstances. The new “applicable county” definition creates a waterfall to identify the proper county where an action can take place.
The definition of “insolvent” in §607.01401(42) has been modified to add a balance-sheet test to the definition.
A definition of “authorized entity” has been added to clarify the types of entities that may act as the registered agent for a Florida corporation or for a foreign corporation authorized to transact business in Florida, including expressly adding limited liability companies.
The newly added definition of “qualified director” is used in the revised derivative action provisions of article 7, and in the revised director conflict of interest and indemnification provisions contained in article 8.
• Notices and Electronic Notices — The changes to §607.0141 concerning the giving of notices adopt most of the changes made in the notice requirements in §1.41 of the Model Act. With the substantial growth of electronic transmission (and a corresponding decline in mailed correspondence), a modernization of Ch. 607 was believed necessary.
Section 607.0141(6) in the revised act adds a clarification that if the corporation’s articles or bylaws authorize notice or other communications to directors by way of electronic transmission, then no consent of a recipient director shall be required for the corporation to provide notice or other communication to the recipient director by electronic transmission.
Article 2: Incorporation
• Articles of Incorporation Generally — The changes that the revised act makes to the sections concerning articles of incorporation and bylaws do not effectively change the mandated requirements for articles of incorporation in Florida. As a result, most practitioners who employ their own form of articles of incorporation (rather than using the online preprinted form), will be able to continue to use their form under the revised act. Nevertheless, it still would be advisable for each practitioner to compare his or her existing form of articles of incorporation against the changes included in §607.0202 of the revised act.
• Exclusive Forum Provisions Expressly Permitted in Articles of Incorporation and Bylaws — New subsection (2)(b)6 of §607.0202 expressly permits articles of incorporation to include exclusive forum provisions, to the extent permitted by new §607.0208. Similarly, new §607.0206(4) authorizes bylaws to include exclusive forum provisions. Even though the subcommittee believed that exclusive forum provisions were already permissible under the generic catch-all language in §607.0202(2)(d), because of extensive discussions about such provisions around the country and the fact that this authority is expressly included in both the DGCL and the Model Act, the express authority has been added.
• Fee-shifting Provisions Are Not Permitted, Except in Limited Circumstances — In contrast, §607.0202(5) and new §607.0206(5) expressly prohibit the inclusion in articles of incorporation or bylaws of provisions that purport to impose liability upon a shareholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim. However, the subcommittee recognized that such a provision could still be adopted by unanimous shareholder approval in conformity with a shareholders’ agreement meeting the requirements of §607.0732.
• Bylaws — New §607.0206(3) expressly authorizes the inclusion in corporate bylaws of proxy access provisions that require a corporation to include individuals nominated by shareholders for election as directors in its proxy statement and to require the reimbursement by the corporation of expenses incurred by the shareholders in soliciting proxies in connection with an election of directors. While these provisions can be adopted by any Florida corporation, they are largely designed for use by public companies. Although many believe that proxy-access provisions were already permissible in a Florida corporation’s bylaws under existing law, this language has been added to eliminate any ambiguity in that regard.
Because substantial substantive changes are being made throughout Ch. 607, and given that most corporate bylaws cover a wide range of internal governance issues, most if not all practitioners will need to update their standard form bylaws for Florida corporations for use beginning January 1, 2020. Bylaws of existing Florida corporations will need to be reviewed, and in many cases, amended.
Article 4: Corporate Names
• Corporate Name — The revised act makes a significant change to §607.0401. The change allows a corporation to register under a name that is not otherwise distinguishable on the records of the department with the consent of the other entity if the consent is filed with the department at the time of registration of such name. The one limitation to this provision is that identical names are not permitted.
• Reservation of Corporate Name — New §607.04021 once again allows for a one-time 120-day reservation of a corporate name.
Article 5: Office and Agent
• Registered Agent and Registered Office — The bulk of the changes that have been made in §§607.0501 through 607.05031 are either clarifying or designed to mirror similar provisions already contained in FRLLCA.
The changes to §607.0501(6) clarify that a domestic corporation cannot prosecute or maintain an action in this state unless it has complied with its obligation to maintain a registered agent and registered office in Florida. However, a Florida corporation may defend an action in Florida even if it is not so compliant.
