table of contents - american bar...

TABLE OF CONTENTS 1. “Pitfalls and Problems in State Limited Liability Company Statutes: Underlying

Conflicts and Teambuilding . . . and the Resulting Statutory Frameworks,“ by Joan MacLeod Heminway, Associate Professor, Clayton Center for Entrepreneurial Law, The University of Tennessee, College of Law.

2. “Avoiding Common Pitfalls in Drafting LLC Operating Agreement,” by Richard

R. Spore, III, Bass, Berry & Sims PLC. 3. “Members, Conversions, and Other Organic Transactions By and Among

Business Entities – What Makes You Think Anything Could Go Wrong?” by Thomas E. Rutledge, Ogden, Newell & Welch, PLLC.

4. Speaker Bios

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AMERICAN BAR ASSOCIATION

SECTION OF BUSINESS LAW

SPRING MEETING

APRIL 2005 NASHVILLE, TENNESSEE

Pitfalls and Problems in State Limited Liability Company Statutes:

Underlying Conflicts and Teambuilding . . . and the Resulting Statutory Frameworks

Joan MacLeod Heminway Associate Professor

Clayton Center for Entrepreneurial Law The University of Tennessee

College of Law

Heminway says: Two factors create pitfalls and problems in LLC statutes—

the drafters and the drafting.

I. The Drafters

A. Substantive Competence/Expertise

1. Nature of client base

a. public vs. private vs. nonexistent b. national vs. regional vs. local c. urban vs. suburban vs. rural d. joint ventures e. family businesses f. professional business associations (medical, legal, etc.)

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2. Nature of professional role

a. private firm practitioner – large, medium, small b. sole practitioner c. government attorney – business and tax d. academic e. legislator

B. Change Bias

1. Conservative – desiring minimal changes from the organization, phraseology, word choice, and punctuation in the existing statute or draft

2. Liberal – willing to change anything that can be made better

C. Detail Orientation

1. “Nit-Pickers” – craving and willing to work toward absolute precision and consistency in organization, phraseology, word choice, and punctuation

2. “Good-Enoughers” – believing that when the substance is reasonably clear and the drafting is reasonably complete and accurate, it’s time to call it the quits.

D. Patience

1. Individual internal forces – personality types and styles

2. External forces

a. existing personal obligations – including job, family, community activities, etc.

b. sponsoring and promotional activities – especially including state bar association processes

c. legislative calendar – “Good Statute Now” or “Better Statute Later”

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II. The Drafting

A. Substantive Rules of Play

1. Form of statute to be used as a base/model

a. existing state statute b. another state’s statute c. uniform or model act

2. Philosophical guidelines – how base/model is to be used, keeping in mind that this will not be “set in stone”

3. Transition issues – how, as to whom, and when the new statute will become effective and govern

B. Agreement on Statutory Objectives/Motivating Policy

C. Structure

1. Division of title into chapters

2. Ordering of chapters

3. Division of chapters into sections

4. Ordering of sections

5. Division of sections into subsections

a. outline format? b. headings/titles? c. long, specific lists or items vs. summary paragraphs

Example: Name Distinguishability

List every type of entity and public filing that must be checked for name distinguishability OR indicate that an LLC name, assumed name, reserved name, or registered name must be distinguishable from “any name, assumed name, reserved name, or registered name of any entity that has filed that name, assumed name, reserved name, or registered name with the secretary of state.”

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D. Defined Terms

1. Selection of terms to define

2. Inclusion is a separate section

3. Capitalization?

4. Use of multiple defined terms for the same concept or thing

Example:

“ . . . (3) ‘articles’ or ‘articles of organization’ means . . . .”

E. Some Key Substantive Considerations

1. Hierarchy and role of governing instruments/organizational documents

a. articles (including amendments) i. mere notice filing? ii. supremacy over operating agreement?

b. operating agreement i. written vs. oral ii. single vs. multiple documents iii. waivable and nonwaivable statutory provisions iv. public availability of written agreements v. LLC as an express or implied party

See, e.g., Elf Atochem North America, Inc. v. Jaffari, 727 A.2d 286 (Del. 1999).

c. required records

2. Basic structural types

a. member-managed (single-member entity permitted?) b. manager-managed c. board-managed? d. formalities associated with selecting/implementing a

specific structural type i. default rule ii. affirmative selection

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3. Fiduciary duties

See generally Sandra K. Miller, The Role of the Court in Balancing Contractual Freedom with the Need for Mandatory Constraints on Opportunistic and Abusive Conduct in the LLC, 152 U. PA. L. REV. 1609 (2004) (describing the central role of courts in LLC fiduciary duty analysis).

a. codification – to “RUPA” or not to “RUPA?” b. identifying fiduciary duties

i. care ii. loyalty iii. other (e.g., good faith)?

See, e.g., Anderson v. Wilder, No.E2003-00460-COA-R3-CV, 2003 WL 22768666 (Tenn. Ct. App. Nov. 21, 2003).

c. who owes duties, and to whom?

See, e.g., McGee v. Best, 106 S.W.3d 48 (Tenn.Ct.App. 2002).

d. expressing the contents/parameters of those duties e. waivability? f. addressing related issues re. liability to third parties for

LLC obligations i. safe harbors for conflicting interest transactions ii. exculpation iii. indemnification iv. insurance v. veil piercing

See, e.g., Hollowell v. Orleans Reg'l Hosp., 1998 U.S. Dist. LEXIS 8184 (D. La. 1998), aff’d, 217 F.3d 379 (2000).

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4. Agents for the LLC

a. statutory agents, generally or for specific matters (e.g., real estate transactions)?

See, e.g., Taghipour v. Jerez, 52 P.3d 1252 (Utah 2002).

b. reliance on general agency law principles

See, e.g., TIC Holdings, LLC v. HR Software Acquisitions Group, Inc., 750 N.Y.S.2d 425 (N.Y. Sup. 2002), aff’d, 2003 WL 116115 (N.Y. A.D. 1 Dept., Jan. 13, 2003).

5. Type and nature of LLC ownership rights and interests

a. governance rights and interests, including default voting rules (per capita or based on interest?)

b. financial rights and interests, including rights to distributions

c. transferability d. member dissociation or withdrawal/termination of

membership interest e. charging orders

6. Rights and duties of LLC constituents on dissolution, wind-up, and LLC termination

See, e.g., Five Star Concrete, L.L.C. v. Klink, Inc., 693 N.E.2d 583 (Ind. Ct. App. 1998).

7. Business combinations and conversions

See, e.g., VGS, Inc. v. Castiel, No. C.A. 17995, 2000 WL 1277372 (Del. Ch. Aug. 31, 2000) aff’d, 781 A.2d 696 (Del. 2001); Robert D. Pinson, Controversies & Conundra: Converting a Partnership into an LLC, 4 TRANSACTIONS 47 (2002) (highlighting and resolving certain uncertainties in connection with the conversion of partnerships to LLCs under Tennessee law).

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8. Dissenters’ Rights

See, e.g., Froelich v. Senior Campus Living LLC, 355 F.3d 802 (4th Cir. 2004).

9. “Specialty” issues involving “specialty” LLCs

a. Foreign LLCs b. Family LLCs c. Professional LLCs

F. “Plain English”

1. “Thereof,” “thereto,” etc.

