Wisconsin Lawyer: Next Economy Legislation: Allowing Complex Business Reorganizations 3:

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  • Wisconsin Lawyer
    March
    31
    2008

    Next Economy Legislation: Allowing Complex Business Reorganizations 3

    Joseph BoucherLeonard SosnowskiThomas Nichols

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    The Next Economy Legislation keeps Wisconsin at the forefront with its generally progressive and flexible business entity statutes. This legislation also clarifies and reforms Wisconsin's LLC Act, expands securities law provisions, and adopts several technical changes identified by the Department of Financial Institutions.

    Wisconsin Lawyer
    Vol. 75, No. 8, August 2002

    History of the LLC and NEL Laws

    The Wisconsin Legislature created chapter 183, the Wisconsin Limited Liability Company Law (LLC Law), in 1993. Since then, LLCs have become the dominant form of new business entity in Wisconsin. In 2001 nearly 70 percent of the new entities formed in Wisconsin were LLCs, while new corporations declined to 28 percent of the total. LLCs currently constitute more than 30 percent of all entities organized under Wisconsin law. Not only has the LLC been favorably received by small business, it also has become the entity of choice for many large, sophisticated matters. Increasingly, LLCs are used as corporate subsidiaries, for joint ventures and project financings, and in other transactions that require limited liability, flexibility, and favorable taxation rules.

    The 1993 LLC Law did not include comprehensive provisions dealing with mergers or conversions involving other types of entities. At the time, so-called "cross-species" transactions were not seen as essential, both because switches to "partnership" status from "corporate" status were, and are, fully taxable for income tax purposes and because most practitioners used the new LLC entities to avoid the less flexible corporate tax rules to begin with. Also, many felt that the difficult tax issues associated with cross-species mergers and conversions would present a tax trap for the unwary. In addition, few other states' LLC statutes allowed for cross-species mergers or conversions. Therefore, prior to the passage of the NEL, the merger language in the LLC Law was rudimentary. LLCs could only merge with other domestic or foreign LLCs.1

    With the growth in use of LLCs and their engagement in transactions, such as acquisitions, with other types of entities, it soon became apparent that additional flexibility was required. Several states began to enact comprehensive cross-species merger and conversion provisions, making these states more attractive as forums in which to organize. Among these states was Delaware, long known for its flexible entity legislation. By not providing for these types of corporate transactions, Wisconsin was missing an element critical to maintaining its progressive business entity statutes.

    1 See Wis. Stat. § 183.1201 et. seq. (1999-2000).

    Joseph W. Boucher
    Boucher
    Leonard S. Sosnowski
    Sosnowski
    Thomas J. Nichols
    Nichols

    Joseph 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 U.W.-Madison Business School. He assisted in drafting the Wisconsin LLC Act and is coauthor of the State Bar CLE publication, LLCs and LLPs: A Wisconsin Handbook.

    Leonard S. Sosnowski, Michigan 1972 cum laude, 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. 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.

    The Next Economy and the Wisconsin Uniform Securities Law

    One of the stated purposes of the Next Economy package was to "change our securities law to promote capital formation."

    The amendments to the Wisconsin Uniform Securities Law as a result of the Next Economy legislative package:

    • raise to 25 the number of security holders permitted by the securities registration exemption under Wis. Stat. section 551.23(10);
    • raise to 25 the number of offerees permitted by the securities registration exemption under Wis. Stat. section 551.23(11);
    • allow agents for securities issuers to sell securities to accredited investors without the requirement that they be licensed as agents under chapter 551; and
    • delete the "investor sophistication" requirement in the Wisconsin accredited investor exemption under Wis. Stat. section 551.23(8)(g).
    • like the other provisions of the Next Economy package, the securities law revisions take effect Oct. 1, 2002.

    As a companion initiative to the Next Economy legislation, the Department of Financial Institutions' Division of Securities promulgated a Next Economy rule package effective Jan. 1, 2002. Containing several securities registration exemptions suggested in the 2001 Governor's Summit on Venture Capital, which were designed to balance the capital needs of business with the division's core mission of the protection of investors, the rules:

    • increase to $5 million from $1 million the maximum amount of capital that may be raised using the registration exemption under Wis. Admin. Code section DFI-Sec 2.028, the "Wisconsin issuer registration exemption by filing"; and
    • add the "model accredited investor exemption" of the North American Securities Administrators Association to the registration exemptions available by rule.

    2002 Securities Law for the Wisconsin Practitioner, a full-day seminar, is offered by State Bar of Wisconsin CLE Seminars live on Nov. 22 in Milwaukee and by video on Dec. 13 at select locations. Several of Wisconsin's most knowledgeable securities law practitioners will provide a review of recent cases and legislation and the most current developments in securities law. Tuition is $179. To register, please call the State Bar at (800) 728-7788.

    To learn more

    State Bar CLE Seminars and Books:
    Expand Your Expertise on Wisconsin's Next Economy Law, Uniform Securities Law, and LLCs

    Wisconsin's Next Economy is the focus of a half-day seminar, presented live on Oct. 4 in Madison and by video on Nov. 6. This program provides an overview of the Next Economy Act as it relates to: mergers and conversions of business entities; exemptions from securities registration requirements and licensing requirements for securities broker-dealers and securities agents; registered agents for business entities; the filing of documents relating to certain business entities; the administrative dissolution of business entities; and amended certificates of authority for certain foreign business entities. Tuition is $149.

    2002 Securities Law for the Wisconsin Practitioner will be presented live on Nov. 22 in Milwaukee and by video on Dec. 13 at select locations. This full-day seminar features several of Wisconsin's most knowledgeable securities law practitioners who will provide a review of recent cases and legislation and the most current developments in securities law. Tuition is $179.

    LLCs and LLPs: A Wisconsin Handbook reflects new developments such as the default pass-through tax treatment of LLCs and LLPs under the "check-the-box" regulations, the authorization of single-member LLCs (SMLLCs), and the rule permitting Wisconsin attorneys to use LLCs and LLPs in their practices. Detailed discussions on choosing an appropriate business entity, organizing the business, business formalities, and operational and tax issues are included, as is an entire chapter devoted to annotated forms. A disk with the complete set of forms from the book is included. The disks are available in WordPerfect® or ASCII file format.

    Authors: Joseph W. Boucher, Robert M. Fahrenbach, Leonard S. Sosnowski, Steven R. Battenberg, Debra Sadow Koenig, Marcus S. Loden, Bret A. Roge, William R. West. 515+ pp.; rev. ed. Jan. 2001; $165; ISBN: 1-57862-026-0; Product Code: AK0065.

    To register for either seminar or to order the book, please call the State Bar of Wisconsin at (800) 728-7788.