Legislature(2011 - 2012)BELTZ 105 (TSBldg)

03/25/2011 01:30 PM JUDICIARY

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* first hearing in first committee of referral
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                 SB 101-ENTITY TRANSACTIONS ACT                                                                             
1:32:58 PM                                                                                                                    
CHAIR FRENCH announced the consideration of SB 101.                                                                             
SENATOR  PASKVAN,   sponsor,  spoke  to  the   following  sponsor                                                               
statement as he introduced SB 101:                                                                                              
     Senate   Bill  101   conforms   to   the  Uniform   Law                                                                    
     Commissioners' Model Entity  Transaction Act (META). If                                                                    
     implemented in  the State  of Alaska,  this legislation                                                                    
     will  help facilitate  transactions  between more  than                                                                    
     one  form  of  entity, improve  the  existing  business                                                                    
     climate   in  Alaska,   and  help   reduce  unnecessary                                                                    
     administrative and  legal burdens currently  imposed on                                                                    
     Alaska companies.                                                                                                          
     During  the  past  twenty  years   many  new  types  of                                                                    
     business   entities  -   including  limited   liability                                                                    
     companies, limited liability  partnerships, and limited                                                                    
     liability limited  partnerships - have  been recognized                                                                    
     under state  law. As a  result of the  proliferation of                                                                    
     new entity  forms, many businesses now  utilize various                                                                    
     types of  entities in their  organizational structures.                                                                    
     The relaxation  of federal  tax rules  governing entity                                                                    
     classification has led to an  increase in the volume of                                                                    
     restructuring  and  acquisition   transactions  by  and                                                                    
     among the various types of entity forms.                                                                                   
     Because  of  the  lack  of  clear  statutory  authority                                                                    
     allowing  transactions between  more than  one form  of                                                                    
     entity, these transactions have  often required the use                                                                    
     of  multiple indirect  steps, as  opposed  to a  single                                                                    
     Senate Bill  101 will offer new  statutory authority to                                                                    
     permit  cross-entity transactions  in  order to  remain                                                                    
     responsive  to  the  needs  of  Alaskan  companies  and                                                                    
     should be  enacted in order to  allow Alaska businesses                                                                    
     the    opportunity    to   engage    in    cross-entity                                                                    
     Adopting  SB  101 will  be  an  important step  towards                                                                    
     bringing Alaska  more into the mainstream  of statutory                                                                    
     business law.                                                                                                              
1:33:44 PM                                                                                                                    
SENATOR WIELECHOWSKI joined the committee.                                                                                      
SENATOR  PASKVAN   informed  the  committee  that   he  initially                                                               
introduced  this legislation  during  the  26th Legislature,  but                                                               
after one  hearing he  yielded to requests  by the  Department of                                                               
Commerce,  Community and  Economic  Development  (DCCED) and  the                                                               
Department of Law  (DOL) to hold the complex bill  and work on it                                                               
over the Interim.  That hard work, he stated, is  reflected in SB                                                               
1:35:58 PM                                                                                                                    
JEFF STEPP,  Staff to Senator  Paskvan, reviewed the  contents of                                                               
the  bill  packet  to highlight  the  rigorous  and  professional                                                               
reviews that the  50-page bill had undergone. In  addition to the                                                               
eight-page sectional summary is  a memorandum from attorney Steve                                                               
Miller with Sherman  & Howard L.L.C. advocating for  an update of                                                               
Alaska business  statutes. Page 2  of the memo depicts  the four-                                                               
step process  that an Alaska corporation  currently must initiate                                                               
in  order to  merge with  a limited  liability company.  First, a                                                               
corporation  must  form  a  foreign  limited  liability  company;                                                               
second, it must  merge the Alaska limited  liability company into                                                               
the  foreign limited  liability company;  third, it  must convert                                                               
the  surviving  entity  of  the  merger  -  the  foreign  limited                                                               
liability company  - into a  foreign corporation pursuant  to the                                                               
provisions of  that state's business  laws; and finally,  it must                                                               
merge  the foreign  corporation into  an Alaska  corporation. The                                                               
goal of  SB 101 is  to accomplish such  inter-entity transactions                                                               
in a single step.                                                                                                               
The  bill  packets  also contain  the  Uniform  Law  Commission's                                                               
Entity  Transaction   Act  Summary  and  the   Council  of  State                                                               
Governments (CSG)  Suggested State  Legislation for 2011.  SB 101                                                               