The procedures for a corporation changing its registered agent or office, for a registered agent to resign, and for a registered agent to change its name and/or its office address are now broken out into separate sections, harmonizing with the corollary provisions in FRLLCA.
• Service of Process — Under §607.0504 of the revised act relating to service of process, giving notice and making demand, there are two key changes. First, the revised act bifurcates the statutory provisions between those provisions relating to service of process and those provisions dealing with notices or demands on the corporation. The language in the revised section is derived from §605.0117 of FRLLCA. Second, the revised section establishes a “waterfall” approach for proper service of process on a corporation, consistent with FRLLCA.
Article 6: Shares and Distributions
• Share Rights, Options, Warrants, and Awards — There are several substantive changes to §607.0624 relative to share rights, options, warrants, and awards. There are also many language changes that are designed to adopt the more modern language contained in §6.24 of the Model Act, but which are not intended to be substantive changes.
New §607.0624(3) clarifies that not only the board of directors, but also committees of the board charged with dealing with these matters (such as a compensation committee acting under a stock incentive plan), may be authorized by the board to make equity compensation decisions. Unlike current §607.0825, which requires limits to be specified for such an authorization, the authorization under this new subsection, although limited to equity compensation, may be absolute rather than within specified limits. Nevertheless, as a matter of good corporate governance, boards would be well advised to specify at least certain broad limits in making any such delegation.
Further, and of particular note, new §607.0624(3) allows delegations of authority to “officers” (not just to “senior executive officers”) to make equity compensation decisions without imposing an obligation on the board of directors to set forth specified limits on such officers’ authority.
Article 7: Shareholders
• Annual and Special Shareholder Meetings — Section 607.0701, dealing with annual meetings of shareholders, and §607.0702, dealing with special meetings of shareholders, were modified to remove from those sections (and move elsewhere) the discussion regarding participation in meetings of shareholders by remote communication. The provisions dealing with participation in meetings of shareholders by remote communication are now contained in new §607.0709. The new language, among other things, authorizes the board of directors, in its sole discretion, to determine that the meeting can be held at a physical place or solely by means of remote communication (i.e., a virtual meeting).
• Court-ordered Shareholder Meetings — As under current law, if a corporation fails to hold an annual meeting of shareholders in a timely manner, a court may order a meeting. Subsection (1)(a) of §607.0703 is amended to increase from 13 months to 15 months the amount of time a corporation has to hold its annual meeting or undertake action by written consent before a court may order a meeting or other action.
• Shareholder Action by Written Consent — Language has been added to §607.0704(1) to clarify when a shareholder consent meets the requirements to reflect delivery of consents representing a number of shares sufficient to authorize or take the action within the 60-day timeframe contemplated by this statute. Subsection (4) of §607.0704 has also been modified to allow the corporation to delay effectiveness of the action for a reasonable period of time to permit tabulation of the consents received. Further, new §607.0704(7) makes clear (consistent with what is believed to be the current state of the law) that the failure to give the required notice to shareholders who did not submit a consent does not delay the effectiveness of the action or invalidate the action taken, subject to the right of a court to fashion an appropriate remedy for failure to give such notice.
• Record Date — Section 607.0707 has been amended to expressly allow a corporation’s bylaws to establish a bifurcated record date whereby there can be a different record date for which shareholders may vote at a meeting, versus the record date for which shareholders are entitled to notice of a meeting.
• Proxies — Changes have been made to §607.0722(3) to clarify that a proxy is valid for the period specified in the appointment form, and that if no term is specified in the proxy, the term would be defaulted to 11 months unless such appointment is irrevocable under §607.0722(5) (because it is coupled with an interest).
• Voting Agreements — In the current version of the FBCA, §607.0731 and §607.0732 both refer to shareholders’ agreements. However, §607.0731 only deals with the enforcement of voting agreements among shareholders to vote their shares in a certain manner. As a result, the name of §607.0731 has been modified to make clear that §607.0731 only relates to voting agreements.
• Shareholders’ Agreements — Section 607.0732 allows shareholders to modify traditional corporate norms in a myriad of ways. Under the existing statute, this provision only applies to corporations with 100 or fewer shareholders. However, in the revised act, the 100-shareholder limitation has been eliminated. Further, two additional categories of the types of actions that can be taken in a unanimous shareholders’ agreement have been added.
