Part I
FINANCIAL INSTITUTIONS, COMMERCIAL LAW, AND CORPORATIONS
TASK FORCE TO STUDY BANK CHARTER MODERNIZATION
In Chapter 302 of the Acts of 1997, the General Assembly established the Task Force to Study Bank Charter Modernization, a 16-member group chaired by the Commissioner of Financial Regulation and consisting of individuals representing: the General Assembly; State regulatory agencies that oversee financial institutions; banks, savings and loans, credit unions, and other financial institutions; consumer interests; and the general public. The Task Force was directed to "...study comprehensively all existing State laws that affect the operation and powers of State-chartered banking institutions, including commercial banks and savings banks, and that affect conversion of other financial institutions to State-chartered banking institutions in order to modernize the State's banking laws and facilitate conversions of other financial institutions to State-chartered banking institutions."
After nearly two years of reviewing the State's bank charter laws, the Task Force completed its work during the 1998 interim and issued a final report and recommendations for the 1999 Session. Most of the recommendations of the Task Force are encompassed in Senate Bill 114/House Bill 50 (both passed). The remaining recommendations, pertaining just to automated teller machines, are embodied in House Bill 51 (passed).
Bank Charter Modernization and Other Banking Law Reforms
Senate Bill 114/House Bill 50 encompass the bulk of the recommendations of the Task Force to Study Bank Charter Modernization. Specifically, Senate Bill 114/House Bill 50 consolidate and modernize bank charter laws and streamline various reporting requirements for financial institutions. The bills also make a major change to the State's "wild card" statute by allowing the Commissioner of Financial Regulation (Commissioner) to grant State-chartered banks the authority to engage in the same kinds of commercial activity, service, or practice that the federal government authorizes for national banks.
Senate Bill 114/House Bill 50 change the State banking laws in the following areas:
Senate Bill 114/House Bill 50 expand the State's "wild card" statute by authorizing the Commissioner to allow a State-chartered banking institution to engage in any additional activity, service, or other practice that a national bank may undertake under federal law. This change is intended to allow the Commissioner to act quickly, when it is deemed appropriate, to help maintain parity between State-chartered and national banks. The Commissioner may grant State banks additional authority under the "wild card" statute only if: (1) the Commissioner determines that the approval is reasonably required to protect the welfare of the general economy of the State and of banking institutions, or is not detrimental to the public interest or to banking institutions; and (2) the approval imposes the same conditions that federal law requires or permits for national banks.
Senate Bill 114/House Bill 50 consolidate the laws relating to a financial institution's policies governing real estate appraisals by including those provisions under the laws relating to the general powers, duties, and responsibilities of the Commissioner. This change is intended to enhance user convenience and understanding of those laws by financial institutions.
Senate Bill 114/House Bill 50 eliminate the requirement that a trust company file a common trust plan with the Commissioner, thereby modernizing the process and eliminating unnecessary and duplicative paperwork since the plan already is on file at the trust company's office and is subject to inspection by representatives of the Commissioner at any time.
Senate Bill 114/House Bill 50 eliminate the requirement that a State-chartered commercial bank file an annual stockholders report with the Commissioner, thereby reducing unnecessary paperwork and eliminating duplication of effort since the report is on file at the bank and is reviewed by bank examiners during each periodic in-house examination.
Senate Bill 114/House Bill 50
permit the directors of a State-chartered banking institution to serve staggered terms,
thereby giving those institutions more flexibility in selecting a management team.
Senate Bill 114/House Bill 50 repeal the requirement that a State-chartered banking institution file a copy of its federal Community Reinvestment Act (CRA) statement with the Commissioner since federal law no longer requires that a banking institution have such a statement. However, a copy of the public portion of the banking institution's most recent CRA performance evaluation report, which documents and assesses a bank's lending activities in the communities it serves, would continue to be filed with the Commissioner.
