SB 304-ENTITY TRANSACTIONS ACT  3:09:36 PM CHAIR PASKVAN called the meeting back to order at 3:09 p.m. and announced SB 304 to be up for consideration. He wanted to begin the discussion on what a model entities transaction act is and what is intended. 3:10:21 PM MIKE GERAGHTY, Private Practice Attorney, said he is a Uniform Law Commissioner for the State of Alaska. He said the Uniform Law Commission is a body that was formed over 100 years ago with the general goal of trying to develop uniform laws for consideration and enactment by the various states. He said as a Republic of 50 states it is not difficult to imagine the mayhem that could be wreaked if businesses or individuals had to cope with erratically different laws as they cross state lines. So, the goal of the Commission has been to draft and enact these types of laws in particular to enhance commerce and economic development by making them more uniform. In 1914, the Uniform Law Commission first enacted the Uniform Partnership Act. Today familiar entities such as partnerships, limited partnerships, limited liability partnerships, limited liability companies and corporations form the basic entities under American law that provide the means to aggregate capital, limit liability where applicable and provide a structure to organize and govern an enterprise whether it be for profit or non profit. Most of this work has been done by the Uniform Law Commission in collaboration with the American Bar Association, but the development of these model acts and uniform acts has made American law particularly efficient for entrepreneurs. Anyone who establishes and develops a business has choices available for the entity and they can choose the entity form that would best benefit their business. As a business grows, these options also allow for some changes in form to the business. For example, a small enterprise may choose to be a partnership initially, but once it grows it has the opportunity to reorganize as a corporation when the business is big enough to warrant the advantages of the corporate form. He emphasized that this is also true for non-profit businesses. Today, a great array of these same organizational forms can be used for non- profit businesses such as limited liability companies and limited partnerships. Flexibility in development of these business entities along with a well developed body of law has really made America law the envy of the rest of the world. 3:14:23 PM MR. GERAGHTY said the Model Entity Transactions Act (META) is a significant development in the growth of these various entities. Today changing entity form has no real comprehensive statutory framework whether it's for merger of entities, conversion of one entity to another, exchange of interests, or changing the location of an entity (domestication). Some of the more recent model acts like the Model Corporations Code have provisions dealing with mergers of corporations and like kind entities (partnerships with partnerships and corporations with corporations), but SB 304 allows for the conversion of one entity to another and all in one statutory framework. He explained that the problem with conversions and mergers is that many times it involves dissolving one entity to accomplish a desired end. Technically, one would have to wind down one business satisfying creditors and interest holders and potentially incurring adverse tax consequences in the process of forming a new business. This is a burden when the object is not to dissolve the business, but to simply continue it in another form or another location. "The hazards of the process are many and they are costly." He said a statute that allows these events to occur without dissolving at least one of the entities involved would certainly increase efficiency and lower costs for entrepreneurs and for business in general. A general statute which is not limited to corporations or partnerships is highly desirable to accomplish this goal and to allow cross-entity transactions. That is what SB 304 is intended to accomplish and what it does accomplish. 3:16:39 PM MR. GERAGHTY explained that SB 304 addresses four types of transactions: a merger of one entity with another entity, a conversion which is changing one entity to another type of entity (for example, a partnership to a corporation), an interest exchange (where, for example, all the holders of units in a limited partnership exchange all the units in that limited partnership for shares in a corporation), and a domestication (where for example, a businessman owns a business in California and moves with his family to Alaska and he doesn't want to end his business in California, but he finds that it would be more advantageous to have it registered as an Alaskan corporation, so he wants to change the location). He said each one of these transactions has to have a plan that is approved by the interest holders (shareholders or debt holders, for instance). One of the goals is to make sure that no interest is extinguished in the process of any of these SB 304 transactions. For instance, if a partnership decides it's better to do business as a corporation and were to convert to a corporation, this bill is very careful to preserve that debt and that interest. So the bill cannot be used to circumvent obligations or to evade them; the same is true for shareholders. 3:19:19 PM The bill doesn't run afoul of whatever agreement partners or shareholders may have. If it requires two-thirds of a vote of partners to affect something, that is honored. If the provision is that all partners would have to agree to the conversion, that is what is protected. It protects the rights of dissenters and interest holders so that the cross entity transactions do not prejudice or harm those legitimate interests. 3:20:22 PM He summarized that overall the purpose of the bill is to set up some procedures that ends up with an entity that continues the business of the previous entities that it succeeds without extinguishing obligations and it does it in a seamless and non- disruptive transfer and it does it without having to dissolve one of the businesses to accomplish the conversion. It's good for business and non-profit ventures alike. 3:21:35 PM MR. GERAGHTY said these transactions involve a plan that has to be approved by everyone and it involves filing various disclosures with the Department of Commerce and Economic Development. Once the plan is approved there has to be a permanent record for transparency. In closing, he said three issues merit the committee's consideration. One is that Alaska has the Uniform Partnership Act, Limited Liability Company Act, et cetera on its books that already provide for mergers and such, but only for like-kind transactions. This addresses those types of transactions, but cross-entity transactions, as well. The bill is complex and must be coordinated carefully with existing statutes so that there are no inconsistencies. 3:24:08 PM CHAIR PASKVAN thanked him for getting this issue off and running and finding no further business to come before the committee, he adjourned the meeting at 3:24 p.m.