Legislature(1999 - 2000)
02/25/2000 03:23 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 357-REDEMPTION OF CORPORATE SHARES CHAIRMAN ROKEBERG announced the first order of business would be HOUSE BILL NO. 357, "An Act relating to the redemption of shares of certain Alaska corporations." REPRESENTATIVE LISA MURKOWSKI, Alaska State Legislature, came forward to testify as the sponsor of HB 357. She stated that HB 357 is a relatively simple bill. It essentially allows a corporation to issue preferred shares that are redeemable at the option of the holder. Currently in statute this is not allowed. She pointed out that the statutes were patterned after the California Corporations Code. California has since made revisions to their statutes, however, as have many other states. This bill allows Alaskan corporations to raise capital another way. She indicated she prefers to have the Department of Community and Economic Development (DCED) address any specific questions. Number 0214 TERRY ELDER, Director, Division of Banking, Securities and Corporations (DBSC), Department of Economic and Community Development, came forward to testify on HB 357. He stated that the division has reviewed HB 357, which allows corporations to issue preferred shares redeemable at the option of the holder. The division does not see a problem with this. It does not impact any of their filing requirements. From an administrative standpoint, the bill has no impact. From a policy standpoint, he indicated the legislature would have to decide whether it is appropriate. He said it is accurate that a number of states, including California, allow this. In the division's review of Title 10, it appears the bill gives corporations an option and does not require them to do this. Corporations would be using this option when they feel that it is in their interest in a negotiated environment. There are other parts of Title 10 that provide protections for shareholders from redemptions, which would include these kinds of redemptions. Shareholders' protections continue to be adequate in light of this option. CHAIRMAN ROKEBERG asked Mr. Elder to put the policy issue in a nutshell. MR. ELDER explained that the statute currently allows the corporations to issue preferred shares that are redeemable at the option of the corporation. This allows them to issue redeemable shares at the option of the shareholder as well as the corporation. Number 0418 JOHN LOWBER, Chief Financial Officer, General Communications, Incorporated (GCI), testified via teleconference from Anchorage. He has been in this capacity for about 15 years. He stated: I am here today representing GCI and, as most of you probably know, we are an Alaska company. We were founded by Alaskans. We're headquartered in Alaska, and we're one of only a handful of publicly traded companies that are, in fact, headquartered in Alaska. We and all of our subsidiaries are incorporated in Alaska, and we like being an Alaskan company, and we hope to continue to be incorporated in Alaska. My interest in this bill is to make sure that Alaska companies don't suffer any competitive disadvantages by virtue of the fact that we are, in fact, incorporated in Alaska. I submitted some written testimony which also explains my interest that was based on some practical experience that I had about a year ago, when I actually did, indeed, try to raise about $20 million by selling some preferred equity to a couple investors. We negotiated the terms sheets, and only once we tried to put the attorneys to the task of preparing the definitive agreement did we find that state law would not actually allow us to do what we had agreed to do. So, we had to get in and make some changes to the deal to salvage it. At that point, it came to my attention that Alaska law really hadn't kept up with some of the changes [to] the California law that it was based on; the changes that they had made were not actually implemented in Alaska. So, it looked like a little bit of a hole there that perhaps, with a little effort, could be plugged, so that down the road we wouldn't bump into this restriction again. From my perspective, the bill eliminates an existing competitive disadvantage, and it would help Alaska companies raise competitively priced capital, which I think would be good for commerce in Alaska and would continue to encourage companies such as ourselves to incorporate in Alaska, which I think is a good thing for the state. CHAIRMAN ROKEBERG asked Mr. Lowber to explain what preferred stocks are and to give an example of how the rights of redemption on the part of a purchaser work. Number 0600 MR. LOWBER explained: A preferred stock is a (indisc.) of equity. There's generally common shareholders, which everybody has a right -- you know, you're basically at the end of the food chain when it comes to having equity interest in the corporation, all your secured creditors and so on. Unsecured creditors are in line ahead of you, and you get basically what's left. A preferred shareholder, as the name implies, has a preference over the common shareholders, so their rights are generally a little bit above the common shareholders. Generally what happens is you can raise equity through selling shares to the common shareholders. Another means of doing it is to sell preferred equity to an investor in preferred in