Senate Bill 114/House Bill 50 repeal an antiquated State law pertaining to bills payable which now forces State-chartered commercial banks that borrow money for more than 90 days to collateralize the borrowing with the bank's unimpaired capital and surplus. A similar federal law was repealed in 1982. The change made by the bills will create a competitive playing field for State-chartered banks and federal banks, since the current restriction limits a State-chartered bank's ability to borrow funds quickly in a changing economy, contributes to further weakening of the bank's earnings, and stifles the bank's growth.
Senate Bill 114/House Bill 50 revise current law to address the high equipment costs incurred by banks for data processing, automated teller machines, and other items by providing that the bank may invest in its bank building and furnishings an amount equivalent to 75 percent of its unimpaired capital, surplus, and undivided profits, or its guaranty fund and undivided profits.
Reorganization of State Banking Laws Relating to ATMs
House Bill 51 is the second of the two bills introduced in the 1999 Session by the Task Force to Study Bank Charter Modernization. Introduced as a nonsubstantive revision of all State laws governing automated teller machines (ATMs) that are located throughout the Financial Institutions Article, House Bill 51 contains only one substantive provision.
House Bill 51 reorganizes the laws regulating ATMs within a specific subtitle of the Financial Institutions Article to enable users to locate the laws more easily. The consolidation establishes uniform definitions and a single name for functions relating to ATMs. House Bill 51 also more clearly specifies when a financial institution, whether it is an in-State institution or an out-of-state institution that is establishing a presence in the State, must file various documents with the Commissioner of Financial Regulation.
The one substantive change that House Bill 51 makes relates to the preemption of local laws. Under current law, only the State may enact a law regarding customer safety at an ATM. House Bill 51 expands the preemption by providing that State law preempts any local law regarding ATMs.
TASK FORCE TO STUDY MODERNIZATION OF CREDIT UNION LAW
Credit unions were originally established by the Federal Credit Union Act of 1934 to make credit available to persons not serviced by either thrifts or banks. Prior to 1982, credit union membership was limited to well-defined groups with a "common bond of occupation". In 1982, the National Credit Union Administration (NCUA) allowed federal credit unions to add multiple membership groups or select employee groups. The administrative rule permitted federal credit unions to expand existing charters to include different membership groups, so long as each group had its own common bond.
Following a seven-year legal battle between credit unions and the banking industry, the Supreme Court in February, 1998 held that credit unions could not expand their membership beyond the employees of a narrowly defined core group. According to the NCUA, the outcome of the Supreme Court case directly affected more than 10.1 million members of 3,602 federal credit unions that serve multiple groups. Indirectly, the decision affected 1,730 state-chartered credit unions with multiple-group memberships.
In response to the Supreme Court's decision, in August, 1998 the United States Congress enacted Public Law 105-219 and amended the Federal Credit Union Act of 1934 to clarify existing federal law and ratify the NCUA's authority to grant multiple common-bond charters to federal credit unions.
Given the ambiguity at the federal level as to the standing of state-chartered credit unions with multiple-group memberships, and the existence of the State's "wild card" statutory provision that permits State-chartered credit unions to serve multiple groups, clarification of the field of membership issue for State-chartered credit unions is needed. In addition, many of the State's credit union laws are in need of major nonsubstantive revisions. Currently, there are 11 State-chartered and 131 federally chartered credit unions operating in the State.
In response to the need to clarify and revise the State's credit union laws, the General Assembly passed Senate Bill 102/House Bill 96 (both passed) to create the Task Force to Study the Modernization of Credit Union Law. Similar in membership to the Task Force to Study Bank Charter Modernization, this 15-member Task Force is composed of representatives of the General Assembly, the Department of Labor, Licensing, and Regulation, federal and State-chartered financial institutions, consumer interests, and the general public.
The general purpose of the Task Force is to study and make recommendations for legislative changes to current State laws that affect the operation and powers of State-chartered credit unions. In particular, the Task Force is directed to identify, document, and study federal law changes since 1934 that affect credit unions, the response by other states to these federal law changes, and current State law for chartering credit unions. The Task Force is required under the bills to issue an interim report by December 1, 1999, and a final report by December 1, 2000.