The first category includes provisions that potentially impose liability on a shareholder for fees and expenses in connection with an internal corporate claim (a fee-shifting provision). These provisions are not permissible outside of unanimous agreements under §607.0732. The second category includes provisions that provide a mechanism for breaking a deadlock among the directors or shareholders of the corporation. Finally, the provision that allows shareholders’ agreements to include any other types of provisions so long as such provisions are not contrary to public policy has been retained. However, the examples of provisions that might be considered as being contrary to public policy has been eliminated in favor of allowing courts to determine over time what may be contrary to public policy under particular circumstances.
Additionally, §607.0732(8) has been added to clarify that shareholders’ agreements that do not meet the requirements of §607.0732, because not all shareholders joined in the agreement, may still nevertheless be valid against those specific shareholders who entered into the agreement and against the corporation under certain circumstances.
• Derivative Actions Generally — The FBCA currently includes all of the derivative action provisions in a single statutory section. On the other hand, the Model Act breaks this topic into multiple sections (§§7.41-7.47). The changes in the revised act follow the multiple-section approach of the Model Act. However, many of the derivative-action provisions contained in the revised act continue the substance of the current derivative-action provisions contained in existing §607.07401.
• Derivative Actions — Standing — New §607.0741 provides that a shareholder may not commence a derivative action proceeding unless the shareholder was a shareholder of the corporation when the transaction complained of occurred or unless the person became a shareholder through transfer by operation of law from one who was a shareholder at that time. The revised standing provision does not add any specific language to the effect that a shareholder must remain a shareholder throughout the derivative-action proceeding in order to continue to proceed with an otherwise properly brought derivative action. It was the general view of the subcommittee that imposing any such condition to continuing to maintain such an action should be based on the equities in each respective situation and, thus, should be left to courts to decide.
• Derivative Actions — Demand and Excuse — Under current §607.07401(2), a derivative proceeding cannot be brought unless the complainant alleges that demand was made to obtain action of the board of directors (commonly called “universal demand”) and the demand was refused or ignored by the board of directors for a period of at least 90 days from the first demand, unless it could be shown that irreparable injury to the corporation would result from waiting the 90 days, in which case a shortened waiting period is permitted.
The Model Act continues to include a required universal demand before a derivative action may be brought. On the other hand, FRLLCA, in §605.0802(2), contemplates that if making a demand on the other members (in a member-managed LLC) or on the other managers (in a manager-managed LLC) would be futile or would cause irreparable injury to the company, then such demand shall not be required in order to maintain a derivative proceeding against the LLC. The FRLLCA provision follows the uniform act on this topic. Further, while not in the DGCL, the futility concept, as an alternative to a demand requirement, has been adopted as a matter of judicial policy by the Delaware courts.
Based on an extensive analysis by the subcommittee of all of these factors, new §607.0742 allows a complaining shareholder to argue that demand would be futile by alleging the reasons for the shareholder not making the effort to obtain the action desired.
• Derivative Actions — Dismissal — Section 607.07401(3) currently states that a court may dismiss a derivative proceeding under certain circumstances. Similar to §605.0804(5) of FRLLCA, new §607.0744 gives the court discretion to dismiss a derivative action based on the recommendation of a board committee of qualified directors (truly independent directors who qualify under the definition set forth in §607.0143) or a disinterested litigation committee appointed by the court in a situation in which the committee is disinterested and independent and, in both cases, where the committee has acted in good faith, independently, and with reasonable care. Both of these provisions are different from the Model Act, which requires a court to dismiss a derivative action on the recommendation of a disinterested special litigation committee.
• Direct Actions by Shareholders — In an effort to bring greater consistency to positions taken by courts in Florida, new §607.0750 provides a definition of when an action will be considered a direct action versus a derivative action. The provision is largely modeled after §605.0801 of FRLLCA, but modifies the language in this section to bring it into substantial conformity with recent Florida case law on this topic, and particularly the holdings in Dinuro Investments, LLC v. Camacho, 141 So. 3d 731 (Fla. 3rd DCA 2014), and Strazzulla v. Riverside Banking Co., 175 So. 3d 879 (Fla. 4th DCA 2015). Similar harmonizing modifications have also been made to §605.0801.
