In the case of “Greenmark Properties, LLC v. Parts, Inc.,” heard by the Maryland Appellate Court, the key issue revolved around the validity of two real estate sale contracts for a property owned by Parts, Inc. (“Parts”). The case is unreported, but it is interesting. So I am summarizing it here.
Facts of Greenmark Properties v. Parts
The case concerns two conflicting contracts for Pilot’s Cove Farm, a 129-acre farm in Charles County, Maryland, owned by Parts, Inc. Greenmark entered into a sale agreement with Parts on July 30, 2019, for $850,000, additional financial benefits, and a five-year lease for Brian Puckett, the sole and controlling shareholder of Parts.
At the time of the agreement, Brian owned 5% of Parts’ voting stock and controlled the remaining shares through his late mother’s will. The Greenmark Contract remained unbreached, and Greenmark’s earnest money was still held by the Escrow Agent. Despite this, the Garners secured a contract to purchase the farm for $1 million from Matthew Simpson, the Personal Representative of James and Anne Puckett’s estates, who acknowledged the Garner Contract as a secondary option to Greenmark’s.
Parts was operated by James and Anne Puckett until their deaths, after which Brian became the sole director and officer, owning 5% of the stock and inheriting the rest. Matthew Simpson, as the personal representative, delayed the closing of Greenmark’s contract, citing estate complications, but executed the Garner Contract without terminating Greenmark’s. The Pucketts’ estates were apparently unsettled for years.
Simpson presented both contracts to the Orphans’ Court as options. Greenmark, learning of the double cross, sued for specific performance as the holder of equitable title. The Charles County Circuit Court Judge Karen H. Abrams initially ruled in favor of Greenmark, validating its contract.
But the judge later reversed this decision, declaring Greenmark’s contract invalid due to lack of shareholder meeting compliance with Maryland law. Why? Because the Greenmark contract was not in compliance with Maryland Code Ann. Corps. & Assoc. § 3-105. Glenmark’s motion to reconsider was denied, leading to this appeal.
Maryland Code Ann. Corps. & Assoc. § 3-105
This is an important statute so let’s break it down:
- Basic Rule for Major Corporate Changes: When a company wants to merge with another, exchange shares, or sell significant assets, it usually needs to follow specific approval procedures outlined in this law. However, there are some exceptions.
- Exceptions to the Basic Rule:
- If a parent company owns 90% or more of a subsidiary, it can merge with the subsidiary more easily, following simpler rules in a different section (§ 3–106).
- Certain types of mergers involving Maryland corporations have their own special rules (§ 3–106.1 and § 3–106.2).
- If only shares are being exchanged, and the company receiving the shares is in Maryland, only its board of directors and any other requirements in its charter need to approve it.
- If a company in Maryland is receiving assets from another company, again, only its board of directors and any other charter requirements are needed for approval.
- For companies incorporated outside of Maryland (“foreign corporations”), they need to follow the rules and voting procedures of their own charters and the laws of their home countries.
- If a Maryland successor company (a company formed from a merger) doesn’t significantly change its stock or charter through the merger, only a majority of its board of directors needs to approve it.
- For a business trust (a type of business structure) involved in a merger, it must follow the approval process in its trust declaration and the laws of the place where it’s organized.
- For Maryland corporations that are open-end investment companies, they must follow specific board approval rules and the Investment Company Act of 1940.
- Process for Approval:
- The boards of directors of the companies involved must pass a resolution (a formal decision) saying the merger, share exchange, or asset transfer is a good idea, and set the terms for it.
- They must then arrange for a stockholder meeting, either a regular annual one or a special meeting, to consider the transaction.
- Notifying Stockholders:
- All stockholders, whether or not they can vote on the transaction, must be notified about the meeting and its purpose, except in some cases where stockholder rights aren’t affected by a merger.
- Stockholder Approval:
- For the transaction to go ahead, two-thirds of the votes that can be cast on the matter need to say ‘yes’.
Court’s Holding
The appellate court’s decision focused on whether the contracts to sell a farm, first with Greenmark and subsequently with the Garners, complied with Maryland’s corporate and real estate laws. The central issue was whether these contracts adhered to the statutory requirements governing the sale of substantial corporate assets.
The court held that the contract between Greenmark and Parts was invalid. Echoing Judge Abrams ruling, Judge Tang based her ruling on the necessary corporate formalities, as stipulated by Maryland law, which were not followed. The law requires that the sale of all or substantially all of a corporation’s assets must be approved by the majority of the shareholders at a duly constituted meeting. The court found that this procedure was not adhered to in the Greenmark Contract, rendering it void.
In contrast, the Garner Contract was deemed valid by the court. The difference lay in the corporate procedures followed before its execution. The Garners’ contract with Parts, Inc. was approved by a corporate resolution, satisfying the statutory requirements. This compliance with the formalities required by Maryland law was crucial in the court’s determination of its validity.
Take Home Message
The court’s ruling underscores the importance of adhering to corporate governance rules and statutory requirements in significant asset transactions. It highlights the necessity for corporations to meticulously follow established procedures in asset sales, especially when dealing with substantial properties or assets.