FIDUCIARY INSTITUTIONS - DISCLOSURE OF CUSTOMERS' FINANCIAL RECORDS
Generally, a fiduciary institution, its officers, employees, agents, and directors may not disclose to any person any financial record relating to a customer of the fiduciary institution. Under State law, "fiduciary institution" means a national or State-chartered bank, an other-state bank that maintains a branch in the State, a federal or State-chartered credit union, a federal or State-chartered savings and loan association, or any other organization that is organized under the banking laws of this State and subject to the supervision of the Commissioner of Financial Regulation.
A fiduciary institution is authorized under current law to disclose customer financial records under limited circumstances. Senate Bill 476 (Ch. 40) alters the circumstances under which a fiduciary institution may disclose a financial record of a customer in situations concerning child support enforcement.
In particular, Senate Bill 476 creates an exception to the general prohibition by allowing disclosure if the fiduciary institution receives a request or subpoena for information indirectly through the federal Parent Locator Service under 42 U.S.C. § 666(A)(17). This federal law provides procedures under which a state agency that has authority over child support enforcement matters and financial institutions may enter into agreements concerning the collection of child support payments. These agreements include developing and operating a data match system, using automated data exchanges for each noncustodial parent who maintains an account at the fiduciary institution and who owes past-due support, as identified by a state. Data matching with fiduciary institutions that operate in more than one state is conducted by the federal Office of Child Support Enforcement through the federal Parent Locator Service.
In addition, Senate Bill 476 alters a current law exception that permits disclosure if the fiduciary institution receives a request or subpoena for information from the Child Support Enforcement Administration of the Department of Human Resources. The Act provides that the request or subpoena for information must come directly from the Child Support Enforcement Administration.
GENERALLY
The Maryland Fair Distributorship Act
The Maryland Fair Distributorship Act was enacted in 1993 to provide a statutory framework for the legal relationships between wholesale commercial distributors and manufacturers. The Act was amended in 1995 to clarify that Maryland distributors and grantors could seek remedies in Maryland courts. Senate Bill 676/House Bill 785 (both passed) further revise the Maryland Fair Distributorship Act to provide that if a dispute arises between a manufacturer and a distributor relating to the application of the Act, on the request of either party, the parties must submit the dispute to arbitration in the State under the Maryland Uniform Arbitration Act. In addition, the bills require a manufacturer, when notifying a distributor of a proposed cancellation or nonrenewal of an agreement, to also provide notice to a distributor of its failure to comply with a reasonable requirement of the agreement, and an opportunity for the distributor to cure or dispute the asserted deficiency.
Uniform Commercial Code - Secured Transactions
House Bill 1053 (passed) is a uniform bill drafted by the National Conference of Commissioners on Uniform State Laws. The bill revises, corrects, updates, and clarifies provisions of the Commercial Law Article relating to secured transactions. More specifically, House Bill 1053 expands the duties of a secured party, amends rules governing the perfection and priority of security interests, codifies certain case law, accommodates new forms of collateral, and provides for several new types of transactions, including deposit accounts. The revisions made by House Bill 1053 are effective July 1, 2001. This uniform bill is currently being introduced in state legislatures across the country.
CREDIT REGULATION
Financing of Prior Loan Balances
A revision to the Federal Reserve Board's Regulation Z (Truth In Lending Act) has made it necessary for Maryland law to expressly allow the financing of prior loan balances. As revised, Regulation Z prohibits an agreement from indicating a "negative" down payment. Accordingly, Senate Bill 361 (passed) specifically allows a company to finance "negative equity" through a retail installment sales contract involving traded-in property. This situation typically occurs when a buyer of an automobile presents as the down payment a trade-in that has an outstanding loan amount greater than its market value.
Private Mortgage Insurance
The federal Homeowners Protection Act of 1998 is intended to govern, effective July 29, 1999, the disclosure and termination requirements of private mortgage insurance. Senate Bill 222/House Bill 427 (both passed) bring Maryland law into conformity with the federal law. The bills require a banking institution or a savings and loan association that holds a first mortgage on residential property, where a private mortgage insurance corporation partially insures the mortgage, to eliminate all charges to the mortgagor for mortgage insurance premiums when the mortgage is reduced to the level at which the federal law requires termination of the private mortgage insurance. The bills also repeal the disclosure requirements in State law relating to private mortgage insurance. Consequently, the disclosure provisions of the federal law will apply. Senate Bill 222/House Bill 427 are effective July 29, 1999, the effective date of the federal Act.
