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  • Wisconsin Lawyer
    March
    31
    2008

    Legislative Watch

    Joseph Boucher

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    The Next Economy Legislation provides greater flexibility for mergers and conversions of business entities, clarifies and reforms Wisconsin's Limited Liability Company Act, expands securities law provisions, and adopts several technical changes identified by the Department of Financial Institutions.

    Wisconsin Lawyer
    Vol. 75, No. 2, February 2002

    Legislation Incorporates Cutting-edge Business Combination Concepts

    The Next Economy Legislation provides greater flexibility for mergers and conversions of business entities, clarifies and reforms Wisconsin's Limited Liability Company Act, expands securities law provisions, and adopts several technical changes identified by the Department of Financial Institutions.

    by Joseph W. Boucher, Leonard S. Sosnowski & Thomas J. Nichols

    IT IS HOPED THAT GOV. SCOTT McCallum's proposed Next Economy Legislation, 2001 Senate Bill 333 and 2001 Assembly Bill 650 (NEL), will be passed by the Wisconsin Legislature early in 2002. Both the state Senate and Assembly unanimously passed the bills from committee during December 2001. The NEL is a bipartisan effort spearheaded by state Sens. Mark Meyer and Rob Cowles and state Reps. Sue Jeskewitz, Jeff Plale, and Dan Vrakas, with 21 other cosponsors. It provides greater flexibility for mergers and conversions of business entities, clarifies and reforms our Limited Liability Company (LLC) Act, expands securities law provisions, and adopts several technical changes identified by the Department of Financial Institutions (DFI). The State Bar of Wisconsin Business Law Section drafted portions of the NEL and supports its enactment. This article provides a brief overview of the legislation. If enacted, a more comprehensive review will be published.

    Background

    By 1995 all 50 states had passed LLC legislation. Wisconsin's statute became effective Jan. 1, 1994. Since then, the LLC has become the dominant form of new business organization in Wisconsin. From 1993 through 2001, LLCs have risen from 0 percent to well over 65 percent of the new entities formed.

    Joseph W. BoucherJoseph W. Boucher, U.W. 1978 cum laude, M.B.A., CPA, practices in business and tax law and estate planning at Neider & Boucher S.C., Madison. Boucher also teaches business law at the UW-Madison Business School. He assisted in drafting the Wisconsin LLC Act and is a coauthor of the State Bar CLE publication, LLCs and LLPs: A Wisconsin Handbook.

    Leonard S. SosnowskiLeonard S. Sosnowksi, Michigan 1968, is a partner in the Madison office of Foley & Lardner. He assisted in drafting the Wisconsin LLC Act and is a coauthor of the State Bar CLE book, LLCs and LLPs: A Wisconsin Handbook.

    Thomas J. NicholsThomas J. Nichols, Marquette 1979, CPA, is a shareholder in the Milwaukee firm of Meissner Tierney Fisher & Nichols S.C., where he has practiced corporate and tax law since 1979.

    When the original LLC legislation passed in 1993, it did not address so-called cross-species mergers and conversions. At that time no states addressed these. Since then, some other states, notably Delaware, have passed various forms of such legislation, and the ABA Business Law Section and the Uniform Law Commission have similar projects underway. In 2001 the State Bar of Wisconsin Business Law Section approved drafting and working to enact similar changes in Wisconsin, and the authors began to draft language for the cross-species merger and conversion provisions, as well as some other LLC modifications discussed below. With the inclusion of these provisions, the NEL would incorporate cutting-edge business combination concepts into Wisconsin's corporate and other entity statutes.

    In February 2001, Gov. McCallum hosted Wisconsin's first Venture Capital Summit. The Summit drew hundreds of people and elicited ideas on how Wisconsin could improve its venture capital environment. Many of the securities law changes included in the NEL can be directly attributed to the summit and the work of attorney Joe Hildebrandt of Foley & Lardner in Madison. In addition to thanking the governor, the bipartisan legislative authors and cosponsors, and others involved in this collaborative effort, the authors thank the DFI for all its work and the Legislative Reference Bureau for its assistance and drafting expertise.