is included  in the CSG  document, clearly demonstrating  that it                                                               
is  timely  in order  to  bring  Alaska  into the  mainstream  of                                                               
statutory business law.                                                                                                         
MR. STEPP  noted that Uniform  Law Commissioner  Michael Geraghty                                                               
was available  online to explain  the legislation in  more detail                                                               
and to answer  the more technical questions.  Teri Bannister, who                                                               
drafted  the legislation,  was asked  to be  available to  answer                                                               
questions.  Don   Habeger,  the  Director  of   the  Division  of                                                               
Corporations,  Business and  Professional Licensing  Section with                                                               
the DCCED, was available to address  the fiscal note and speak to                                                               
the department's view on implementing this legislation.                                                                         
1:42:44 PM                                                                                                                    
CHAIR FRENCH  asked Mr.  Geraghty to  provide his  perspective of                                                               
the legislation.                                                                                                                
1:43:11 PM                                                                                                                    
MIKE  GERAGHTY,  Attorney,  stated  that  he  is  a  Uniform  Law                                                               
Commissioner  (ULC) who  has practiced  in this  jurisdiction for                                                               
about 32  years. He explained  that the American  Bar Association                                                               
(ABA)  worked  in conjunction  with  the  Uniform Law  Commission                                                               
(ULC)  in  the drafting  of  the  very complicated  Model  Entity                                                               
Transaction Act (META).  It was promulgated in 2005  and has been                                                               
enacted in the District of  Columbia and introduced in Alaska and                                                               
1:45:46 PM                                                                                                                    
CHAIR FRENCH said he read that  both Idaho and Kansas have passed                                                               
this legislation as well.                                                                                                       
MR. GERAGHTY  said he would  stand corrected  if that were  to be                                                               
MR. STEPP  directed attention to  the Legislative Fact  Sheet for                                                               
the Entity Transactions  Act in the packet. It  reports that this                                                               
legislation has been enacted in  the District of Columbia, Idaho,                                                               
and  Kansas and  it's  been introduced  in  both Connecticut  and                                                               
Alaska.  He  cited  the  source as  the  Uniform  Law  Commission                                                               
MR. GERAGHTY said  Mr. Stepp has obviously done  his homework. He                                                               
continued to say that he sent a  copy of SB 101 to the ULC asking                                                               
for formal input  and Harry Haynsworth, who was the  chair of the                                                               
ULC  committee  that drafted  the  Model  Entity Transaction  Act                                                               
(META), reviewed the bill and  expressed satisfaction that it was                                                               
consistent   with  the   spirit  and   intent  of   META.  What's                                                               
particularly appealing about SB 101,  Mr. Geraghty noted, is that                                                               
it  allows for  cross-entity transactions  as opposed  to current                                                               
law where one  entity typically has to dissolve in  order for the                                                               
transfer to happen.                                                                                                             
1:49:21 PM                                                                                                                    
MR.  GERAGHTY  said SB  101  addresses  basically four  types  of                                                               
transactions  or   transfers.  One  type  is   a  merger  between                                                               
different types  of entities - corporation,  partnership, limited                                                               
partnership,  and  Limited  Liability  Company,  for  example.  A                                                               
second  type is  a conversion  of  one entity  into another.  The                                                               
holders of the limited partnership  convert to a corporation, for                                                               
example. A third  type of transaction is an  interest exchange in                                                               
which  the shareholders  or partners  transfer their  interest in                                                               
the  entity they  hold for  shares in  a new  corporation they've                                                               
formed. The fourth  type of transaction is  a domestication. This                                                               
is  an entity  organized in  one state  that will  morph into  an                                                               
entity  under the  laws of  another  state. SB  101 requires  the                                                               
receiving state  to have  provisions in its  laws that  allow the                                                               
new entity to be recognized.                                                                                                    
MR. GERAGHTY  said this  bill is complex  because the  details of                                                               
each type  of transfer  have to  be addressed,  but at  heart the                                                               
effort is  to protect  all interests. Whatever  plan is  used, it                                                               
must  be submitted  to the  division of  corporations and  put on                                                               
file and the  plan must be followed  scrupulously. The provisions                                                               
and  protections  were  carefully  crafted  to  ensure  that  the                                                               
existing business  interests are protected  and that it is  not a                                                               
vehicle to avoid  or abate creditors. These  transactions have to                                                               
be done for legitimate business purposes.                                                                                       
1:55:34 PM                                                                                                                    