CONSUMER PROTECTION
Responding to many Maryland residents who consider telemarketing solicitations to be a nuisance, the General Assembly introduced two bills during the 1999 session which would have restricted telemarketing activities in the State. Based on a 1998 Kentucky law, House Bill 20 (failed) would have required the Consumer Protection Division of the Office of the Attorney General to maintain and publish a mail solicitation privacy list and a telephone solicitation privacy list. Maryland residents would have been able to request to be included on either list, and telemarketers would have been prohibited from soliciting residents who appeared on the list. Similarly, House Bill 873 (failed) would have required telemarketing businesses to register annually with the Consumer Protection Division and would have restricted the time and manner that businesses could engage in telemarketing.
CORPORATIONS AND REAL ESTATE INVESTMENT TRUSTS
Unsolicited Takeovers
Senate Bill 169 (passed) makes several changes intended to strengthen Maryland laws relating to unsolicited takeovers of corporations and real estate investment trusts. The bill makes available one commonly used antitakeover tool, the stockholder rights plan or "poison pill," which is used to dilute the voting interests of a person that acquires more than a specified percentage of the stock of the target corporation. The bill establishes a definition of a "stockholder rights plan" and codifies the authority of the board of directors of a corporation and the board of trustees of a real estate investment trust (REIT) to adopt a stockholder rights plan.
Senate Bill 169 also increases the effectiveness of the stockholder rights plan as a defensive tool by allowing a corporation or REIT to adopt a "continuing director" provision. These provisions allow the redemption or amendment of a corporation's stockholder rights plan only by one or more of the corporation's "continuing directors," generally those directors who were in office when the plan was adopted or who are subsequently elected to the board with the approval of the continuing directors. The effect of these provisions is to prevent a corporate suitor from engaging in a proxy contest to remove an incumbent board and then have a new board amend or redeem the stockholder rights plan as a precursor to a hostile takeover.
Senate Bill 169 also strengthens the ability of the board of directors or trustees to resist an unsolicited acquisition by: (1) authorizing a corporation or REIT to include in its charter or declaration of trust a provision that allows the board of directors or trustees to consider the effect of a potential takeover on the stockholders, employees, suppliers, customers, creditors, and the communities in which the corporation or REIT operates; (2) clarifying that the standard of care required of directors and trustees does not require them to accept a proposed acquisition; (3) establishing that acts of a director or trustee relating to an acquisition are not subject to higher scrutiny than is applied to any other act of the director or trustee; and (4) creating a presumption that an act of a director or trustee satisfies the standard of care required of directors and trustees. Finally, Senate Bill 169 gives express authority to a REIT to establish committees of the board of trustees and to delegate powers of the board to the committees.
Powers and Extraordinary Actions
House Bill 154 (passed) makes a number of changes in the laws governing corporations and real investment trusts. The major changes relate to the power of corporations to make gifts, charters and declarations of trust, and mergers and consolidations.
Under current law, unless otherwise provided by its charter, a Maryland corporation has the general power to make reasonable gifts or contributions, out of profits, to a government entity or charitable organization. The gifts or contributions must be authorized by the corporation's board of directors. House Bill 154 makes it easier for a corporation to make gifts or contributions by repealing the current law requirements that the gifts or contributions be "reasonable," that they be made out of profits, and that they be approved by the corporation's board of directors. The bill authorizes a corporation to make gifts or contributions in cash, other property, or stock or other securities of the corporation, and allows a corporation to issue stock or other securities to be given as a gift or contribution without consideration of any kind.
House Bill 154 authorizes the charter of a corporation to provide that the board of directors of the corporation, by a majority vote of the entire board and without stockholder approval, may amend the corporation's charter to increase or decrease the aggregate number of shares of stock or the number of shares that the corporation has authority to issue.
