AVI LOEWENSTEIN AND HERRICK K. LIDSTONE, JR.
This article reviews the salient provisions of Colorado Senate Bill 19-086, which amends Colorado laws governing business entities.
On May 9, 2019, the Colorado General Assembly passed Senate Bill (SB) 19-086, "Concerning Updates to the Laws Governing Business Entities," which Governor Polis signed into law on May 13. SB 19-086 updates, corrects, and makes other changes to the Colorado Business Corporation Act (CBCA) and the Colorado Corporations and Associations Act (CCAA). This article summarizes the most significant and noteworthy changes, including those relating to directors' fiduciary duties, forum selection clauses, and conflicting interest transactions.
The CBA and the Legislative Process
Since the Colorado Bar Association was organized, its attorney members have been involved in the legislative process on a wide range of bills, including SB 19-086. The complex legislative process, and the CBAs participation in it, are described in a 2016 Colorado Lawyer article titled "How the Colorado General Assembly Works."1
History of SB 19-086
In 1952, the Corporate Laws Committee of the American Bar Association's Business Law Section (the ABA Committee) published the Model Business Corporation Act (MBCA). Colorado adopted the MBCA with modifications in 1958 and significantly revised it in 1959.2 The ABA Committee approved a substantial revision of the MBCA in 1969, and just 15 years later, the ABA Committee adopted what was then called the Revised Model Business Corporation Act (the 1984 RMBCA).
In 1987, CBA members Claude Maer, Dennis Jackson, and Anthony van Westrum organized the Colorado Corporation Code Revision Committee within the CBAs Business Law Section to consider replacing Colorado's corporation code with a new act based on the 1984 RMBCA. After almost four years of work, including many biweekly meetings, the Colorado Corporation Code Revision Committee proposed a bill, and the Colorado General Assembly agreed to substantially update Colorado's corporation laws based on the 1984 RMBCA. The (then) new CBCA became effective July 1, 1994.
In addition to the CBCA, there were numerous amendments to the CRS Title 7 laws governing entities through the 1990s, which prompted the adoption of the CCAA, effective Tune 3, 1997. The CCAA has occasionally been referred to as the "junction box" statute because it standardizes provisions in Title 7's various entity statutes. For example,
■ instead of different provisions dictating filing requirements, CRS § 7-90-301 of the CCAA details filing requirements for Colorado entities, and replaced similar provisions that previously appeared in the various entity acts; and
■ instead of different and inconsistent provisions governing the filing of periodic reports by "reporting entities" under the various entity acts, all were consolidated in CRS §7-90-501.
Over the years, the ABA Committee promulgated several updates to the RMBCA, most recently the 2016 Model Business Corporation Act (the 2016 MBCA) and amendments there to in November 2018. In 2009, the Business Law Section formed a new committee (the CBA Committee) to consider whether updates to the CBCA were appropriate. The CBA Committee divided itself into subcommittees to address various provisions, and the subcommittees met regularly from 2009 through 2013 to consider changes and updates based in large part on the RMBCA as modified through 2008 (the 2008 RMBCA), subject to modifications for consistency with Colorado law.
After an unplanned delay and starting in mid-2016, the subcommittees' recommendations were coordinated and compiled into a single statute, and the CBA Committee looked to the 2016 MBCA for additional guidance. Meeting occasionally through April 2018, the CBA Committee finalized its work and prepared a bill for consideration by the Colorado General Assembly. After vetting the bill through the CBA and other interested constituencies, primary sponsors Senator Pete Lee and Representative Shannon Bird presented SB 19-086 to the Colorado General Assembly in January 2019.
SB 19-086 does not drastically change the CBCA or the CCAA. Rather, it largely clarifies the law, consolidates and simplifies provisions, responds to court decisions interpreting the law, and reflects changes necessitated by changes in business practices. SB 19-086 becomes effective on July 1, 2020.
Significant Changes to the CBCA
SB 19-086 significantly affects CBCA provisions on directors' standards of care and standards of liability. It also amends CBCA provisions on remedies, damages, and forum selection. It further addresses conflicting interest transactions, dissenters' rights, and dissolution.
Duties of Care and Loyalty
Directors of Colorado corporations owe the duty of care and the duty of loyalty to the corporation. CRS § 7-108-401, as initially adopted and as amended by SB 19-086, prescribes standards of conduct for corporate directors and officers with discretionary authority. Under SB 19-086, CRS § 7-108-401(1) will require that directors and officers with discretionary authority discharge their duties
■ in good faith,
■ with care, and
■ in a manner the director reasonably believes to be in the best interests of the corporation.
Currently, "with care" is defined as "with the care an ordinarily prudent person in a like position would exercise under similar circumstances."4 SB 19-086 modifies that obligation to be simply "with care" because Colorado courts, as a matter of common law, apply the business judgment rule in duty of care cases, with the result that the standard of care is gross negligence.6 The prior "ordinarily prudent person" standard is a tort standard for ordinary negligence and was not consistent with the common law in Colorado and elsewhere for the standard of care for corporate directors.7
Modifying the Directors' Standards of Care
Where the incorporators, or subsequently the shareholders, want to change the directors' standard of care, they are free to do so in the initial articles of incorporation or by amendment. Under CRS § 7-108-402(l)(c), liability can either be increased from gross negligence to ordinary negligence, or reduced to knowing misconduct or a knowing violation of law. As described below, the CBCA, in CRS § 7-102-102(2)(d), continues that ability where it is set forth in the corporation's articles of incorporation.
Thus, SB 19-086 clarifies the meaning of a director's and officer's obligation to act with "care" and codifies the gross negligence standard consistent with Delaware and other jurisdictions.
Duties of Directors in the Zone of Insolvency (Actual Insolvency)
19-086 amends CRS § 7-108-401(5) (renumbered as CRS
§ 7-108-401(4)). Section 7-108-401(5) was added to the
CBCA in 2006 at the CBA's request and in response to the
Court of Appeals' decision in Anstine v. Alexander
Under our common law, the creditors of an insolvent corporation are not owed general fiduciary duties by the corporation's officers and directors. Officers and directors of an insolvent corporation owe creditors a duty to avoid favoring their own interests over creditors' claims.12
However, the Supreme Court then confused the intended standard of conduct when it stated in footnote (9):
A 2006 amendment to the Colorado Revised Statutes, which does not apply to this case, states that directors and officers of corporations owe no fiduciary duties to the corporation's creditors [citing CRS § 7-108-401(5)]. We express no opinion on whether this provision applies where a corporation is insolvent. (Emphasis added.)
To clarify the standard of care for the board of directors and to address footnote (9) of Anstine II, SB 19-086 amends CRS § 7-108-401(4) to state: