Matthew D'Ascenzo, Attorney at Law

Matthew R. D’Ascenzo


Posted on December 1, 2014

Parties forming new corporations often file preprinted form articles of incorporation without considering whether they are appropriate for the corporation being formed.  Such form articles of incorporation sometimes fail to address peculiarities of state corporation laws and can lead to unanticipated consequences.

In particular, the Pennsylvania Business Corporation Law of 1988, as amended (the “BCL”), contains two sets of default provisions that diverge from the approach taken in most states.

First, Under Section 1758(c) of the PA BCL, all voting for directors of a PA corporation is cumulative unless the articles of incorporation provide otherwise.[1]  Under cumulative voting, shareholders may allocate their votes between different candidates for the board of directors.  This provision potentially benefits minority shareholders by allowing them to allocate all of their votes to a single director, increasing the likelihood of representation of minority shareholders on the board of directors.  If a corporation does not want to have cumulative voting for directors (and this is a non-standard provision that should only be provided after careful consideration), the corporation should include a provision in its articles of incorporation stating that the election of the corporation’s directors will not be subject to cumulative voting.

Second, the BCL contains certain anti-takeover provisions applicable to Pennsylvania companies with publicly registered securities that are far more restrictive than those in most states.  The effects of these provisions include, among others, (a) requiring that, following any acquisition by any person or group of 20% of a public corporation’s voting power, the remaining shareholders have the right to receive payment for their shares, in cash, from such person or group in an amount equal to the “fair value” of the shares, including an increment representing a proportion of any value payable for control of the corporation, and (b) requiring any person or group that publicly announces that it may acquire control of a public company to disgorge to the corporation any profits that it receives from sales of the corporation’s equity securities purchased over the prior 24 or subsequent 18 months.

A corporation, however, can opt out of these anti-takeover provisions in its Articles of Incorporation. Therefore, although the vast majority of corporations formed in Pennsylvania will never go public, new corporations strongly should consider disclaiming the applicability of these anti-takeover provisions in their initial articles of incorporation.  If a corporation waits until shortly before an initial public offering to opt out of these provisions, it may have to explain to its shareholders why it wants to eliminate provisions that some shareholders may perceive to be beneficial

[1] The more common approach (followed in Delaware, among other jurisdictions) is to provide that each director is elected if a majority of the shareholders vote for him or her.

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