2. “Pursuant to” vs. under

3. “Such” used as an adjective

G. Other Word Choice Issues

1. Consistency

2. Standard vs. nonstandard nomenclature

H. Punctuation

1. Placement inside or outside the quotation marks

2. Commas and parentheses

3. Use of semicolons with a colon

4. Commas in series

I. Polish

1. Statutory references within the text of LLC statute

2. References to LLC statute in other acts

3. Official or unofficial commentary

* * *

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For general, relatively current, information on limited liability company statutes, see, e.g., Barbara Ann Banoff, Company Governance Under Florida's Limited Liability Company Act, 30 FLA. ST. U.L. REV. 53 (2002) (focusing on the governance provisions of Florida's LLC Act and comparing them to the governance provisions generally available in other business forms);

Howard M. Friedman, The Silent LLC Revolution - The Social Cost Of

Academic Neglect, 38 CREIGHTON L. REV. 35 (2004) (showing the increasing popularity of the LLC form; examining the absence of interest in the LLC form by scholars, law schools, law publishers and bar examiners; and arguing that academics should focus attention on limited liability companies); Thomas R. Hurst, Fundamental Themes in Business Law Education: Teaching Limited Liability Companies in the Basic Business Associations Course, 34 GA. L. REV. 773 (2000) (describing the necessity of, and challenges associated with, teaching LLCs to law students); Vicki L. Mayfield, Limited Liability Companies in Delaware and Tennessee: A Comparative Approach, 5 TRANSACTIONS 329 (2004) (describing benefits and detriments of Delaware LLCs in relation to Tennessee LLCs); Sandra K. Miller, What Buy-Out Rights, Fiduciary Duties, and Dissolution Remedies should Apply in the Case of the Minority Owner of a Limited Liability Company?, 38 HARV. J. ON LEGIS. 413 (2001) (providing “a critique of the present movement to eliminate buy-out rights of limited liability company members in order to achieve estate tax-related objectives”).

Richard R. Spore, III Bass, Berry & Sims PLC 100 Peabody Place, Suite 900 Memphis, TN 38103 [email protected]

AVOIDING COMMON PITFALLS IN DRAFTING LLC OPERATING AGREEMENTS

I. Governance.

Pitfall: Application of state law default agency rules that grant “passive” members the

apparent authority to bind the LLC.

Solutions:

?

Utilize a manager-managed, rather than a member-managed, LLC.

?

Include a grant of exclusive agency authority in the Articles and contractual

limitations on agency authority in the Operating Agreement.

Pitfall: Uncertainty regarding the actual authority of persons purporting to act on behalf

of the LLC in transactions with third parties.

?

Example: An LLC that develops and sells residential lots may need a simple

way of establishing the authority of the members or managers who execute

deeds and other closing documents on its behalf.

?

Solution: Include a non-exclusive statement of agency authority in the

Articles to eliminate or reduce the need to provide more extensive authority

documentation for each closing. See, for example, T.C.A §48-205-101(15).

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Pitfall: Quorum requirements that are too restrictive or that otherwise do not reflect the

governance realities of a particular LLC.

Solutions:

?

Limit (or eliminate) events that require a quorum of 100% of the LLC’s

voting power.

?

Establish quorum requirements with reference to the actual breakdown in a

particular LLC’s ownership.

Example: The quorum requirements for an LLC with ten 10% members

might well differ from those for an LLC with one 51% member and two

24.5% members.

Pitfall: Voting requirements that are not tailored to an LLC’s actual circumstances.

Solutions:

?

Consider carefully what events should require a majority of:

(i) a quorum;

(ii) all interests entitled to vote; or

(iii) a particular class or group of members.

?

Consider whether certain events should require supermajority approval and

establish supermajority voting requirements with reference to the actual

breakdown of the LLC’s ownership and its particular circumstances.

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Example: A 2/3 supermajority member voting requirement in an LLC with a

75% member is meaningless.

Example: An 80% supermajority member voting requirement in an LLC with

a 50% member and two 25% members is tantamount to a unanimous approval

requirement.

Pitfall: Allowing a minority member to obstruct/stonewall necessary amendments to an

LLC’s Operating Agreement or Articles.

Solutions:

?

Particularly in LLCs with multiple minority members, permit amendments to

the Operating Agreement and Articles by less than unanimous approval of the

members. Approval requirements for amendments to the Articles and

Operating Agreement should usually be symmetrical. However, consider

whether certain amendments to the Articles and Operating Agreement should

require unanimous or supermajority approval (or at least the approval of the

affected member(s)).

Example: A change in the relative rights or preferences of a particular

member or class should arguably require that member’s or class’s approval or,

alternatively, trigger contractual appraisal rights for the benefit of the affected

member or class.

Pitfall: Adopting a governance structure that does not reflect the realities of the particular

business to be conducted by the LLC.

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Solution: Consider carefully the day-to-day operational realities of the LLC’s business

and tailor the governance system in light of the same.

Example: An LLC with many members will likely need some sort of centralized

management--whether a manager, a board or an executive committee of members--to

permit it to function effectively.

Example: A professional medical PLLC may well want a “one member/one vote”

system, regardless of the members’ economic rights.

Example: An LLC organized to conduct an operating business may well need a much

different management structure from an LLC organized to acquire and hold raw land for

investment purposes.

II. Capitalization.

Pitfall: Basing membership interest percentages on relative capital account balances,

since capital account balances can change in unexpected ways and even become negative.

Solution: Base membership interest percentages on some other criteria, such as the

agreed value of the members’ capital contributions.

Pitfall: Failing to plan for the additional capital needs of the LLC, with possible resulting

disruption of the LLC’s business.

Solution: Consider the advisability of including a capital call provision in the LLC’s

Operating Agreement. Such a provision should, among other things, cover:

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(i) Who must approve a capital call. (Note that a unanimous approval

requirement arguably renders a capital call provision meaningless.)

(ii) The consequences of a member’s failure to meet a required capital call.

Such consequences may include, for example:

(a) Making a failure to meet a capital call a member default under the

Operating Agreement, triggering an unfavorable buyout option as

to the defaulting member’s LLC interest.

(b) Treating other members who cover the defaulting member’s capital

contribution as having made a forced loan to the defaulting

member on unfavorable terms and conditions.

(c) Dilution of the defaulting member’s interest in the LLC.

Pitfall: Failing to consider the necessity for, or impact of, individual member guarantees

of LLC obligations.

Solutions:

?

Include provisions regarding guaranty requirements as to individual members

in the Operating Agreement.

?

In the Operating Agreement, establish consequences of failure to provide

required or acceptable guarantee. Such consequences may include, for

example:

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(i) Making such a failure a member default under the

Operating Agreement, triggering an unfavorable buyout

option as to the defaulting member’s LLC interest.

(ii) Providing for additional compensation/guarantee fee(s) to

those members who provide acceptable guarantees.

?

Include cross-indemnities among members relative to their performance under

guaranties of LLC obligations.

?

Describe the members’ obligations (if any) to obtain a release of (or provide

an indemnity against) the guaranty obligations of a withdrawing member.

III. Distributions.

Pitfall: Failing to establish Operating Agreement requirements regarding

timing/frequency of distributions and/or establishment of cash reserves, permitting

“gamesmanship” by controlling members involving the timing and amount of

distributions/reserves.

Example: A failure to make tax distributions could put pressure on certain

members.

Example: Delaying or foregoing distributions in order to delay return of

capital/preferred return distributions to members may impact the timing and

magnitude of economic “flips” based on these factors.

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Example: Delaying or foregoing distributions may pressure the creditor of a

member with a charging order as to such member’s interest to accept an

unfavorable settlement.

Solution: Carefully consider and establish parameters in the Operating

Agreement for the timing of distributions and the establishment of cash reserves.

Pitfall: Lack of clarity in provisions dealing with return of capital concepts and preferred

returns.

?

Make clear whether preferential returns are cumulative and/or compounding.

Make clear the method of compounding. Clarify whether preferred returns

and “payback” concepts are based on initial, or initial plus subsequent, capital

contributions.

?

Consider whether it may be better in some circumstances to use simple

member loans rather than member contributions that include complicated

preferences as to return and repayment.

Pitfall: Failing to consider the element of time in providing for “flips” in economic rights

based on return of capital/payback concepts.

Solution: Provide that the magnitude of the economic “flip” varies with the time

necessary to achieve payback.

Solution: Consider “flips” based on the occurrence of other events or the achievement of

other performance thresholds/milestones.

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Pitfall: An unintended capital shift from a member providing capital to a member

providing services (since this often will not reflect the parties’ true intent and may also

result in unexpected tax consequences for the services member).

Solution: Use a “carried” or profits interest for the member providing services.

Pitfall: Excessive draws by members of a professional services LLC, causing those

members to have “deficit” compensation balances or draw accounts.

Solutions:

?

Obligate “over-compensated” members to restore a deficit compensation or

draw account balance (e.g., if they withdraw from the LLC) or accept reduced

future draws until such deficit balance is recouped by the PLLC.