• Available Remedies Outside of Judicial Dissolution — Two new sections have been added to the FBCA to authorize certain remedies in situations outside the context of a judicial dissolution proceeding. The first provision, new §607.0748, allows the appointment of a receiver or custodian in two situations arising outside the context of seeking a judicial dissolution. The second provision, new §607.0749, allows the appointment of a provisional director outside the context of seeking a judicial dissolution when the directors are deadlocked in the management of the corporate affairs, and the shareholders are unable to break the deadlock.
Article 8: Directors and Officers
• Weighted Director Voting — Existing §607.0804 includes the concept of weighed proportional director voting, if permitted in the corporation’s articles of incorporation. This is not a Model Act provision, but follows §141(d) of the DGCL. In order to eliminate ambiguity, language has been added to make clear that if a shareholders’ agreement has been adopted in conformity with §607.0732, which changes the weight of director votes (even if not in the corporation’s articles of incorporation), those provisions will be respected and all references in Ch. 607 to a majority or other proportion of directors shall refer to a majority or other proportion of the votes of such directors (in the same manner as if such weighted director voting was included in the articles of incorporation under this section).
• Removal of Directors by Judicial Proceedings — The revised act, in new §607.08081, adds statutory language that authorizes a court to remove a director in a derivative proceeding if the court makes certain findings. While it is believed that courts already have this power under existing law, expressly stating it should make that right clear.
• Committees of the Board of Directors — The revised act makes extensive changes to §607.0825 dealing with the composition, operations, and authority of board committees, including authorizing board committees comprised of only one board member and modifying what actions cannot be delegated to a board committee. The revised section also eliminates the provision in current law that imposes limits on the ability of a board of directors to delegate the issuance or sale of shares, or the designation of relative rights preferences and limitations of a voting group, to a board committee, and instead authorizes such ability to delegate without the need to establish parameters.
By way of clarifying language derived from §8.25 of the Model Act, this section confirms the intent of prior §607.0825 to the effect that this section relates only to board committees exercising one or more board functions. This section does not apply to other committees, including advisory committees, set up by the board that may include officers, employees, or others who are not board members and that might be created to deal with non-board issues or to make recommendations for the board or a board committee to consider. Moreover, it does not limit the board’s power to designate non-board-member observers to attend meetings of board committees. However, no such non-board-member observer can be a voting member of a board committee.
• Force the Vote — New §607.0826, which follows §8.26 of the Model Act, provides express authorization for a corporation to enter into an agreement (i.e., a merger agreement) containing a “force the vote” provision.
• Director Fiduciary Standards — The revised act makes extensive modifications to §607.0830, which is the provision setting out fiduciary standards for directors and effectively includes a codification of the business judgment rule. This section has been modified to follow the organization and the wording of §8.30 of the Model Act, although for the most part, the change in language does not change the substance of standards applicable to directors. However, several changes of note have been made.
First, the revised act retains the non-Model Act clarifying reference from the existing Florida statute that these standards apply to directors, whether they are acting as members of the board or as members of a committee of the board. Second, the “prudent person” standard of care in subsection (1) of the existing statute was replaced in subsection (2) with a standard of care that “a person in a like position would reasonably believe appropriate under similar circumstances” standard, thus, incorporating into the standard of care the concept of a “reasonable belief” under the circumstances. The new language is derived from the Model Act provision and is not believed to change the standard in any meaningful way, but rather to give better guidance to courts about how to take this standard into account under various circumstances.
• Director Conflicts of Interest — The revised act makes extensive modifications to the director conflicts of interest provision to match the conflict of interest approach adopted in FRLLCA, and particularly to make clear that 1) an “unfair” conflict of interest transaction cannot be “sanitized” by an approval of qualified directors (defined in §607.0143) or disinterested shareholders, and 2) approval of a conflict of interest transaction by qualified directors or disinterested shareholders will have the effect of shifting the burden of who has to prove whether such transaction is or was fair. The revised provision eliminates the provisions in the current statute that could be read to provide that an “unfair” director conflict of interest transaction may be sanitized if it is approved by disinterested directors or disinterested shareholders.
