Legislature(2009 - 2010)BELTZ 105 (TSBldg)

03/18/2010 01:30 PM LABOR & COMMERCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Moved SB 300 Out of Committee
Moved CSSB 292(L&C) Out of Committee
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                 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                                                               
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.                                                                                              

Document Name Date/Time Subjects
SB 304 Back-Up.pdf SL&C 3/18/2010 1:30:00 PM
SB 304
SB 304 Bill.pdf SL&C 3/18/2010 1:30:00 PM
SB 304