?

Counsel the PLLC against borrowing to fund member draws.

IV. Buy-Sell and Related Issues.

Pitfall: Failing to consider the appropriate scope of the buy-sell. (For example, is a mere

right of first refusal adequate? Or should the buy-sell also be triggered by occurrence of

certain specified “triggering events”?)

?

Solution: Carefully consider and include appropriate buy-sell “triggering events.” In

doing this:

(i) Properly define the “triggering events.”

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(ii) Where appropriate, provide for different buy-out prices for various

“triggering events.” For example, the buy-out price on death,

disability or scheduled retirement might well be higher than the buy-

out price on early withdrawal, divorce or other involuntary

conveyance.

Pitfall: Failing to consider the economic feasibility of a particular buyout regime.

Solution: Consider suggesting insurance as a funding mechanism in the context of a

buyout following death or disability.

Solution: Provide for deferred payments of the buy-out price, perhaps including

stipulated credit enhancements. (Carefully consider whether the buyout option should

run in favor of the LLC, the other members or both, and the consequences of each

model.)

Solution: Consider other funding sources for the buyout of a member from a professional

service or other service-oriented LLC.

Pitfall: Failing to provide an exit strategy for members in a deadlocked 50/50 LLC.

Solution: Use a “shotgun” buy-sell provision to provide an exit strategy following a

governance deadlock of this kind.

Pitfall: Allowing a minority member to “hijack” the sale of an LLC or allowing a

majority member to transfer control of the LLC without due consideration of the interests

of minority members.

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Solution: Consider inclusion of “drag along”/“tag along” provisions in the context of the

sale of LLC membership interests.

Pitfall: Making other common mistakes in drafting buy-sell provisions, such as

“glitches” in appraisal processes/timelines and stipulated buy-out prices or formulas that

are not kept current.

V. Tax Issues

Pitfall: Failure to understand and communicate to clients that the esoteric tax allocation

provisions in the Operating Agreement ultimately have economic consequences, since

final liquidating distributions are typically in accordance with positive capital account

balances.

Pitfall: Failure to communicate adequately to clients the differences between allocations

of taxable income, gain and loss, on the one hand, and distributions of cash, on the other

hand.

Pitfall: Imposition of self-employment tax on distributions to “passive” members.

Solution: Include Operating Agreement provisions limiting the agency and other

governance rights of “passive” members so that they may argue for treatment as “limited

partners” under the self-employment tax regulations and exclusion of their LLC

distributions from self-employment income. See Prop. Reg. 1.1402(a)-2.

Pitfall: Failure to understand and take into account the impact of state taxation on the

LLC. (For example, in Tennessee, the Hall Tax would arguably apply to certificated

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membership interests in an LLC and state franchise and excise taxation can be punitive in

the context of real estate LLCs.)

VI. Other Issues

Pitfall: Being saddled with a disruptive, nonproductive, or “rogue” member.

Solution: Include a member expulsion provision, perhaps on supermajority or unanimous

approval of all other members (and make sure it dovetails with buy-sell provisions).

Pitfall: Failing to anticipate and properly deal with potential conflicts of interest

involving business transactions between members and the LLC.

Solution: If conflict transactions are anticipated, approve them in advance (or establish

standards for approving them) in the Operating Agreement, subject to any unwaivable

statutory requirements.

Pitfall: Failing to include robust non-compete/confidentiality agreements by members, or

failing to waive statutory default non-compete obligations, in either case where

appropriate.

Solution: As a business matter, determine with the client whether withdrawing or

terminated members should be subject to noncompete/confidentiality obligations. If so,

and if these obligations are not in a separate agreement (often advisable), these provisions

should be included on the Operating Agreement.

Solution: As a business matter, determine whether members should be able to compete

freely with the LLC. If so, include an affirmative statement tot that effect in the

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Operating Agreement and waive, to the extent possible, all statutory noncompete

obligations.

Pitfall: Failing to modify or limit default statutory or common law fiduciary duties where

appropriate.

Solution: Include appropriate limitations or waivers of these duties in the Operating

Agreement, to the extent permitted by applicable law.

Pitfall: Failing to include alternative dispute resolution provisions where appropriate.

Solution: Where appropriate, consider adding mediation/arbitration provisions, with an

appropriate carve-out for injunctive relief relative to a threatened violation of buy-sell or

confidentiality/noncompete provisions.

Pitfall: Failing to clarify the lawyer’s role in drafting the Operating Agreement; who is

the lawyer’s client?

Solution: Document precisely whom the lawyer represents and whom the lawyer does

not represent.

5072047.2

© Thomas E. Rutledge, February 15, 2005

MERGERS, CONVERSIONS, AND OTHER ORGANIC TRANSACTIONS BY AND AMONG BUSINESS ENTITIES -

WHAT MAKES YOU THINK ANYTHING COULD GO WRONG?

Thomas E. Rutledge Ogden Newell & Welch PLLC

1700 PNC Plaza 500 W. Jefferson Street

Louisville, Kentucky 40202-2874

All things are in motion and nothing is at rest ….You cannot go into the same [river] twice. - Heraclitus, paraphrased by Socrates as as recounted by Plato in CRATYLUS

The world of business organization law was once so neat and organized. Corporations

were fairly similar irrespective of the state of incorporation. Corporations formed in a state could merge with one another, and most of the time corporations formed in different states could as well merge. General partnerships were formed under the ubiquitous Uniform Partnership Act (1914) (“UPA”). And while those structures could combine with one another, the law treated them as “aggregates,” not “entities,” and as such they did not “merge” as we understand that term for corporations. Limited partnerships, formed usually under the Uniform Limited Partnership Act (1976) or that act with the 1985 Amendments (“RULPA”), did not have the power to merge. Like general partnerships, they could combine by contract, but not under a statutory mechanism.

Today the world is not so simple. First the range of organizational forms and the acts under which they were formed has increased significantly:

• UPA general partnerships

• non-uniform UPA limited liability partnerships

• RUPA general partnerships

• RUPA limited liability partnerships

• RULPA limited partnerships

• non-uniform RULPA limited liability limited partnerships

• Uniform Limited Partnership Act (2001) (“ReRULPA”) limited liability limited partnerships

• LLCs

• Corporations

And let’s not forget structures such as co-ops, cemetery associations, business trusts, and every other structure that at one time or another seemed to be a good idea.

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In this new world of an increase in the absolute number of business forms and the differences between those forms across state lines, we are confronted as well with the desire to engage in organic transactions not only between entities of the same type (an “intra-entity” transaction), but also between entities of different types (an “inter-entity” transaction).

The intra-entity transaction:

Corporation A merges

------------ > into

Corporation B

Partnership A merges

------------ > into

Partnership B

LLC 1 merges

------------ > into

LLC 2

The inter-entity transaction:

Corporation A merges

------------ > into

LLC B

Partnership A merges

------------ > into

LLC B

LLC 1 merges

------------ > into

Corporation B

But when you consider all of the types of entities that exist, the number of types of two-party mergers that could take place is dizzying:

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Corporation

LLC

LP

LLP

LLLP

GP

Corporation

LLC

LP

LLP

LLLP

GP

But then, the world is not restricted to two-party transactions. Today we see mergers of both a corporation and an LP into an LLC (which may itself be the general partner of a limited partnership).

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Corporation A

Ltd. Part. D

LLC C

Ltd. Part. B The G.P.of

merge

into

And we see every other presentation of multiple party merger that you can devise.

But we do not want to restrict our discussion to just the “merger.” Rather, there are as well other “organic transactions” that need to be considered, namely:

• Conversion

• Division

• Interest Exchange

• Domestication

• “Other”

The Conversion

When you get converted, you still have the same personality. You merely exercise it in terms of a different set of values.

-- Robert Penn Warren, All the King’s Men 8.

Imagine you have a limited partnership, and for whatever reason you want it to be a LLC.

You could:

(1) form NewCo LLC; (2) merge OldCo LP into NewCo LLC; and (3) change the name of NewCo LLC to “OldCo” LLC.

But now OldCo LLC is a new legal entity, and is not identical to OldCo LP (think of the date of formation/organization on the records of the Secretary of State). And there are a large number of steps involved in the transaction.