• General Fiduciary Standards for Officers — The revised act adds new §607.08411, which sets forth general fiduciary standards for officers.
• Indemnification Generally — The FBCA currently includes all of the indemnification provisions in a single statutory section. On the other hand, the Model Act breaks this topic into multiple sections (§§8.50-8.59). The changes in the revised act follow the multiple sections approach of the Model Act. However, many of the indemnification provisions contained in the revised act continue to follow the substance of the indemnification provisions contained in existing §607.0850.
• Indemnification, Permissible Indemnification — The Model Act leaves indemnity of employees and agents to the laws of agency. Although the current Florida statute included employees and agents in the applicable sections of §607.0850, which provided for permissible and mandatory indemnification, the revised act follows the Model Act and elects to cover indemnification of employees and agents under the laws of agency.
Section 8.51(a)(2) of the Model Act, which requires any indemnity that is provided beyond the statutory provisions must be included in the corporation’s articles of incorporation to be applicable, has not been adopted in the revised act. Thus, to be consistent with that approach, §607.0202 of the FBCA does not include the Model Act language that would expressly allow for indemnity beyond the statutory provisions only in circumstances in which such authorization is set forth in the corporation’s articles of incorporation. As a consequence, indemnity beyond the statutory provisions may be provided in various ways. This point is expressly made clear in new §607.0858(1), which allows any legally permissible expanded indemnification to be included in the corporation’s articles of incorporation, in its bylaws, in an agreement, or in resolutions adopted by a vote of shareholders or disinterested directors.
• Indemnification, Mandatory Indemnification — The standard for statutory mandatory indemnification in new §607.0852 follows the Model Act requirement that an officer or director must be “wholly successful” to be entitled to mandatory indemnification. This is in contrast with the “successful” standard in §607.0850(3) as it was in effect prior to this revision. An indemnification agreement can still incorporate the “successful” standard.
• Indemnification, Advancement of Expenses — New §607.0853 deals with the advancement of expenses. The provisions in Model Act §8.53(c), which establishes how advancement of expenses is to be determined when there are directors who are parties to the proceeding at the time of authorization, has been included in the revised act to clearly reflect how this decision is to be made under different circumstances.
A corporation may obligate itself pursuant to §607.0858(1) to advance expenses under §607.0853 by means of a provision set forth in its articles of incorporation or bylaws, by a resolution of its board of directors or shareholders, or in an agreement. Moreover, unless provided otherwise, §607.0858(1) expressly deems a general obligatory provision requiring indemnification to the fullest extent permitted by law to include advancement for expenses to the fullest extent permitted by law (unless the provision specifically provides otherwise), even if not specifically mentioned, subject to providing the required repayment undertaking. No other procedures, including without limitation any requirement of certification of good faith and reasonable belief or any requirement of merits proof, are required or contemplated.
• Indemnification, Court-ordered Indemnification and Advance for Expenses — New §607.0854 deals with court-ordered indemnification and advancement for expenses. In subsection (1), the word “may” that is contained in existing §607.0850(9) has been retained. By comparison, the word “shall” is used in the corollary Model Act provision.
• Indemnification, Variation by Corporate Action and Overriding Restrictions on Indemnification — New §607.0858 permits the corporation to indemnify officers and directors beyond the permissive indemnification contained in §607.0851 and the advancement of expenses under §607.0853. The wording of §607.0850(7) that was in effect prior to this revision, which sets forth how a corporation may obligate itself to provide indemnification beyond the provisions contained in existing §607.0850, has been retained in §607.0858(1), rather than following the more limited corollary provision contained in the Model Act. However, even under this subsection, as in the FBCA provision that was in effect prior to this revision, indemnification cannot be provided under the circumstances described in §607.0859.
The limits of permitted indemnification are contained in new §607.0859.
Part II of this Article
Part II of this article will be published in the January/February 2020 issue of the Journal. It will cover the balance of the revised act. Further, two additional articles containing more detailed explanations of these aspects of the balance of the revised act and describing other sections of the revised act are expected to be posted on the section’s website, http://flabizlaw.org.
This column is submitted on behalf of the Business Law Section, Jacob A. Brown, chair, and Matthew Horowitz, editor.