shares. In our particular case, the deal that we struck -- well, in a typical case, the money comes in to the corporation, and the investor generally has a right to convert that preferred stock down the road into common stock. And if the common stock value, such as in the case of a public company ... increases ..., the preferred investor will eventually convert into common stock and then generate a return on their investment when they liquidate the common stock. The redemption option really gives the preferred shareholder an exit strategy in the event that things don't go as planned, and that is if there's not an economic incentive to convert into common stock, then they have the right to go back to the corporation and say, "I'd kind of like to get my money back," at which time, then, the corporation would be able to redeem the shares under certain previously negotiated circumstances. So, it's basically an escape mechanism for the preferred shareholder, and to the extent that you're able to negotiate a term sheet that allows reduction of risk - that is to say, an escape clause in the event things don't go as planned - that generally equates to a lower price for the equity for the company. So, once again, reduced risk equates to reduced return or reduced cost for the Alaska company. Number 0755 CHAIRMAN ROKEBERG wondered if having the ability to have a "call provision" on the terms of the issue significantly helps the rate of the issue if the buyer had the election to call it. MR. LOWBER asked if Chairman Rokeberg means redeem it. CHAIRMAN ROKEBERG replied yes and that he means "to redeem it at a point in time that may be on the term sheet." MR. LOWBER answered: Definitely. It's just an added protection for the investor. People go into these things hoping and expecting that they'll never actually get their money back in the form of redemption. They expect that down the road their investment will appreciate as the common stock appreciates and ultimately they'll get to convert that into common and then enjoy the ownership of the common stock. It's basically an option to buy common at a fixed price. So, to the extent that they have an escape clause or a way to monetize that investment in the event that the common does not appreciate, that reduces risk and encourages them to agree to terms that they otherwise might not agree to, ultimately, with the idea of increasing flexibility for the company or decreasing costs to the company. Number 0871 JULIUS BRECHT, Attorney, Wohlforth, Vassar, Johnson & Brecht, testified via teleconference from Portland, Oregon. He stated: I am a past director of the Alaska Division of Banking, Securities and Corporations, serving from 1976 through 1980. Since then, I have been in private practice in Anchorage, and my practice is in the area of business law, with a focus on securities, corporate and finance law. I'd first like to thank you for the opportunity to appear before the committee to offer testimony on HB 357, a bill relating to share redemption. I participated in the development and, later, the review of proposals for a new Alaska corporate code in the late-1970s and through the 1980s. That was a ten-year effort, and it resulted in a bill being enacted by the Alaska Legislature which became the Alaska Corporations Code. The code became effective on July 1, 1989, and, as you know, is codified at AS 10.06. As comprehensive as that effort was, over a period of ten years and then culminating with the enactment by the Alaska legislature, corporate law is in need of change with time. For example, the Alaska Corporations Code provisions on redemption of shares found at AS 10.06.325 was based upon a similar provision of the California Corporations Code at that time. The California law had for some time prior to that prohibited shares that are redeemable at the option of the holder with limited exception. However, in 1983, the California Code was changed expressly to allow share redemption at the option of the holder. What HB 357 provides is for amendment to the Alaska Corporations Code pertaining to share redemption for Alaska corporations. The primary focus of the bill is on changes to section 325 [AS 10.06.325]. At present, that section allows share redemption at the option of the issuing corporation only. And further, it prohibits an Alaska corporation from selling stock that includes a right in the holder of the stock to require the corporation to redeem the stock. Number 1036 The changes to section 325 proposed by the bill before the committee, in major part, simply revise the Alaska corporate law to reflect the same changes adopted in California relating to share redemption at the option of the holder. A number of other states, which have become commercial centers in this country, have similar provisions regarding share redemption at the option of the holder. Based on my limited review - using a very low-tech method of going to the library and pulling the statute books from the various states, and only of a small portion of those commercial states - I found that, in addition to California, the states of Michigan, Ohio, Connecticut, Delaware and New Jersey have similar provisions. Even with the enactment of HB 357, the share redemption right would continue to be subject to other provisions of the code which preclude the exercise of the redemption