The conversion is meant to allow a one-step means by which a business organized in one form may convert into another form. As contrasted with a merger:

(1) at any moment, there exist only one business entity;

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(2) there having been no merger, “due on merger” clauses are not triggered;

(3) the converted entity is the same entity that existed prior to the conversion.

Note that any conversion is an inter-entity transaction.

The Division

Observe how all things are continually being born of change ….Whatever is, is in some sense the seed of what is to emerge from it. - Marcus Aurelius, MEDITATIONS 4.36

Today your client corporation has three lines of business, and the CEO had decided that the activities of Line 1 should be separated and sold to a buyer. But for tax reasons this needs to be a sale of securities and not a sale of assets. So what do you do?

(1) OldCo Corp. forms wholly-owned subsidiary, NewCo LLC (or NewCo Corp., depending upon tax issues)

(2) OldCo Corp. capitalizes NewCo LLC, and NewCo LLC assumes liabilities connected with those assets

(3) OldCo Corp. asks the creditors on those transferred liabilities to release it from them and to agree to look exclusively to NewCo LLc

(4) OldCo Corp. sells to Buyer the membership interests in NewCo LLC

The division is a single integrated transaction pursuant to which:

(1) NewCo LLC is created;

(2) Assets and liabilities are transferred to and assumed by NewCo LLC; and

(3) OldCo Corp., subject to the laws of fraudulent conveyances, is released from the transferred liabilities.

The Interest Exchange

Predatory Corp. desires to acquire Desirable Corp., and wants to “pay for” the acquisition with Predatory Corp. shares. After sufficiently brow-beating the directors of Desirable Corp., Predatory Corp. convinces them to agree to a share exchange: one share of Predatory Corp. stock for each three shares of Desirable Corp. stock.

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Which works fine, as long as two corporation are involved. But what if you have a corporation and an LLC. Or two LLCs. Does the Corp - Corp share exchange statute apply to a Corp - LLC transaction? Nope. Does your LLC Act have a membership interest exchange provision? Probably not.

Domestication

Your LLC is organized in the state of Normal. But for some reason someone has convinced management that they should be organized in Delaware - probably a Delaware attorney. And you need to make this happen. So what do you do?

(1) Form NewCo LLC in Delaware

(2) Merge OldCo LLC into NewCo LLC

But you have just resurrected all of the merger related issues that you had in doing a merger to accomplish a conversion. There is a better way, the domestication:

(1) File a Certificate of Domestication.

And your LLC is now governed by Delaware law.

Other

There are some transactions, or events that look like transactions, but do not fall into any of these categories. For example, a RUPA partnership has its chief executive office in the State of Normal. After thoughtful investigation you recommend that the partnership become a Delaware limited liability partnership. A Statement of Qualification is filed in Delaware, and the partnership is now governed by Delaware law. It is not a conversion, it is not a domestication, it is just a something “other.”

Tax Issues

The tax issues involved in organic transactions, even only intra-entity, are legion. Inter-entity transactions are an even higher level of complexity. There exist a wealth of commentary in the area, some of which is cited in the bibliography. Here are a few points to keep in mind:

(1) Be careful of not mixing state law and tax law concepts. For state law your LLC � LLC merger is a merger. But each LLC is taxed as a partnership. Ergo, Code § 368, which addresses tax free mergers between corporation, does not apply.

(2) Do not assume that state (or local) tax law will conform to federal tax treatment.

(3) Watch out for phantom income in transactions involving S-corps and entities taxed under Subchapter K.

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(4) Disregarded entities are disregarded for income tax, but not all, purposes. E.g., REV. RUL. 2004-88, 2004-32 IRB 165.

(5) Breakdown every step of the deemed transaction that is taking place and analyze it under the applicable Code provisions.

Yes, the deemed transaction. Just because state law says you go from A to B does nto mean the tax law means you go from A to B. Sometimes it diverts you to C, or G, or 1/X. For example, there are three models for the merger of two entities taxed as partnerships: assets over, assets up and interest over.1

• Assets over: assets of the entity not surviving the merger are treated as being contributed to surviving entity in return for interest in surviving; not surviving distributes those interests to its owners in a liquidating distribution.

A B

A B

C D

A B

In te re s ts in A B

A s s e t 2A s s e t 1

S te p O n e

S te p T w o

C D

C DIn te re s ts in

A B

R e d e m p tio no f In te re s tin C D

R e d e m p tio no f In te re s t

in C D

A B

A B

A s s e t 1 A s s e t 2

A B

R e s u ltA B

C D


1 The three following diagrams are adopted from RIBSTEIN AND KEATINGE ON LIMITED LIABILITY

COMPANIES ch. 20.

8

• Assets up: assets of disappearing entity are distributed to the owners in a liquidating distribution who then contribute them to surviving in exchanging for interests in surviving.

A B


S te p O n e

S te p T w o

In te re s ts inA B

A B

R e s u lt


C D

R e d e m p tio no f In te re s t

in C D


A B C D

A s s e t 2

A s s e t 1

C DA s s e t 2A s s e t 2

C D

A BA B

C D

9

• Interest over: the owners of the disappearing entity contribute their interest in it to surviving in return for interests in surviving.

A B In te re s ts

A B


S te p O n e

S te p T w o

A B

R e s u lt


C D

C D

A s s e t 2

A B

C D

BA

C D In te re s ts

A B


A B

C D

C D

Well, I’m glad that is clear.

Statutory Drafting Efforts - The Model Inter-Entity Transactions Act and the Model [Uniform] Entity Transactions Act

With the proliferation of business forms and their widespread acceptance, there has arisen a need for global mechanisms by which these disparate business entities may engage in mergers, ownership interest exchanges, consolidations and similar organic transactions. Over the past ten years, most corporate, LLC and to a lesser extent limited partnership statutes have been modified, on a somewhat piecemeal basis, to provide for particular inter-entity transactions. More recently, it has been determined that such a piecemeal approach is ultimately unsatisfactory in that it typically requires multiple statutory amendments, and then the continuous maintenance of all of those provisions which, depending upon the number of entities provided for, can quickly grow by geometric scales.

In response, both a group within the American Bar Association organized as the Ad-hoc Committee on Entity Rationalization as well as the NCCUSL have undertaken projects to provide a global mechanism for inter-entity organic transactions. The ABA effort has yielded

10

the Model Inter-Entity Transactions Act (“MITA”).2 The effort undertaken by NCCUSL in this regard is the Uniform Entity Transactions Act (“UnETA”).3 UnETA received its first reading at the NCCUSL annual meeting in August 2001, and the second and final reading had been scheduled for the NCCUSL annual meeting to be held July 2003. That final reading did not take place. Rather, the NCCUSL and ABA efforts were merged into the Model Entity Transactions Act (“META”). META was approved by NCCUSL in July 2004. However, it has not received ABA approval, and there exists significant controversy over its merits.4

An interesting point is that once UnETA or META is adopted in any state, it will have nationwide impact. Assume you are in a state in which you want to consolidate a limited partnership into an LLC, and then merge into that surviving entity a corporation. Assume also that your state law does not provide for inter-entity transactions, and does not provide for consolidations at all. Assume that another state has adopted UnETA. You would then merge your corporation into a corporation in that UnETA jurisdiction, merge your limited partnership into a limited partnership formed in that UnETA jurisdiction, and do the same with the LLC. You then accomplish the desired inter-entity transaction in that foreign jurisdiction and then merge the surviving entity back into your desired domestic LLC.

Counsel’s Drafting Issues

Now this presentation is about state law issues, but that little foray into tax serves an important purpose - the tax implications need to be reflected in your transactional documents. And that is in addition to everything else that must be done under state law.

Imagine that today you need to do the following transaction in Kentucky.

Partnership, Limited Partnership and Corporation each want to be combined into a single already existing LLC.

