By Ryan McCabe
In this article, Ryan M. McCabe, an associate in the commercial and business litigation practice, provides an overview of Act 328, the overhaul of the Louisiana Business Corporation Law, and information how the changes will impact your business.
Act 328 – The Law as of January 1, 2015
On May 30, 2014, a complete overhaul of the Louisiana Business Corporation Law became law. Upon being signed by the Governor, this overhaul became 2014 Act No. 328 and went into effect on January 1, 2015. The purpose of Act 328 was to align Louisiana’s law governing corporations with the Model Business Corporation Act, which is the law in thirty other states.
Act 328 only applies only to business corporations and, with limited exceptions, does not affect limited liability companies, partnerships, and other types of business entities.
Changes to the Basic Rules
The Act affects every single Louisiana corporation—not only because it applies to both new and existing corporations (see LA. REV. STAT. § 12:1-1701)—but also because it changes the most basic rules that a corporation must follow to maintain its good standing with the State.
For instance, if a corporation fails to file its annual report, the Secretary of State is now required to revoke its charter after ninety days. See LA. REV. STAT. § 12:1-1442(A)(2). The permissible delinquency period had been much longer under previous law. Likewise, the Secretary of State must terminate a corporation’s existence if it fails to maintain a Louisiana registered office and a Louisiana registered agent for service of process for ninety days. Id. at § 12:1442(A)(1).
Other Key Changes to the Louisiana Business Corporation
Among the other key changes to the Louisiana Business Corporation are:
Director and Officer Liability: Officers’ and directors’ monetary liability for certain unintentional breaches of fiduciary duty is limited by LA. REV. STAT. § 12:1-832, which also requires the corporation to opt-out of the new default rule via its articles of incorporation:
A. Except to the extent that the articles of incorporation limit or reject the protection against liability provided by this Section, no director or officer shall be liable to the corporation or its shareholders for money damages for any action taken, or any failure to take action, as a director or officer, except for one of the following:
(1) A breach of the director’s or officer’s duty of loyalty to the corporation or the shareholders.
(2) An intentional infliction of harm on the corporation or the shareholders.
(3) A violation of R.S. 12:1-833.
(4) An intentional violation of criminal law.
B. The liability of a director or officer for conduct described in Paragraphs (A)(1) through (4) of this Section may not be limited or eliminated, but the corporation may purchase insurance against that liability as provided in R.S. 12:1-857.
C. For purposes of this Section, the duty of loyalty does not include any duty to act with any degree of care in the exercise of the director’s or officer’s responsibilities to the corporation or its shareholders.
Oppressed Shareholders: “If a corporation engages in oppression of a shareholder, the shareholder may withdraw from the corporation and require the corporation to buy all of the shareholder’s shares at their fair value.” LA. REV. STAT. § 12:1-1435(A). Under the new law, the oppressed shareholder’s primary remedy is for the corporation to buy his or her shares.
This change in the law makes it more difficult for a shareholder to cause an involuntary dissolution of the corporation. See generally LA. REV. STAT. § 12:1-1438.
Voting: Act 328 changes the vote required for various fundamental actions such as amendment of the articles of incorporation and mergers. Under the prior law, a favorable vote of two-thirds of voting shares present at a corporate meeting was required for such actions.
Under Act 328, the required vote is changed to a simple majority of all shares entitled to vote.
Derivative Suits: A number of new requirements and rules now govern derivative suits. For instance, under the prior law, a shareholder could be excused from making demand on the corporation prior to filing a derivative suit if the demand was futile and more than half of the corporation’s directors were named as defendants.
Under Act 328, however, demand is required in every case. See LA. REV. STAT. § 12:1-742.
Inspection of the Corporation’s Books and Records: Previously, if a shareholder was a competitor of the corporation, there was no right to inspect the corporation’s books and records unless he, she, or it owned 25% of the corporation’s shares.
Act 328 reduced the ownership threshold to 5%, provided that the shareholder has owned the shares for at least six months prior to the inspection demand and the demand is made in good faith and for a proper purpose. See LA. REV. STAT. § 12:1-1602.
Several Variations Contained in the Law
Even if one is already familiar with the Model Business Corporation Act and its provisions, Louisiana’s enactment contains several variations. For instance:
- LA. REV. STAT. § 12:1-120(H) (requiring certain documents to be acknowledged or executed by authentic act)
- LA. REV. STAT. § 12:1-202 (prohibiting provisions in articles of incorporation that impose owner liability on the corporation’s shareholders)
- LA. REV. STAT. § 12:1-206 (providing that corporate bylaws are not mandatory)
- LA. REV. STAT. § 12:1-622© (requiring shareholders to return unlawful distributions to the corporation)
- LA. REV. STAT. § 1-812(A) (only permitting directors to vote by proxy when authorized by the articles of incorporation)
- LA. REV. STAT. § 1-824 (authorizing the board of directors to continue to conduct business in certain circumstances even if a quorum is lost at a board meeting)
- LA. REV. STAT. § 1-832 (prohibiting exculpation of a director from liability for damages caused by a breach of his or her duty of loyalty)
- LA. REV. STAT. § 1-840 (requiring the appointment of a corporate secretary)
Those closely associated with Louisiana corporations—particularly officers and directors—should determine whether their corporation’s articles of incorporation, bylaws, and other organizational documents comply with the new Louisiana Business Corporation Law. Given the extent of the revisions to the law, it is likely that revisions to the corporation’s governing documents are necessary.
Steeg Law’s attorneys regularly advise and represent clients in transactional and litigation matters involving these and other business and corporate issues. Our clients should contact us to discuss Act 328’s changes and how they impact their respective businesses.