    Cross-species Mergers and Conversions

    The Next Economy Legislation broadly permits cross-species mergers and conversions of domestic and foreign business entities.1 Simply put, the NEL always will allow mergers between limited partnerships, regular chapter 180 business corporations, chapter 181 nonstock corporations, and limited liability companies, and allow such entities to convert from one form to another or change their state of domicile, through a relatively simple procedure.

    This means, for example, that if business owners organized a limited partnership and then realized that a corporation would be preferable, they could convert the limited partnership into a corporation through a simplified procedure, instead of liquidating the partnership and forming a new corporation. Similarly, a corporation and LLC would be able to merge directly, or a foreign corporation could become a Wisconsin corporation without cumbersome extra steps. These procedures require the filing of documents with the DFI after obtaining the requisite shareholder or director approval. They also require filings with the county registers of deeds for all real estate located in Wisconsin. If a foreign entity is involved, the foreign jurisdiction's laws must permit the transaction and be complied with. As noted above, however, states are increasingly adopting similar statutes.

    The NEL does not specifically address any of the tax consequences or other business law considerations that must be part of the decision-making process for determining whether a business should so merge or convert. Such discussion is beyond the scope of this article. However, note that these transactions are not automatically tax free. In particular, conversions from "corporate" status to "partnership" status for tax purposes generally are taxable. Also, converting from "non-profit" status to "for-profit" status has significant tax and other ramifications. However, these NEL procedures allow business entities, in appropriate circumstances, to change their form or jurisdiction of organization without having to individually transfer all of their properties, assign or renegotiate all of their contracts, and reapply for all new licenses, and so on. Along the same lines, the NEL is clear that no pre-existing liabilities of whatever kind are modified or eliminated as the result of any such conversion or merger.

    LLC Changes

    The NEL eliminates a default provision in the Wisconsin LLC law that provides that the dissociation of a member will automatically result in the dissolution of the LLC2 unless the remaining members unanimously agree to continue. Under the new law, an LLC would not need member approval to continue simply because a member dissociates. The legislation also allows members to agree to prohibit withdrawal. Under current law, a member could still withdraw, even though it might be a breach of contract. These provisions were included in the original LLC legislation to help assure partnership tax treatment. However, they are not necessary in light of the 1997 check-the-box regulations.

    Finally, some practitioners argued that multiple classes of LLC ownership were not permitted under our current statute. While this is not the prevailing opinion, new section 183.0504 makes it clear that any number and type of multiple ownership interests are available.

    Securities Laws

    The key securities law modifications include: increasing to 25 from the current 15 the number of security holders permitted under the section 551.23(10) exemption; increasing to 25 from the current 10 the number of offers permitted under the exemption in section 551.23(11) during any 12-month period; amending the individual accredited investor exemption in section 551.23(8)(g) to make it consistent with the federal definition and with definitions in other states; and adding to the list of exemptions from the securities agent licensing requirement under section 551.31(1) an exemption for an agent acting exclusively for an issuer.

    Other

    The NEL includes other technical business statute modification language desired by DFI, including allowing LLPs to act as the registered agent for regular business corporations, nonstock corporations, limited partnerships, and limited liability companies; modifying several business forms and processing operations at DFI to include eliminating the billing process for name reservations and various signature requirements; and providing for unilateral resignation by registered agents of various business entities.

    It is hoped that all of these changes will facilitate and increase business formations under Wisconsin law relative to other states. Certainly, they will provide much needed flexibility for business owners in Wisconsin.

    Please contact your state senator and assembly representative to assure passage of this law.

    Additional Resources

    Endnotes

    1 See Wis. Stat. sections 28-31, amending subchapter VIII of chapter 179; sections 50-81, amending subchapter XI of chapter 180; sections 104-130, amending subchapter XI of chapter 181; and sections 177-189, amending subchapter XII of chapter 183.

    2 See section 166 of both S.B. 333 and A.B. 650.