Kentucky law provides for:

Conversion of a partnership into an LLC Conversion of a limited partnership into an LLC Merger of a limited partnership into an LLC (and vice-versa)

2 See The Ad-Hoc Committee on Entity Rationalization, Proposed Model Inter-Entity Transactions Act,

57 THE BUSINESS LAWYER 1569 (August, 2002). An introduction to MITA appears at Thomas E. Geu and Robert R. Keatinge, The Proposed Model Inter-Entity Transactions Act: A Proposal to Rationalize Changes in Forms of Business Organizations, 37 REAL PROPERTY, PROBATE AND TRUST J. 385 (Fall, 2002).

3 The Uniform Entity Transactions Act is a drafting project of the National Conference of Commissioners of Uniform State Laws, originally under the title The Uniform Conversion or Merger of Different Types of Business Organizations Act. Copies of the various drafts of this drafting effort are available at the website of the National Conference of Commissioners of Uniform State Laws at http://www.nccusl.org.

4 See, e.g., Robert R. Keatinge, Now that the Model Entity Transaction Act (META) Has Been Approved by NCCUSL, What Should Be Done With It? and William H. Clark, Jr. and George W. Coleman, META is Ready for Adoption by the States, both appearing at XXII PUBOGRAM at, respectively, pages 24 and 29 (November, 2004).

11

Merger of a limited partnership into a corporation (and vice-versa) Merger of a corporation into an LLC (and vice-versa)

So plot through the steps:

(1) Partnership will convert into New LLC 1

(2) New LLC 1 will merge into LLC

(3) Limited Partnership will merge into LLC

(4) Corporation will merge into LLC

So, setting aside the tax problems that arose when you merged Corporation (Subchapter C) into Partnership (Subchapter K), you need to prepare and coordinate

Articles of Organization for step 1 Articles of Merger for step 2 Articles of Merger for step 3 Articles of Merger for step 4

Now three sets of Articles of Merger are excessive, so let’s combine all of then into a single document. For each entity you need to provide notices, resolutions, plans of reorganization/merger. And deal with the peculiarities of each organizational law. Are dissenters’ rights available to the owners of Corporation? of LLC? of New LLC1? Don’t forget that they might exist at common law.

Now let’s assume you are not in such an accommodating state, and, for example, your partnership law does not provide for conversions. And you really need to transfer Partnership’s assets, several dozen parcels of real estate in a state with high transfer taxes, by operation of law and not by individual deed. Well, there are lots of other states. Partnership may elect to become a limited liability partnership in the state of RUPA by then filing a Statement of Qualification. And RUPA has a statute allowing its partnerships to convert into an LLC. So we have a solution to that break in the statutory authority. The point is to be flexible and shop around for the statutes that best address your problem.

Beware the Tyranny of the Majority

If you are representing the minority members of a newly formed business, be aware that an organic transaction may (properly?) be used to undercut the minority protections you have so carefully negotiated. Let’s take the example of Iowa. The act (§ 490A.701(3)) required a unanimous vote to amend either the articles of organization or the operating agreement. You have dutifully insisted that each of these requirements be set forth in the operating agreement, confident now that your minority member protections are safe. But wait -- the majority owners (and their devious attorney) have just sent out a notice of a proposed merger. The operating agreement of the new LLC looks just like the one you just negotiated, except none of the minority member protections are included. And the meeting notice says the merger will be approved if it received the consent of a majority of the members. And the devious majority

12

counsel is correct (§ 49A.701(2)(c)). Now you can rant about duty of loyalty and good faith and whatever else may occur to you. But now you have to go to court and seek injunctive relief. Which, had you read § 49A.701(2)(c), and addressed it in the operating agreement, you might not have needed to do.

* * * * *

Bibliography

Thomas Geu and Robert Keatinge, The Proposed Model Inter-Entity Transactions Act: A Proposal to Rationalize Changes in Forms of Business Organizations, 37 REAL. PROP. PROB & TR. J. 385 (Fall 2002).

Larry Ribstein and Robert Keatinge, Ribstein and Keatinge on Limited Liability Companies (2nd Ed.) chapter 20.

Jason P. Walton and Abigail A. Loftus, Characterization of Cross-Entity Conversions and Mergers for Federal Tax Purposes, 20 PUBOGRAM (Newsletter of the Committee on Partnerships and Unincorporated Business Organizations, Section of Business Law, ABA) 16 (July 2003).

Robert C. Art, Conversion and Merger of Disparate Business Entities, 76 WASH. L. REV. 349 (2001).

Robert R. Keatinge, Mergers, Conversions, and Transmogrifications Involving Unincorporated Entities, LIMITED LIABILITY ENTITIES IN TIMES OF CHANGE, VPC0312 ALI-ABA 145 (March 12, 2002).

Proposed Model Inter-Entity Transactions Act (American Bar Association, 2002) 57 BUSINESS LAWYER 1569 (August 2002).

Kelly Smith and Karen Harriger, Limited Liability Company Conversions -- Navigating the State Tax Implications, ___ BUS. ENTITIES ____ (2005)(forthcoming as of the submission date of these materials).

Bruce P. Ely, State Taxation of Subchapter S and Subchapter K Entities and Their Owners - An Overview, presented at CHOICE OF ENTITY - 2005: SELECTING LEGAL FORM AND STRUCTURE FOR CLOSELY-HELD BUSINESSES AND VENTURES (ALI-ABA, February 10, 2005).

14

MODEL ENTITY TRANSACTIONS ACT *

___________________________________________________

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

___________________________________________________

MEETING IN ITS ONE-HUNDRED-AND-THIRTEENTH YEAR

PORTLAND, OREGON

JULY 30 - AUGUST 6, 2004

___________________________________________________


___________________________________________________

Copyright ©2004

Jointly By NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

and


* The following text is subject to revision by the Committee on Style of the National Conference of Commissioners on Uniform State Laws.

15

DRAFTING COMMITTEE OF NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS HARRY J. HAYNSWORTH, IV, William Mitchell College of Law, 875 Summit Ave., St. Paul, MN 55105, Chair

K. KING BURNETT, P.O. Box 910, Salisbury, MD 21803-0910

RONALD W. DEL SESTO, Del Sesto-Hall’s Building, 49 Weybosset St., Providence, RI 02903

STANLEY M. FISHER, 30100 Chagrin Blvd., Suite 301, Cleveland, OH 44122, Enactment Plan Coordinator

STEVEN G. FROST, Suite 1500, 111 W. Monroe St., Chicago, IL 60603-4006

HENRY M. KITTLESON, P.O. Box 32092, 92 Lake Wire Dr., Lakeland, FL 33802-2092

LEON M. McCORKLE, JR., P.O. Box 256, 4288 W. Dublin-Granville Rd., Dublin, OH 43017-0387

DAVID S. WALKER, Drake University Law School, Des Moines, IA 50311

ANN CONAWAY ANKER, Widener University, School of Law, P.O. Box 7474, Wilmington, DE 19803, National Conference Reporter

EX OFFICIO

FRED H. MILLER, University of Oklahoma, College of Law, 300 Timberdell Rd., Room 3056, Norman, OK 73019, President

JOANNE B. HUELSMAN, 235 W. Broadway, Suite 210, Waukesha, WI 53186, Division Chair

EXECUTIVE DIRECTOR

WILLIAM H. HENNING, University of Alabama, School of Law, P.O. Box 870382, Tuscaloosa, AL 35487-0382, Executive Director

WILLIAM J. PIERCE, 1505 Roxbury Road, Ann Arbor, MI 48104, Executive Director Emeritus

DRAFTING COMMITTEE OF AMERICAN BAR ASSOCIATION

GEORGE W. COLEMAN, Suite 3200, 1445 Ross Avenue, Dallas, TX 75202, Chair

WILLIAM H. CLARK, JR., One Logan Square, 18th & Cherry Streets, Philadelphia, PA 19103-6996, ABA Reporter

16

SECTION ON BUSINESS LAW

JON T. HIRSCHOFF, One Landmark Sq., 14th Floor, Stamford, CT 06901, Committee on Negotiated Acquisitions

PAUL L. LION, III, 755 Page Mill Rd., Palo Alto, CA 94304-1018, Committee on Venture Capital and Private Equity

LIZABETH E. MOODY, 1401 61st Street South, St. Petersburg, FL 33707, Committee on Nonprofit Corporations

