By Larry P. Laubach

Act 122 of 2022 revised Title 15 of the Pennsylvania Consolidated Statutes (the Associations Code) with significant changes applicable to Pennsylvania businesses. In early 2023, those amendments to the Associations Code became effective. The most notable changes include requiring all registered Pennsylvania entities to file an annual report (Section 146), permitting the exculpation of officers of Pennsylvania corporations for certain breaches of fiduciary duty (Section 1735), codifying the business judgment rule (Section 1712), permitting the renunciation of the business opportunity doctrine (Section 1719), and providing a procedure for ratification of defective entity actions (Sections 221-229).

Most of these changes, many of which can benefit management, are intended to keep pace with the laws of other states (such as Delaware). In addition, the requirement to file an annual report will cause serious adverse consequences to a Pennsylvania entity that does not comply.

New Requirement to File an Annual Report

Prior to the adoption of Act 122, Pennsylvania was the only state that required businesses to file a decennial (every 10 years) report evidencing its continued existence, rather than annual or biennial reports. Act 122 replaces decennial reporting with an annual filing requirement, so, beginning in 2025, all domestic and foreign entities registered in Pennsylvania must file with the Pennsylvania Department of State (Department) an annual report with filing deadlines determined by entity type:

• July 1 for corporations (both profit and nonprofit).
• Oct. 1 for limited liability companies.
• Dec. 31 for all others.

Entities may file the report electronically or through a paper filing. Each entity will be charged a $7.00 fee, with the exception of nonprofit entities for which there is no fee.

For each registered entity required to file an annual report, the Department must annually deliver notice of the filing requirement at least two months before the annual report is due. However, failure of the Department to deliver the notice or of any entity to receive the notice does not relieve an entity of the obligation to make the annual report filing.

An entity that fails to file its annual report within six months of the filing deadline is subject to administrative dissolution or cancellation by the Department pursuant to Section 381. An administratively dissolved or cancelled entity continues its existence as the same type of entity. However, it may only conduct activities necessary to wind up and liquidate, it is not currently subsisting, and its name will become available for another entity to claim. An entity may correct the dissolution or cancellation by applying for reinstatement and paying an accompanying fee. The Department will not take administrative action to cancel or dissolve for failure to file annual reports until 2027.

Section 146 annual reports do not require the disclosure of beneficial ownership information. Such disclosures are mandated beginning Jan. 1, 2024, under the federal Corporate Transparency Act. Annual reports must include entity name and jurisdiction of formation, registered office address in Pennsylvania, name of at least one person who is a director or manager (or equivalent), name and titles of all principal officers (if any), principal office address, and entity number issued by the Department. Annual reports will be published on the Department’s website. A filed annual report that contains a different registered office address than contained in the records of the Department will be deemed to change the address of the registered office to that shown in the annual report.

Exculpation of Officers

The Associations Code has historically allowed a Pennsylvania corporation’s bylaws to eliminate directors’ (but not officers’) personal liability for certain breaches of fiduciary duty. Act 122 added a new Section 1735 that allows the bylaws of a Pennsylvania corporation to eliminate officers’ personal liability for certain breaches of duty, if the bylaw is adopted by the corporation’s shareholders. Such exculpation of officers (and directors) does not apply …

• If the officer has breached or failed to perform the duties of an officer under the applicable provision of the Pennsylvania Business Corporation Law and such breach or failure constitutes self-dealing, willful misconduct, or recklessness.
• To responsibility or liability pursuant to a criminal statute.
• To the liability for the payment of taxes under applicable law.

Unlike the analogous provision of the Delaware General Corporation Law (Delaware Section 102(b)(7)), officer exculpation under the Associations Code is available to all officers and includes protections against claims brought by or on behalf of the corporation. Parallel changes were made for nonprofit corporations (see Section 5733.2 of the Associations Code).

Business Judgment Rule

In Section 1712(d), Act 122 sets forth a statement of the business judgment rule. Pursuant to Section 1712(d), a director who makes a business judgement in good faith fulfills his duties under Pennsylvania law if the subject of the business judgment does not directly or indirectly involve self-dealing by the director, the director is informed with respect to the subject of the business judgment to the extent the director reasonably believes to be appropriate, and the director rationally believes that the business judgment is in the best interests of the corporation. Act 122 also adopts a statutory business judgment rule for officers, similar to that of a director, which is set forth in a new Section 1734(d).

Section 1712(a) clarifies that a director’s obligation of reasonable inquiry extends only to issues required to be considered by Pennsylvania statutory law and to those factors and interests the director elects to consider in the discharge of the director’s duties. This change was made in response to the case In re Nine W. LBO Securities Litigation, 505 F. Supp. 3d 292, 300 (S.D.N.Y. 2020), which could be read to impose an open-ended duty to inquire into or investigate potential matters beyond those required by statute.

Renunciation of Business Opportunities

Act 122 added a new Section 1719 that permits the articles of incorporation of a Pennsylvania corporation or an action of the board of directors to renounce in advance any interest or expectancy of a business corporation in, or in being offered the opportunity to participate in, a business opportunity that is presented to the corporation or to one or more of its directors, officers, or shareholders. The renunciation may be blanket in nature, apply to any business opportunity, or be limited to specific classes or categories of business opportunities.

Ratification of Defective Entity Actions

Act 122 added procedures for ratifying defective entity actions in circumstances where the defective act is clear, as well as in circumstances where it is unclear whether proper authorization occurred. The process for ratification requires approval by governors (such as the directors, general partner, or board of managers) and, if required, interest holders (shareholders, partners, or members). When properly ratified, defective actions are deemed cured with retroactive effect. Ratification is subject to judicial review. A general statute of repose of 21 years, however, prohibits a defective entity action from being challenged after that time, though shorter periods apply when a public corporation discloses a defective entity action in a filing with the Securities and Exchange Commission or in other specific ways.

Additional Amendments

Act 122 amended the Associations Code in several additional respects, including the following:

• Improving the effectiveness of division transactions (Sections 363–368).
• Providing that a corporation’s bylaws may specify an exclusive forum for the adjudication of internal corporate claims, and that a claim arising under the Securities Act of 1933 may be brought exclusively in federal courts (Section 1513).
• Imposing limits on dissenters’ rights for a class or series entitled to a preference (Section 1571(f)).

Larry P. Laubach is co-chair, corporate practice group, at the law firm Cozen O'Connor in Philadelphia. He can be reached at llaubach@cozen.com.

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^{Statements of fact and opinion are the authors’ responsibility alone and do not imply an opinion on the part of the PICPA's officers or members. The information contained herein does not constitute accounting, legal, or professional advice. For actionable advice, you must engage or consult with a qualified professional.}