Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2004

State of Hawaii

Sir:

Your Committees on Consumer Protection and Commerce and Judiciary, to which was referred H.B. No. 2433 entitled:

beg leave to report as follows:

The purpose of this bill is to update and increase the effectiveness of Hawaii's business registration law by, among other things:

The Business Registration Division of the Department of Commerce and Consumer Affairs submitted testimony in support of this measure and requested an amendment. Testimony in support of Section 5 of the bill was received from the chair of a Hawaii State Bar Association Business Law Section work group (work group) and another individual. Several members of the work group supported the bill but opposed Section 5.

Your Committees find that Section 5 of this bill amends section 414-163, Hawaii Revised Statutes (HRS), which is based on section 7.32 of the Model Business Corporation Act. This provision authorizes certain types of shareholder agreements under certain conditions. The agreements authorized include shareholder voting agreements that affect the exercise or division of voting power by or among the shareholders.

Current law requires that for financing or other transactions, corporations must obtain the unanimous consent of all shareholders or obtain consent at a shareholder meeting. The section 414-163 exception for voting agreements allows shareholders to agree to less than unanimous shareholder consent without a shareholder meeting as long as the agreement is conspicuously disclosed on the share certificates. Failure to note the agreement on the share certificate gives a purchaser of stock who has no knowledge of the agreement, the right to rescind the purchase.

As a practical matter, the voting exception allows corporations to avoid the delays and expenses associated with obtaining unanimous consent or calling a shareholder meeting. These delays may lead to the failure of a company that cannot complete critical financing or other transactions on an expedited basis.

Section 5 of this bill clarifies and specifies that the voting exception applies to shareholder agreements to take action by less than unanimous consent without a shareholders meeting.

Section 5 also provides that if any agreement authorized under section 414-163, HRS, including a voting agreement, is set forth in the articles of incorporation, it does not need to be noted on the share certificates. Thus, if an agreement is included in the articles of incorporation, a purchaser would be deemed to have knowledge of the agreement and would not have a right of rescission where the agreement is not noted on the share certificates purchased.

The proponents of Section 5 argue that disclosure via the articles of incorporation is sufficient, and notation on the certificates of outstanding shares, unnecessary. They also argue that the amendments eliminate the costs of recalling and replacing all of a corporation's outstanding certificates at the time of the agreement. The opponents of Section 5 argue that, while the proposed change reduces transaction costs, it also reduces protections for incoming shareholders that are provided by the certificate notation requirement and right of recission, and that no other jurisdiction that has adopted the Model Business Corporation Act has removed the notation requirement and rescission remedy.

Your Committees have amended this bill by:

As affirmed by the records of votes of the members of your Committees on Consumer Protection and Commerce and Judiciary that are attached to this report, your Committees are in accord with the intent and purpose of H.B. No. 2433, as amended herein, and recommend that it be referred to the Committee on Finance, in the form attached hereto as H.B. No. 2433, H.D. 1.