The bill also allows the board of directors, by a majority vote of the entire board and without stockholder approval, to amend the charter of the corporation to change the corporation's name or the name or other designation or the par value of any class or series of stock of the corporation and the aggregate par value of the corporation's stock. House Bill 154 gives the same authority to the board of trustees of a real estate investment trust (REIT) to amend, without shareholder approval, the REIT's declaration of trust to change the name of the REIT or the name or other designation or the par value of the REIT's shares.
In addition, the bill alters the requirement under the law that proposed amendments to the declaration of trust of a REIT be considered at a meeting of the shareholders by allowing approval by written consent of two-thirds of all the votes entitled to be cast on the matter, and allows a REIT's declaration of trust to include a provision requiring, before action can be taken, a greater proportion of votes than otherwise is required by statute for that action.
Under current law, a 90 percent or more owned subsidiary corporation or REIT may merge, without stockholder approval, with or into its parent corporation or REIT only if the charter or declaration of trust of the parent is not amended in the merger. House Bill 154 alters the law to allow an "upstream" or "downstream" merger to take place without stockholder approval even if the charter or declaration of trust of the successor is amended to change its name, the name or other designation or the par value of any class or series of its stock, or the aggregate par value of its stock. The bill also alters the definitions of "foreign corporation" and "foreign business trust" to allow a Maryland corporation to consolidate with or merge into a corporation or business trust organized under the laws of a foreign country, and a Maryland REIT to merge into a business trust organized under the laws of a foreign country.
Miscellaneous Provisions
House Bill 810 (passed) makes numerous changes in the laws governing corporations and real estate investment trusts (REITs). Some of the major changes made by the bill:
(1) eliminate the restriction that stockholder meetings must be held in the United States;
(2) alter the manner in which stockholders may remove a director;
(3) alter the manner of determining when a person is an "interested stockholder" under provisions of State law governing business combinations;
(4) provide that the approval of the stockholders of a corporation, and articles of transfer or share exchange, are not required for a transfer of corporate assets as a distribution;
(5) eliminate the requirement that an issuance of stock be accompanied by a resolution adopted by the board of directors stating the actual value of the consideration for the stock or that the board has determined that the actual value is or will not be less than a certain sum;
(6) provide that shares of a corporation's own stock acquired by the corporation between the record date for determining stockholders entitled to notice of or to vote at a meeting of the stockholders and the time of the meeting may be voted at the meeting by the holder of record as of the record date and shall be counted in determining the total number of outstanding shares entitled to be voted at the meeting;
(7) provide that the fact that a stock certificate of a corporation or a REIT does not contain or refer to a restriction on transferability or ownership that is adopted after the date the stock certificate is issued does not mean that the restriction is invalid or unenforceable;
(8) provide that for provisions in a charter or declaration of trust relating to capital stock of a corporation or REIT, "facts" ascertainable outside the charter or declaration of trust include the contents of any agreement to which the corporation or REIT is a party or any other document;
(9) provide that an agreement of consolidation, merger, share exchange, or transfer of assets of a corporation may require that the proposed transaction be submitted to the stockholders, even if the board of directors determines, at any time after having declared the advisability of the proposed transaction, that it is no longer advisable and either makes no recommendation to the stockholders or recommends that the stockholders reject the proposed transaction, and provide a similar provision for mergers of REITs;
(10) clarify that provisions of law governing service of process and notice for corporations and other business entities also apply to REITs;
(11) allow a REIT to use the process currently used by corporations of filing a certificate of correction to correct nonsubstantive errors in documents filed with the State Department of Assessments and Taxation;
(12) eliminate the restrictions that a REIT may not use or apply land for farming, agriculture, horticulture, or similar purposes, and must hold, either directly or through other entities, at least 75% of the value of its assets in real estate assets, mortgages or mortgage related securities, government securities, and cash and cash equivalent items; and
(13) authorize the declaration of trust of a REIT to include restrictions on ownership designed to permit the REIT to comply with federal law, and to provide for committees of the board of trustees and the delegation of any powers of the board to the committees.
