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Maryland Close Corporations

Close corporations are generally smaller businesses who desire the limited liability and tax benefits of a corporation but whose stockholders wish to maintain streamlined managerial control of the business.  With corporation status comes many formalities.  One of the advantages of a close corporation is the elimination of the board of directors. Close corporations are creatures of statute and states generally differ as to the rules that govern them. 

In Maryland, a business can elect to be a close corporation by including a clear and unambiguous statement in its Articles of Incorporation, filed with the State Department of Assessment and Taxation, that it is electing such status. An election may also be made by way of an amendment to the articles, when approved by every stockholder.  MD Corp. & Assoc., § 4-201.  Upon election to be a close corporation, various rights and responsibilities are conferred upon the corporation’s stockholders.  

Board of Directors.  A close corporation may elect to have no Board of Directors.  Until such an election becomes effective, there must be at least one director; however, when the election does become effective, the directorship position is terminated. MD Corp. & Assoc., § 4-301.  By electing to forego having a board of directors, the stockholders become responsible for any actions ordinarily required by law to be taken by the board of directors.  The stockholders may also exercise all powers normally afforded to the directors and manage the affairs of the corporation. MD Corp. & Assoc., § 4-303.

Unanimous Stockholders’ Agreement.  In a close corporation, a unanimous stockholders’ agreement allows for the stockholders to regulate and manage any aspect of the corporation’s affairs. These affairs include the management of business, restrictions on stock transfer, the rights of stockholders to dissolve the corporation, the division of voting power, terms and conditions for officer and employee employment, and the election of officers and payment of dividends. MD Corp. & Assoc., § 4-401.    A unanimous stockholders agreement of a close corporation may only be amended by unanimous consent of the stockholders who were party to the agreement.  If a stockholder acquires stock after the stockholders agreement is already in effect, that stockholder is considered to have consented to the agreement if,  1) the acquisition of stock was by gift or through inheritance from a stockholder who was party to the agreement,  or 2) if the stockholder had actual knowledge of the agreement at the time he acquired the stock.  MD Corp. & Assoc., § 4-401.

Annual Stockholder Meeting.  The bylaws of a close corporation must provide for an annual meeting of stockholders, but this annual meeting does not need to actually take place unless it is requested by a stockholder.   The request for an annual meeting must be made in writing and delivered to the President or Secretary of the corporation at least thirty days before the date or period when the meeting should be held, as stated in the bylaws. MD Corp. & Assoc., § 4-402.  

Right of Inspection and Request for Statement of Affairs.  A stockholder or agent of a stockholder may inspect and copy any records of the corporation relevant to its business during business hours.  These records include bylaws, minutes of the stockholders’ meetings, annual statements of affairs, stock ledgers and books of account. MD Corp. & Assoc., § 4-403. A stockholder may also, by written request, receive a statement of affairs once per calendar year. MD Corp. & Assoc., § 4-404

Unanimous Voting Requirements.  Requiring unanimous approval of all stockholders is one way that minority shareholders are protected in a close corporation. Unanimous votes from all stockholders are required for the following issues: 1) election and termination of close corporation status; 2) issuance of stock, 3) transfers of stock, 4) stockholder agreements; 5) denial & restriction of voting rights and 6) fundamental corporate changes such as consolidation, merger or transfer of assets.  

Restrictions.  By statute, a close corporation may not have outstanding any securities which are convertible into its stock, voting securities other than stock, or options, warrants or other rights to purchase any of its stock, unless they are nontransferable. MD Corp. & Assoc., § 4-502.  It is common for close corporations to have restrictions on stock sale or transfer.  Small business stockholders generally want to ensure that the company stock remains within the control of the current stockholders, or sometimes even in the family of stockholders.  Sale or transfer restrictions can be imposed by way of the company bylaws, articles of incorporation or through a stockholders’ agreement.  A common restriction is an agreement wherein each stockholder will agree to refrain from selling his/her stock without first allowing the corporation the offer to repurchase at an agreed upon price. Transfers of close corporation stock are invalid unless all stockholders unanimously consent to the transfer in writing, within ninety days of the transfer, or if the transfer is made pursuant to the stockholders agreement. MD Corp. & Assoc., § 4-503.

Dissention.  While unanimous voting requirements can afford some protections and advantages to close corporation stockholders, it also means that any one stockholder can cause a proposed change to be rejected simply by withholding consent.  Maryland’s statute provides a remedy for situations where the stockholders find themselves in voting deadlocks and therefore can no longer conduct the affairs of the business to the stockholders’ general benefit.  Any stockholder may petition the court for dissolution of the corporation if the stockholder has not received consent to transfer his stock within thirty days of the request, or when a party to the stockholders’ agreement defaults on an obligation. MD Corp. & Assoc., § 4-602. The threat of involuntary dissolution can effectively incentivize stockholders into reaching an agreement themselves, but this is not always the case. Recognizing that involuntary dissolution and court interference in business is not always the best solution, Maryland law provides stockholders with a method to avoid dissolution.  A stockholder may avoid dissolution by purchasing from the petitioning stockholder his stock for fair value, determined either by the parties or by the court. MD Corp. & Assoc., § 4-603.

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