THOMAS E. RUTLEDGE, 1700 PNC Plaza, 500 W. Jefferson St., Louisville, KY 40202-2874, Committee on Partnerships and Unincorporated Business Entities

BRYN VAALER, 50 South Sixth Street, Minneapolis, MN 55402, Committee on Corporate Laws

SECTION ON REAL PROPERTY, PROBATE AND TRUST LAW

THOMAS EARL GEU, University of South Dakota, School of Law, 414 Clark St., Suite 214, Vermillion, SD 57069-2390

ROBERT R. KEATINGE, Suite 3200, 555 17th Street, Denver, CO 80202-3979

CAROL G. KROCH, RR 1 E College Rd E, P.O. Box 2316, Princeton, NJ 08543

BARRY NEKRITZ, 8000 Sears Tower, 233 S. Wacker Dr., Chicago, IL 60606

SECTION ON TAX LAW

ROBERT R. CASEY, 8555 United Plaza Blvd, Suite 500, Baton Rouge, LA 70809

OBSERVERS

CARTER G. BISHOP, American University Law School, 4801 Massachusetts Ave. NW, Washington, DC 20016-8181

DANIEL S. KLEINBERGER, William Mitchell College of Law, 875 Summit Ave., St. Paul, MN 55105

MELISSA WANGEMANN, Kansas Secretary of State, 120 SW 10th Ave., Topeka, KS 66612-1594

17

Copies of this Act may be obtained from:

NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS 211 E. Ontario Street, Suite 1300, Chicago, Illinois 60611 312/915-0195 www.nccusl.org AMERICAN BAR ASSOCIATION - SECTION ON BUSINESS LAW 321 N. Clark St. Chicago, Illinois 60610 312/988-6244 www.abanet.org

MODEL ENTITY TRANSACTIONS ACT

[ARTICLE] 1 GENERAL PROVISIONS

SECTION 101. SHORT TITLE. This [act] may be cited as the [State] Entity Transactions Act.

SECTION 102. DEFINITIONS. In this [act]:

(1) “Acquired entity” means the entity, all of one or more classes or series of interests in which are acquired in an interest exchange.

(2) “Acquiring entity” means the entity that acquires all of one or more classes or series of interests of the exchanging entity in an interest exchange.

(3) “Approve” means, in the case of an entity, for its governors and interest holders to take whatever steps are necessary under its organic rules, organic law, and other law to:

(A) propose a transaction subject to this [act];

(B) adopt and approve the terms and conditions of the transaction; and

(C) conduct any required proceedings or otherwise obtain any required votes or consents of the governors or interest holders.

(4) “Conversion” means a transaction of the kind authorized by [Article] 4.

(5) “Converted entity” means the converting entity as it continues in existence after a conversion.

(6) “Converting entity” means the domestic entity that approves a plan of conversion pursuant to Section 403 or the foreign entity that approves a conversion pursuant to the law of its jurisdiction of organization.

(7) “Domestic entity” means an entity whose internal affairs are governed by the law of this state.

(8) “Domesticated entity” means the domesticating entity as it continues in existence after a domestication.

(9) “Domesticating entity” means the domestic entity that approves a plan of domestication pursuant to Section 503 or the foreign entity that approves a domestication pursuant to the law of its jurisdiction of organization.

(10) “Domestication” means a transaction of the kind authorized by [Article] 5.

19

(11) “Entity” means a person other than an individual that either has a separate legal existence or has the power to acquire an interest in real property in its own name. The term does not include a testamentary, inter vivos, or charitable trust, but does include a business trust or similar trust. The term also does not include:

(A) an association or relationship that is not a partnership by reason of [Section 202(c) of the Uniform Partnership Act (1997)] or a similar provision of the law of any other jurisdiction;

(B) a decedent’s estate; or

(C) a government, a governmental subdivision, agency, or instrumentality, or a quasi-governmental instrumentality.

(12) “Filing entity” means an entity that is created by the filing of a public organic document.

(13) “Foreign entity” means an entity other than a domestic entity.

(14) “Governance interest” means the right under the organic law or organic rules of an entity, other than as a governor, agent, assignee, or proxy, to:

(A) receive or demand access to information concerning, or the books and records of, the entity;

(B) vote for the election of the governors of the entity; or

(C) receive notice of or vote on any or all issues involving the internal affairs of the entity.

(15) “Governor” means a person by or under whose authority the powers of an entity are exercised and under whose direction the business and affairs of the entity are managed pursuant to the organic law and organic rules of the entity.

(16) “Interest” means:

(A) a governance interest in an unincorporated entity;

(B) a transferable interest in an unincorporated entity; or

(C) a share or membership in a corporation.

(17) “Interest exchange” means a transaction of the kind authorized by [Article] 3.

(18) “Interest holder” means a person that is the direct holder of an interest.

(19) “Interest holder liability” means personal liability for a liability of an entity that is imposed on a person:

20

(A) solely by reason of the status of the person as an interest holder; or

(B) by the organic rules of the entity pursuant to a provision of the organic law authorizing the organic rules to make one or more specified interest holders or categories of interest holders liable in their capacity as interest holders for all or specified liabilities of the entity.

(20) “Jurisdiction of organization” of an entity means the jurisdiction whose law includes the organic law of the entity.

(21) “Liability” means a debt, obligation, or any other kind of liability arising in any manner and whether or not secured.

(22) “Merger” means a transaction of the kind authorized by [Article] 2.

(23) “Merging entity” means an entity that is a party to a merger and exists immediately before the merger becomes effective.

(24) “Organic law” means the statutes, if any, other than this [act] governing the internal affairs of an entity.

(25) “Organic rules” means the public organic document and private organic rules of an entity.

(26) “Person” means an individual, corporation, business or similar trust, estate, trust, partnership, limited liability company, association, joint venture, public corporation, government, or governmental subdivision, agency, or instrumentality, or any other legal or commercial entity.

(27) “Plan” means a plan of merger, interest exchange, conversion, or domestication.

(28) “Private organic rules” mean the rules, whether or not in a record, that govern the internal affairs of an entity, are binding on all of its interest holders, and are not part of its public organic document, if any.

(29) “Protected agreement” means:

(A) a debt security, note, or similar evidence of indebtedness for money borrowed, whether secured or unsecured, issued or signed by an entity that is unpaid, in whole or in part, on the effective date of this [act];

(B) a contract or agreement that is binding on an entity on the effective date of this [act];

(C) the organic rules of an entity in effect on the effective date of this [act]; or

(D) a contract or agreement that is binding on any of the governors or interest holders of an entity on the effective date of this [act].

21

(30) “Public organic document” means the public record the filing of which creates an entity, and any amendment to or restatement of that record.

(31) “Qualified foreign entity” means a foreign entity that is authorized to transact business in this state pursuant to a filing with the [Secretary of State].

(32) “Record” means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form.

(33) “Sign” means:

(A) to execute or adopt a tangible symbol with the present intent to authenticate a record; or

(B) to attach or logically associate an electronic symbol, sound, or process to or with a record with the present intent to authenticate the record.

(34) “Surviving entity” means the entity that continues in existence after or is created by a merger.

(35) “Transferable interest” means the right under an entity’s organic law to receive distributions from the entity.

(36) “Type,” with regard to an entity, means a generic form of entity:

(A) recognized at common law; or

(B) organized under an organic law, whether or not some entities organized under that organic law may also be subject to certain provisions of that law that create different categories of the form of entity organized under that law.

SECTION 103. RELATIONSHIP OF [ACT] TO OTHER LAWS.

(a) Unless displaced by particular provisions of this [act], the principles of law and equity supplement this [act].

(b) This [act] does not authorize an act prohibited by, and does not affect the application or requirements of, law other than this [act].

(c) A transaction effected under this [act] may not create or impair any right or obligation on the part of a person under a provision of the law of this state other than this [act] relating to a change in control, takeover, business combination, control-share acquisition, or similar transaction involving a domestic merging, acquired, converting, or domesticating corporation unless either:

(1) if the corporation does not survive the transaction, the transaction satisfies any requirements of the provision; or

22

(2) if the corporation survives the transaction, the approval of the plan would also be sufficient to create or impair the right or obligation directly under the provision.