CORPORATIONS
Use of Electronic Transmissions
A corporation may notify stockholders of a stockholders' meeting by personal delivery, by leaving notice at the stockholder's residence or usual place of business, or by mailing notice to the stockholder at the stockholder's address as it appears on the records of the corporation. House Bill 776 (passed) allows a corporation to also give notice to a stockholder by electronic mail or by any other electronic means.
The bill also allows a stockholder to authorize another person to act as proxy for the stockholder by transmitting the authorization by electronic mail or any other electronic or telephonic means. Under current law, authorization may be transmitted by telegram, cablegram, datagram, or other means of electronic transmission.
Filing Requirements on Dissolution or Termination
House Bill 47 (Ch. 58) repeals the requirement that a Maryland corporation, before articles of dissolution may be filed, or a foreign corporation, before terminating its registration or qualification, must file with the State Department of Assessments and Taxation (SDAT) certificates from local taxing jurisdictions, the Comptroller, and the Secretary of Labor, Licensing, and Regulation stating that personal property and other taxes, unemployment insurance contributions, and other obligations of the corporation have been paid or provided for. House Bill 47 instead requires a domestic or foreign corporation to file with the SDAT the personal property reports required by Title 11 of the Tax - Property Article.
According to the SDAT, the certification filings required under current law do not serve as an effective tax enforcement mechanism. Collection of these certifications is a time consuming process and many corporations do not comply with the current law. Instead of dissolving or terminating their registration or qualification, they stop filing personal property tax returns so that the corporation's charter is forfeited. Furthermore, when a corporation's charter is forfeited, the corporation's name must be left available for the corporation to use if it reinstates its charter in the future. This increases the SDAT's name tracking responsibilities and prevents the reuse of corporate names. In the event of dissolution, the corporate name becomes available to other business entities. Only Ohio and Maryland require tax clearance certificates from every local taxing jurisdiction before a corporation may dissolve.
Investment Companies
House Bill 775 (passed) makes two changes in State law governing a corporation that is registered as an investment company under the federal Investment Company Act of 1940. The bill authorizes an investment company that has stock issued in more than one class or series to cause the investment portfolio for one class or series to purchase, hold, vote, and receive distributions on stock in another class or series.
The bill also authorizes the charter of a closed-end investment company, or any prospectus filed by the company under the federal Investment Company Act of 1940, to require the company to submit to its stockholders, at an annual or special meeting of the stockholders, a proposal to: (1) amend its charter to convert to an open-end investment company; (2) dissolve; (3) require the closed-end investment company to make one or more tender offers for its shares; or (4) take other action intended to eliminate any trading discount to net asset value of its shares. The proposal must be submitted to the stockholders even if the board of directors fails to recommend the proposal or declare the proposal advisable, or even if the board recommends that the change made by House Bill 775 is intended to give stockholders the right to consider and vote on these matters even if the board, at the time of the proposed action, does not believe it to be in the corporation's best interest.
BUSINESS TRUSTS
A business trust may exist in Maryland under the common law but is not subject to specific statutory regulation, with the exception of a real estate investment trust. House Bill 774 (passed) codifies, as the "Maryland Business Trust Act," the standards applicable to business trusts and provides for the establishment of a business trust as an alternative form of business organization in the State. The bill provides a framework governing the formation, operation, termination, and dissolution of a business trust, the interests, rights, and liabilities of a beneficial owner, and the powers, duties, and liabilities of a trustee.
A business trust may be organized under the Maryland Business Trust Act by filing, on or after January 1, 2000, a certificate of trust with the State Department of Assessments and Taxation. A business trust established under the Act is regarded for purposes of Maryland law as a separate legal entity.
House Bill 774 specifies that it has no effect on the validity, powers, rights, liabilities, trustees, or beneficiaries of a common law business trust, but allows a common law trust to elect to be governed by the Maryland Business Trust Act by filing a certificate of trust. Real estate investment trusts will continue to be governed separately by Title 8 of the Corporations and Associations Article. Over the past 10 years, a number of other states, including Delaware, have enacted business trust statutes.