February 2006 Bulletin 06-08 Amends Provisions of Business Corporation Law Relating to Removal of Directors and “Control Transactions”

If you have questions or would On February 10, 2006, Pennsylvania Senate Bill 595 (the “Bill”) was enacted into like additional information on the law. This Bill amended two sections of the Pennsylvania Business Corporation Law: material covered in this Bulletin, 15 Pa. C.S. §1726 (relating to the removal of directors); and 15 Pa. C.S. §2543 please contact one of the authors: (relating to “control transactions” affecting registered corporations). As noted below, Robert K. Morris these amendments are widely viewed as having been adopted in connection with the () ongoing dispute involving Sovereign Bancorp, a Pennsylvania corporation, and 215.851.8176 [email protected] Relational Investors LLC, but they apply to all Pennsylvania corporations. Arlie R. Nogay Removal of Directors () 412.288.4594 15 Pa. C.S. §1726 creates a different “default” provision for the removal of directors [email protected] of a Pennsylvania corporation in two different situations: (1) when the corporation has a board where the directors are classified by term of office (often referred to as a …or the Reed Smith attorney with whom you regularly work. “staggered board”) as permitted by 15 Pa.C.S. §1724(b); and (2) all other cases. For Pennsylvania corporations not having a classified board, the statutory default rule is that directors may be removed from office without assigning any cause by vote of the shareholders. This default rule may be varied by a bylaw adopted by the shareholders, i.e., such a bylaw could provide that directors may be removed by a vote of the shareholders only for cause. The Bill does not change the provisions applicable to removal of directors of a Pennsylvania corporation that does not have a classified board. For Pennsylvania corporations having a classified board, the statutory default rule is that directors may be removed from office by a vote of shareholders only for cause. This default rule can only be varied by a provision in the corporation’s articles of incorporation. The newly enacted Bill requires that, in the classified board situation, the provision in the corporation’s articles which varies the statutory default rule (under which directors can be removed only for cause) must be “a specific and unambiguous statement that directors may be removed from office without assigning any cause.” Accordingly, in the case of a Pennsylvania corporation which has a provision in its articles which could arguably be interpreted as varying the statutory default rule of removal only for cause, but which does not do so in a specific and unambiguous way, such provision would not be effective to change the statutory default. NEW YORK LONDON LOS ANGELES Control Transactions PARIS SAN FRANCISCO Subchapter E of Title 15 of the Pennsylvania Business Corporation WASHINGTON, D.C. Law, entitled “Control Transactions,” applies to publicly held PHILADELPHIA PITTSBURGH Pennsylvania corporations which have not opted out of its OAKLAND coverage. A corporation can opt out of Subchapter E by an MUNICH PRINCETON amendment to its articles of incorporation, which would require NORTHERN VA WILMINGTON NEWARK

This bulletin is presented for informational purposes and is not intended to constitute legal advice. MIDLANDS, U.K. © Reed Smith LLP 2006. All Rights Reserved. CENTURY CITY “Reed Smith” refers to Reed Smith LLP, a limited liability partnership formed in the state of Delaware. RICHMOND r e e d s m i t h . c o m

Client Bulletin 06-08

shareholder approval, at any time prior to the date of a transaction which would otherwise trigger applicability of the statute. In general, Subchapter E requires that any person or group which acquires at least 20 percent in voting power of the shares of the corporation must pay, to any other shareholder of the corporation who objects to the transaction, the judicially determined “fair-value” of the objecting shareholder’s shares. Certain transactions are exempted from the coverage of the statute, including the acquisition of shares directly from the corporation by a person engaged in business as an underwriter of securities who acquires the shares through its participation in good faith in a firm commitment underwriting registered under the Securities Act of 1933. The Bill adds an additional exception to Subchapter E’s coverage. It provides that no person or group shall be deemed to have acquired 20 percent voting power (and thereby trigger Subchapter E) if any of the shares required to be counted in order to meet the 20 percent minimum were shares acquired directly from the corporation in a transaction exempt from the registration requirements of the Securities Act. This new exception would allow a publicly held Pennsylvania corporation to issue shares in a private placement transaction to an investor without those shares being counted in determining whether the investor has acquired 20 percent of the voting power for the purposes of Subchapter E. This would free the investor from the obligation to pay fair value for the remainder of the corporation’s outstanding shares without the need for a shareholder vote to opt out of Subchapter E. Governor Rendell’s Comments In signing the Bill into law, Governor Ed Rendell sent a letter to the Pennsylvania Senate, expressing his “great hope for the potential positive impact” of the Bill for Sovereign, which the Governor called “one of Pennsylvania’s key employers” and “one of our most significant mid-state financial institutions.” The Governor expressed concern, however, that the language in the Bill “is so far-reaching that it may require a review of and possibly changes in the bylaws, or articles of incorporation, or both, of literally thousands of corporations across the Commonwealth.” The Governor also expressed concern that the amendment to Subchapter E “may result in unnecessarily contentious actions by corporate board members and shareholders.” As a result, the Governor urged the Pennsylvania legislature to enact new legislation that would narrow the impact of the Bill. At this time, the Legislature has not taken action on the Governor’s letter. * * * * * *

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