CHAIR FRENCH asked  for an explanation of  the difference between                                                               
a model act and a uniform  act. His understanding is that this is                                                               
a model act.                                                                                                                    
MR.  GERAGHTY  replied he  didn't  want  to speculate  and  would                                                               
therefore prefer to submit the answer in writing.                                                                               
CHAIR FRENCH asked  if any consumer groups  had expressed concern                                                               
that this  act would in any  way put consumers at  a disadvantage                                                               
in dealing with  businesses. There seems to be  good alignment in                                                               
the business community.                                                                                                         
MR.  GERAGHTY said  he hadn't  heard any  concerns from  consumer                                                               
groups  but he  only  distributed  the initial  bill  to the  law                                                               
community, not other potential stakeholders.                                                                                    
2:00:32 PM                                                                                                                    
CHAIR FRENCH  asked why  this is  a matter  of state  rather than                                                               
federal law and if there is similar law on the federal books.                                                                   
MR GERAGHTY  said he  doesn't believe that  federal law  has ever                                                               
occupied  this field.  Business organization  has typically  been                                                               
left to individual states and  that's one reason that the Uniform                                                               
Law Commission was established.                                                                                                 
SENATOR   COGHILL   asked   if    this   change   would   relieve                                                               
responsibility for  advertizing purposes.  He added that  it took                                                               
some time to  realize that "foreign" refers to  outside the state                                                               
and not outside the country.                                                                                                    
2:04:28 PM                                                                                                                    
MR. GERAGHTY clarified  that there is no way  to escape liability                                                               
under  these  conversions.  He   also  confirmed  that  the  term                                                               
"foreign" does in fact refer to other states.                                                                                   
SENATOR  COGHILL asked  if DCCED  is the  entity that  ultimately                                                               
would say that a particular plan conforms to this law.                                                                          
MR.  GERAGHTY  said he  would  defer  to  Ms. Bannister,  but  he                                                               
believes that  the review  would typically  fall to  the attorney                                                               
who is  doing the paperwork  and giving advice on  the conversion                                                               
or transaction. However,  no conversion will occur  until all the                                                               
members  of   the  Limited  Liability  Company   consent  to  the                                                               
2:07:40 PM                                                                                                                    
CHAIR FRENCH asked Ms. Bannister to comment.                                                                                    
TERI   BANNISTER,    Attorney,   Legislative    Legal   Services,                                                               
Legislative Affairs  Agency, explained that a  conversion usually                                                               
takes place  privately, but  sometimes a  document must  be filed                                                               
with  DCCED  to  register  what   has  changed.  With  regard  to                                                               
liability,  she  confirmed  that   there  is  no  elimination  of                                                               
liability regardless  of the kind  of transaction.  Most consumer                                                               
protection laws  are drafted to cover  any type of person  so the                                                               
type of change doesn't matter.                                                                                                  
SENATOR  COGHILL  said  it  sounds   as  though  it's  more  like                                                               
registration or notice of a change in behavior.                                                                                 
MS. BANNISTER  clarified that there is  no automatic registration                                                               
for  these transactions.  However,  sometimes  it's necessary  to                                                               
file documents to  reflect the change in form in  order to comply                                                               
with current statutes.                                                                                                          
CHAIR  FRENCH  recapped  that these  mergers  don't  require  the                                                               
blessing  of the  state or  any  person other  than the  entities                                                               
MS. BANNISTER agreed that no blessing is required.                                                                              
2:11:05 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if there  is any danger  of companies                                                               
changing status to avoid legal liability.                                                                                       
MS. BANNISTER  said she  doesn't see  any obvious  danger because                                                               
the bill identifies to whom the liabilities are transferred.                                                                    
CHAIR FRENCH noted  that the term "entity" is defined  on page 39                                                               
and  it excludes  an "individual"  and "testamentary  trusts." He                                                               
asked why can't a person can't be an entity.                                                                                    
2:12:38 PM                                                                                                                    
MR.  GERAGHTY said  a person  can form  a corporation  or limited                                                               
liability company  so people can  form entities and once  they do                                                               
that they  can take advantage of  the bill to convert  to another                                                               
entity. But  an individual by  himself doesn't take  advantage of                                                               
any  business entity  form that  is currently  recognized. That's                                                               
the reason  that the bill  would logically exempt  an individual.                                                               
