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.
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.
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.
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.
Wisconsin
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