With the update of the Wisconsin business entity statutes through 2021 Wis. Act 267, there are now four different types of transformational mechanisms under Wisconsin law for business entities: mergers, interest exchanges, conversions, and domestications.
Domestications are new. Domestications are similar to but distinct from conversions. Given the way the term “domestication” is used to refer to a variety of transactions that are not “Wisconsin domestications,” one needs to be careful when seeing or using the label domestication to describe a transaction.
Changes in state or foreign laws and markets, or differences in tax and regulatory regimes often cause businesses to seek new jurisdictions or form of their entity structure, whether it be moving to a different jurisdiction, changing to a different type of entity, or changing ownership.
The revisions to the Wisconsin entity statutes now allow these changes to be accomplished in a variety of ways.
The Merger and the Interest Exchange
The merger and interest exchange mechanisms utilize the existence of at least two constituent entities: an acquired entity and an acquiror entity. A merger allows an entity to both change its jurisdiction and its form. Following a merger, only the acquiring entity survives, with assets and liabilities transferring to the new entity by operation of law.
Following an interest exchange, two entities survive (unless the acquired entity is then liquidated or merged into the acquiring entity), such that the primary effect of the transaction is a compulsory change of ownership, but the new equity can be in a different type of entity organized in a different jurisdiction.
On the other hand, upon a conversion or domestication, one entity migrates or transforms to a new jurisdiction and/or new type of entity through a process in which the entity retains its corporate history.
Domestication statutes predate conversion statutes. Originally domestication transactions were allowed in only a few states, and allowed corporations formed outside of the United States to transfer or domesticate as a domestic corporation. The original entity, without further action, maintained its existence in the original jurisdiction, thus continuing as a single entity but with a dual existence.
Eventually some of these statutes allowed the reverse: domestic corporations to domesticate in foreign jurisdictions, while maintaining their existence in the domestic jurisdiction, again as one entity.
Over time, some statutes were expanded to allow entities to domesticate into another type of entity in another jurisdiction. Conversion statutes were then enacted, giving entities other than corporations the ability to convert to another type of entity within their jurisdiction.
And finally, many conversion statutes were drafted to permit conversions across jurisdictions, such that an entity could move from one state to another state.
Wisconsin has permitted various types of conversion transactions for a few years, and with Act 267 now permits domestications. The principal distinctions between domestications and conversions are that:
in a domestication, the transformation is that of a Wisconsin entity with a non-U.S. entity, either inbound or outbound. In a conversion, a Wisconsin entity may convert into another Wisconsin entity or into a foreign entity that is a U.S. entity (or the reverse may occur with a non-Wisconsin but U.S. entity converting into a Wisconsin entity); and
in a domestication, the transformation results in the entity having both a domestic and foreign existence following the transaction. In a conversion, the converting entity is no longer subject to the governing law that applied prior to the conversion.
In both a conversion and a domestication, the date of the original entity formation is retained. The single corporate personality is recognized. Title to property is vested in the domesticated or converted entity without transfer, reversion, or impairment. The domesticated or converted entity has all the debts, obligations, and other liabilities of the domesticating or converting entity. Contracts remain unaffected. The form of entity can change. These transactions are allowed only with foreign jurisdictions that have statutes permitting such transactions.
A New Flexibility
After Act 267, Wisconsin now provides significant flexibility, generally eliminating the need to move to another jurisdiction just to utilize another state’s conversion or domestication statute.
Domestication in the Wisconsin sense is generally allowed in offshore financial centers, such as the Cayman Islands and the British Virgin Islands. The domestication provisions would be used when, for example, a company incorporated in the Cayman Islands wishes to become a Wisconsin company without having to dissolve the Cayman Islands entity. Following domestication, the existence of the Cayman Island entity would remain intact and the entity would not be required to wind up its affairs or pay its liabilities or distribute assets.
Domestication allows the entity to retain its original date of incorporation, bank accounts, licenses, and debt arrangements.
Issues around applicable governing law require careful consideration if there is a larger number of equity owners. A domestication is generally an “F” reorganization, which can be tax free, but due to I.R.C. section 367 can be taxable for some shareholders.
Uses of ‘Domestication’
Today, the term domestication is often used in a much broader sense to cover nearly any type of corporate transaction that moves the principal jurisdiction of an entity from one jurisdiction to another, whether by way merger, conversion, or a Wisconsin-type domestication.
For example, if you research domestication, you will find service providers promoting their assistance in “domesticating” your entity to a new state, often by way of a conversion.
The term domestication is often used when referring to the pre-transaction structuring involving Special Purpose Acquisition Companies (SPACS). SPACs typically raise capital by issuing stock and warrants to public investors in an initial public offering (IPO), with the intent of using the capital to fund the acquisition of a target company. Sponsors in the market for targets in the U.S. generally form a domestic SPAC, whereas sponsors in the market for foreign targets generally form a foreign SPAC.
If, however, the target turns out not to be in the same jurisdiction as the SPAC, the SPAC typically migrates to the appropriate jurisdiction prior to the business combination. More often the “domestication” occurs by way of a merger.
For most Wisconsin entities, conversion will be all that is required to move to a different state. Wisconsin domestications will be very rare.
But don’t be surprised when that conversion will be referred to as a “domestication,” even though it isn’t a domestication in a technical Wisconsin statute sense.
This article was originally published on the State Bar of Wisconsin’s
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