Obviously,  an individual  can form  a business  entity and  once                                                               
they've done so they would be  free to take advantage of the bill                                                               
when it's enacted.  But the bill wouldn't apply  to an individual                                                               
by himself  who hasn't taken  advantage of forming any  entity to                                                               
do business.                                                                                                                    
MS. BANNISTER said it was  a deliberate choice and the commentary                                                               
on the  Model Entity  Transactions Act  may outline  the reasons.                                                               
She offered to review the commentary.                                                                                           
CHAIR FRENCH  asked if trust  law practitioners are  pleased that                                                               
the definition of "entity" excludes  a testamentary, inter vivos,                                                               
or charitable trust.                                                                                                            
MR.  GERAGHTY said  he didn't  receive any  commentary from  that                                                               
sector  when he  circulated the  bill  last year.  He added  that                                                               
trusts  typically  aren't  utilized  as  a  form  under  which  a                                                               
business would operate.                                                                                                         
CHAIR FRENCH noted that Senator  Paskvan pointed out that on page                                                               
39,  line 17,  the definition  of "entity"  includes a  "business                                                               
trust or statutory trust entity."                                                                                               
SENATOR WIELECHOWSKI asked for the  rationale behind the language                                                               
on page 1, lines 8-10.                                                                                                          
MS. BANNISTER said that's a  conforming amendment to make the new                                                               
provisions apply to national banks.                                                                                             
2:18:38 PM                                                                                                                    
MR.  GERAGHTY clarified  that  when he  said  that trusts  aren't                                                               
typically used for business, he  was referring to a family trust.                                                               
He has no knowledge of a business trust.                                                                                        
SENATOR COGHILL  pointed out that  Section 30  on page 49  is the                                                               
repealer section.                                                                                                               
CHAIR FRENCH asked  Senator Paskvan to summarize  the progress of                                                               
the similar legislation that was filed last year.                                                                               
SENATOR PASKVAN explained that it  received one hearing in Senate                                                               
Labor and Commerce and after  further discussion with the DOL and                                                               
DCCED  it was  deemed  prudent to  rework  the legislation.  That                                                               
work, which occurred  at both the national and  local levels, has                                                               
taken about a  year. At this point there appears  to be consensus                                                               
that using  the Model Entity Transaction  Act - as compared  to a                                                               
uniform law  concept -  and incorporating  the nuances  of Alaska                                                               
law is the best way to accommodate it for Alaska.                                                                               
2:21:38 PM                                                                                                                    
DON HABEGER,  Director, Division  of Corporations,  Business, and                                                               
Professional  Licensing, Department  of  Commerce, Community  and                                                               
Economic Development (DCCED), stated  that the department delayed                                                               
the legislation last year as it  looked at the model act under SB                                                               
304 and  the nuances  in Alaska corporate  law. Staff  from DCCED                                                               
also worked  with the  DOL to address  how the  legislation would                                                               
affect other pieces of statute  such as cemetery associations and                                                               
nonprofits set forth in Section 5 on page 2.                                                                                    
The  division   has  determined   that  it  has   an  appropriate                                                               
administrative role  and SB 101  clearly spells out  the criteria                                                               
for grading any documents that  come in. The division foresees no                                                               
problems if the  legislation were to be  implemented. DCCED staff                                                               
contacted the two jurisdictions  that have implemented this model                                                               
legislation and  learned that  about 200  entities in  Idaho have                                                               
taken  advantage of  the  Act.  Kansas was  unable  to offer  any                                                               
statistics. DCCED estimates that between  40 and 50 entities will                                                               
take  advantage  of the  Act  in  the  state of  Alaska.  Current                                                               
staffing can accommodate this level of activity.                                                                                
2:26:20 PM                                                                                                                    
SENATOR COGHILL noted the July  1, 2013 timeline for implementing                                                               
regulations under  the Act  and asked  if he has  a feel  for the                                                               
scope of regulation that might be required.                                                                                     
MR. HABEGER replied  it may be as simple as  setting fees for the                                                               
documents they receive.                                                                                                         
2:27:25 PM                                                                                                                    
CHAIR  FRENCH announced  he would  hold SB  101 in  committee for                                                               
further consideration.                                                                                                          

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