right under certain circumstances. And this really gets to the policy issue that ... you raised in question to Director of Banking and Securities, Terry Elder, and that is that even with the enactment of this bill, the share redemption right would continue to be subject to other provisions of the code that would preclude the exercise of that redemption right under circumstances. Those circumstances are set out in section 358 [AS 10.06.358] of the code, and they deal with the distribution to a corporation's shareholders such as, as an example, on the exercise of share redemption rights. That is, such an action would be prohibited unless certain conditions are met and those conditions are that the amount of a corporation's retained earnings immediately before the proposed distribution equals or exceeds the amount of the proposed distribution or otherwise satisfies the conditions on distributions set forth in that section of the code. In my view, the proposed changes to section 325, do not lessen the provisions of the code protecting shareholders of a corporation. However, the proposed changes will allow greater flexibility to a corporation's board of directors in addressing capital needs in present day financial markets as was outlined by Mr. Lowber previously. The other provisions of HB 357 make other changes to the Alaska Statutes to accommodate these primary changes to section 325. I have prepared a brief section-by-section outline of the provisions of the bill, and it is included along with my written statement of testimony submitted to the committee through the chairman. In summary, the Alaska Corporations Code is, in my view, presently in need of amendment to recognize the needs of modern corporations, while retaining shareholder protection as already adopted in those other commercial states. Specifically, the amendment is needed to incorporate changes to code provisions of California on which section 325 is based. Again, I thank you for the opportunity to present this testimony before the committee, and I'm available if you have any questions about the bill. Number 1228 CHAIRMAN ROKEBERG asked, "Mr. Brecht, you were the director when these provisions we're repealing were in place. Could you give very briefly the rationale why they were in place at that time?" MR. BRECHT specified that he predated the Alaska Corporations Code. When he was the director of the Division of Banking, Securities and Corporations, the prior business code was in place, the Alaska Business Corporation Act. He became involved in a review process that ultimately culminated in the drafting of a proposed new code when he was still Director. After leaving state government and going into private practice, he continued his involvement through a committee of the Alaska Bar Association that reviewed, deliberated and offered comment on the proposed changes to the code. These changes were fashioned by the Corporations Commission [Alaska Code Revision Commission] that was set up by the Alaska State Legislature. MR. BRECHT said that process took a better part of ten years before it culminated in the drafting and submission of a bill to the legislature. The bill ultimately became effective July 1, 1989. The prior code did not have provisions such as those being proposed in HB 357. When the Alaska Corporations Code was enacted, it was enacted based on prior version of the California code dealing with share redemption. The California code was subsequently amended and the amendment was not incorporated by other amendments to the Alaska Corporations Code up to this point. Number 1341 CHAIRMAN ROKEBERG asked, "You don't recall the public policy argument to have that in there?" MR. BRECHT stated that it was based on the California code. DAVID TAYLOR, Chief Financial Officer, Brady & Company, Incorporated, testified via teleconference from Anchorage. He has been in that position for 17 years. He said his company is Alaska's largest insurance brokerage. It is a privately held corporation and based in Anchorage. He is speaking in support of HB 357 for many of the same reasons that have already been spoken to. He thinks allowing Alaska corporations to remain competitive in raising capital makes the bill revenue positive. The increased economic activity facilitated would generate positive corporate taxable income. CHAIRMAN ROKEBERG thanked Mr. Taylor for stating that HB 357 is a pro-business and pro-jobs development bill. MORRIS SHEPARD, Vice-President of Finance, Reeve Aleutian Airways, testified via teleconference from Anchorage. He stated that he is in support of HB 357. He also stated that previous testimony has adequately covered the reasons he supports the bill. He believes any bill that can grant additional flexibility helps the overall health of Alaska businesses. CHAIRMAN ROKEBERG asked whether Mr. Shepard knows of any firms that have had any problems because of this statute. MR. SHEPARD answered that he has not had any problems with respect to his company and does not know of any other firms that have encountered this problem. REPRESENTATIVE HALCRO made a motion to move HB 357 out of committee with individual recommendations and the attached fiscal note. There being no objection, HB 357 moved from the House Labor and Commerce Standing Committee.
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