SECTION 104. REQUIRED NOTICE OR APPROVAL.

(a) A domestic or foreign entity that is required to give notice to, or obtain the approval of, a governmental agency or officer in order to sell some or all of its assets, be a party to a merger, or change its purposes or form of organization must give such notice, or obtain such approval, to be a party to a transaction under this [act].

(b) Property held for a charitable purpose under the law of this state by a domestic or foreign entity immediately before a transaction under this [act] becomes effective may not, as a result of the transaction, be diverted from the objects for which it was donated, granted, or devised, unless the entity obtains an order of [name of court] [the attorney general] to the extent required by or pursuant to [cite state statutory cy pres or other nondiversion law] specifying the disposition of the property.

SECTION 105. STATUS OF FILINGS. A filing under this [act] by a domestic entity becomes part of the public organic document of the entity if the organic law of the entity provides that similar filings under that law become part of the public organic document of the entity.

SECTION 106. NONEXCLUSIVITY. The fact that a transaction under this [act] produces a certain result does not preclude the same result from being accomplished in any other manner permitted by law other than this [act].

SECTION 107. REFERENCE TO EXTERNAL FACTS. A plan may refer to facts ascertainable outside of the plan if the manner in which the facts will operate upon the plan is specified in the plan. The facts may include, without limitation, the occurrence of an event or a determination or action by a person, whether or not the event, determination, or action is within the control of a party to the transaction.

[SECTION 108. APPRAISAL RIGHTS. Except as otherwise provided in the entity’s organic law or organic rules, an interest holder of a domestic merging, acquired, converting, or domesticating entity shall be entitled to appraisal rights in connection with the transaction if the interest holder would have been entitled to appraisal rights in the event the entity were a party to a merger under its organic law.]

[SECTION 109. EXCLUDED ENTITIES AND TRANSACTIONS.

(a) The following entities may not participate in a transaction under this [act]:

(1)

(2)

(b) This [act] may not be used to effect a transaction that:

23

(1)

(2)

(3)]

[ARTICLE] 2 MERGER

SECTION 201. MERGER AUTHORIZED.

(a) Except as otherwise provided in this section, by complying with this [article]:

(1) one or more domestic entities may merge with one or more domestic or foreign entities into a domestic or foreign surviving entity; and

(2) two or more foreign entities may be parties to a merger in which the surviving entity is a domestic entity.

(b) Except as otherwise provided in this section, by complying with this [article] a foreign entity may be a party to a merger under this [article] or may be the surviving entity in such a merger if the merger is authorized by the laws of the foreign entity’s jurisdiction of organization.

(c) This [article] does not apply to a merger under:

(1) [Chapter 11 of the Model Business Corporation Act];

(2) [Chapter 11 of the Model Nonprofit Corporation Act];

(3) [Article 9 of the Uniform Partnership Act (1997)];

(4) [Article 11 of the Uniform Limited Partnership Act (2001)];

(5) [Article 12 of the Prototype Limited Liability Company Act];

(6) [Article 9 of the Uniform Limited Liability Company Act]; or

(7)

[(d) The following entities may not participate in a merger under this [article]:

(1)

(2)]

SECTION 202. PLAN OF MERGER.

(a) A domestic entity may become a party to a merger under this [article] by approving a plan of merger. The plan of merger must be in a record and contain:

24

(1) as to each merging entity, its name, jurisdiction of organization, and type of entity;

(2) if the surviving entity is to be created in the merger, a statement to that effect and its name, jurisdiction of organization, and type of entity;

(3) the manner and basis of converting the interests in each party to the merger into interests, securities, obligations, rights to acquire interests or securities, cash, or other property, or any combination of the foregoing;

(4) if the surviving entity exists before the merger, any proposed amendments to its public organic document or to its private organic rules that are, or are proposed to be, in a record;

(5) if the surviving entity is to be created in the merger, its proposed public organic document, if any, and the full text of its organic rules that are proposed to be in a record;

(6) the other terms and conditions of the merger; and

(7) any other provision required by the law of a merging entity’s jurisdiction of organization or the organic rules of a merging entity.

(b) A plan of merger may contain any provision not prohibited by law other than this [act].

SECTION 203. APPROVAL OF MERGER.

(a) A plan of merger is not effective unless it has been approved:

(1) by a domestic merging entity:

(A) in accordance with the requirements, if any, in its organic law and organic rules for approval of a merger; or

(B) if neither its organic law nor organic rules provide for approval of a merger, by all of the interest holders of the entity entitled to vote on or consent to any matter; and

(2) in a record by each interest holder of a domestic merging entity that will have interest holder liability for liabilities that arise after the merger becomes effective, unless:

(A) the organic rules of the entity provide in a record for the approval of a merger in which some or all of its interest holders become subject to interest holder liability by the vote or consent of fewer than all of the interest holders; and

(B) the interest holder has voted for or consented in a record to that provision of the organic rules or became an interest holder after the adoption of that provision.

(b) Each merging entity that is a foreign entity shall approve the merger in accordance with the law of the foreign entity’s jurisdiction of organization.

25

SECTION 204. AMENDMENT OR ABANDONMENT OF PLAN OF MERGER.

(a) A plan of merger of a domestic merging entity may be amended:

(1) in the same manner as the plan was approved if the plan does not provide for the manner in which it may be amended; or

(2) by the governors or interest holders of the entity in the manner provided in the plan, except that an interest holder that was entitled to vote on or consent to approval of the merger is entitled to vote on or consent to any amendment of the plan that will change:

(A) the amount or kind of interests, securities, obligations, rights to acquire interests or securities, cash, or other property, or any combination of the foregoing to be received by the interest holders of any party to the plan;

(B) the public organic document or private organic rules of the surviving entity that will be in effect immediately after the merger becomes effective, except for changes that would not require the approval of the interest holders of the surviving entity under its organic law or organic rules; or

(C) any of the other terms or conditions of the plan if the change would adversely affect the interest holder in any material respect.

(b) After a plan of merger has been approved by a domestic merging entity and before a statement of merger becomes effective, the plan may be abandoned:

(1) as provided in the plan; or

(2) unless prohibited by the plan, in the same manner as the plan was approved.

(c) If a merger is abandoned after a statement of merger has been filed with the [Secretary of State] and before the filing becomes effective, a statement of abandonment, signed on behalf of a merging entity, must be filed with the [Secretary of State] before the statement of merger becomes effective. The statement of abandonment takes effect upon filing and the merger is abandoned and does not become effective. The statement of abandonment must contain:

(1) the name of each merging or surviving entity that is a domestic entity or a qualified foreign entity;

(2) the date on which the statement of merger was filed; and

(3) a statement that the merger has been abandoned in accordance with this section.

SECTION 205. STATEMENT OF MERGER; EFFECTIVE DATE.

(a) A statement of merger must be signed on behalf of each merging entity and filed with the [Secretary of State].

(b) A statement of merger must contain:

26

(1) the name, jurisdiction of organization, and type of entity of each merging entity that is not the surviving entity;

(2) the name, jurisdiction of organization, and type of entity of the surviving entity;

(3) if the statement of merger is not to be effective upon filing, the later date and time on which it will become effective, which may not be more than 90 days after the date of filing;

(4) a statement that the merger was approved by each domestic merging entity, if any, in accordance with this [article] and by each foreign merging entity, if any, in accordance with the law of its jurisdiction of organization;

(5) if the surviving entity exists before the merger and is a domestic filing entity, any amendments to its public organic document approved as part of the plan of merger;

(6) if the surviving entity is created by the merger and is a domestic filing entity, a copy of its public organic document, as an attachment; and

(7) if the surviving entity is created by the merger and is a domestic limited liability partnership, a copy of its [statement of qualification], as an attachment.

(c) In addition to the provisions required by subsection (b), a statement of merger may contain any other provision not prohibited by law other than this [act].

(d) If the surviving entity is a domestic entity, the name of the surviving entity must satisfy the requirements of the law of this state. If the surviving entity is to be a qualified foreign entity, its name must be available for use in this state or it must adopt an available name for that purpose.

(e) A plan of merger that is signed on behalf of all of the merging entities and contains all of the provisions required by subsection (b) may be filed with the [Secretary of State] instead of a statement of merger and upon filing has the same effect. If a plan of merger is filed as provided in this subsection, references in this [act] to a statement of merger mean the plan of merger filed under this subsection.

(f) A statement of merger becomes effective upon the date and time of filing or the later date and time specified in the statement of merger.

SECTION 206. EFFECT OF MERGER.

(a) When a merger becomes effective:

(1) The surviving entity continues or comes into existence.

(2) Each merging entity that is not the surviving entity ceases to exist.

(3) All property and contract rights of each merging entity vest in the surviving entity without assignment, reversion, or impairment.

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(4) All liabilities of each merging entity are liabilities of the surviving entity.

(5) Except as otherwise provided by law other than this [act] or the plan of merger, all of the rights, privileges, immunities, powers, and purposes of each merging entity vest in the surviving entity.

(6) If the surviving entity exists before the merger:

(A) all of its property and contract rights continue to be vested in it without reversion or impairment; and

(B) it remains subject to all of its liabilities.

(7) The name of the surviving entity may be substituted in any pending action or proceeding for the name of any merging entity.

(8) If the surviving entity exists before the merger, its public organic document, if any, and its private organic rules are amended to the extent provided in the plan of merger and are binding upon the interest holders of the surviving entity.

(9) If the surviving entity is created by the merger, its public organic document, if any, and its private organic rules are effective and are binding upon the interest holders of the surviving entity.

(10) The interests in each merging entity that are to be converted in the merger are converted, and the interest holders of those interests are entitled only to the rights provided to them under the plan of merger [and to any appraisal rights they have under Section 108].

(b) A person that did not have interest holder liability with respect to any of the merging entities and that becomes subject to interest holder liability with respect to a domestic entity as a result of a merger has interest holder liability only to the extent provided by the organic law of the entity and only for those liabilities that arise after the merger becomes effective.

(c) Upon a merger, the interest holder liability of a person that ceases to hold an interest in a domestic merging entity with respect to which the person had interest holder liability is as follows:

(1) The merger does not discharge any interest holder liability under the organic law of the domestic merging entity to the extent the interest holder liability arose before the merger became effective.

(2) The person does not have interest holder liability under the organic law of the domestic merging entity for any liability that arises after the merger becomes effective.

(3) The organic law of the domestic merging entity continues to apply to the release, collection, or discharge of any interest holder liability preserved by paragraph (1) as if the merger had not occurred and the surviving entity were the domestic merging entity.

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(4) The person has whatever rights of contribution from any other person as are provided by the organic law or organic rules of the domestic merging entity with respect to any interest holder liability preserved by paragraph (1) as if the merger had not occurred.

(d) A foreign entity that is the surviving entity:

(1) may be served with process in this state for the collection and enforcement of any liabilities of a domestic merging entity; and

(2) appoints the [Secretary of State] as its agent for service of process for collecting or enforcing those liabilities.

(e) When a merger becomes effective, the certificate of authority or other foreign qualification of any foreign merging entity that is not the surviving entity is canceled.

[ARTICLE] 3 INTEREST EXCHANGE

SECTION 301. INTEREST EXCHANGE AUTHORIZED.

(a) Except as otherwise provided in this section, by complying with this [article]:

(1) a domestic entity may acquire all of one or more classes or series of interests of another domestic or foreign entity in exchange for interests, securities, obligations, rights to acquire interests or securities, cash, or other property, or any combination of the foregoing; or

(2) all of one or more classes or series of interests of a domestic entity may be acquired by another domestic or foreign entity in exchange for interests, securities, obligations, rights to acquire interests or securities, cash, or other property, or any combination of the foregoing.

(b) Except as otherwise provided in this section, by complying with this [article] a foreign entity may be the acquired entity in an interest exchange under this [article] if the interest exchange is authorized by the law of the foreign entity’s jurisdiction of organization.

(c) This [article] does not apply to an interest exchange under:

(1) [Chapter 11 of the Model Business Corporation Act]; or

(2)

(d) If a protected agreement contains a provision that applies to a merger of a domestic entity but does not refer to an interest exchange, the provision applies to an interest exchange in which the domestic entity is the acquired entity as if the interest exchange were a merger until the provision is amended after the effective date of this [act].

[(e) The following entities may not participate in an interest exchange under this [article]:

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(1)

(2)]

SECTION 302. PLAN OF INTEREST EXCHANGE.

(a) A domestic entity may be the acquired entity in an interest exchange under this [article] by approving a plan of interest exchange. The plan of interest exchange must be in a record and contain:

(1) the name and type of entity of the acquired entity;

(2) the name, jurisdiction of organization, and type of entity of the acquiring entity;

(3) the manner and basis of converting the interests in the acquired entity into interests, securities, obligations, rights to acquire interests or securities, cash, or other property, or any combination of the foregoing;

(4) any proposed amendments to the public organic document or private organic rules that are, or are proposed to be, in a record of the acquired entity;

(5) the other terms and conditions of the interest exchange; and

(6) any other provision required by the law of this state or the organic rules of the acquired entity.

(b) A plan of interest exchange may contain any provision not prohibited by law other than this [act].

SECTION 303. APPROVAL OF INTEREST EXCHANGE.

(a) Except as otherwise provided in subsection (d), a plan of interest exchange is not effective unless it has been approved:

(1) by a domestic acquired entity:

(A) in accordance with the requirements, if any, in its organic law and organic rules for approval of an interest exchange;

(B) if neither its organic law nor organic rules provide for approval of an interest exchange, in accordance with the requirements, if any, for approval of a merger in its organic law and organic rules as if the interest exchange were a merger; or

(C) if neither its organic law nor organic rules provide for approval of an interest exchange or a merger, by all of the interest holders of the entity entitled to vote on or consent to any matter; and

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(2) in a record by each interest holder of a domestic acquired entity that will have interest holder liability for liabilities that arise after the interest exchange becomes effective, unless:

(A) the organic rules of the entity provide in a record for the approval of an interest exchange in which some or all of its interest holders become subject to interest holder liability by the vote or consent of fewer than all of the interest holders; and


(b) An acquired entity that is a foreign entity shall approve the interest exchange in accordance with the law of the foreign entity’s jurisdiction of organization.

(c) Except as otherwise provided in its organic law or organic rules, the interest holders of the acquiring entity are not required to approve the interest exchange.

(d) A provision of the organic law of a domestic acquired entity that would permit a merger between the acquired entity and the acquiring entity to be approved without the vote or consent of the interest holders of the acquired entity because of the percentage of interests in the acquired entity held by the acquiring entity does not apply to approval of an interest exchange under subsection (a)(1)(B).

SECTION 304. AMENDMENT OR ABANDONMENT OF PLAN OF INTEREST EXCHANGE.

(a) A plan of interest exchange of a domestic acquired entity may be amended:


(2) by the governors or interest holders of the entity in the manner provided in the plan, except that an interest holder that was entitled to vote on or consent to approval of the interest exchange is entitled to vote on or consent to any amendment of the plan that will change:

(A) the amount or kind of interests, securities, obligations, rights to acquire interests or securities, cash, or other property, or any combination of the foregoing to be received by any of the interest holders of the acquired entity under the plan;

(B) the public organic document or private organic rules of the acquired entity that will be in effect immediately after the interest exchange becomes effective, except for changes that would not require the approval of the interest holders of the acquired entity under its organic law or organic rules; or


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(b) After a plan of interest exchange has been approved by a domestic acquired entity and before a statement of interest exchange becomes effective, the plan may be abandoned:



(c) If an interest exchange is abandoned after a statement of interest exchange has been filed with the [Secretary of State] and before the filing becomes effective, a statement of abandonment, signed on behalf of the acquired entity, must be filed with the [Secretary of State] before the statement of interest exchange becomes effective. The statement of abandonment takes effect upon filing and the interest exchange is abandoned and does not become effective. The statement of abandonment must contain:

(1) the name of the acquired entity;

(2) the date on which the statement of interest exchange was filed; and

(3) a statement that the interest exchange has been abandoned in accordance with this section.

SECTION 305. STATEMENT OF INTEREST EXCHANGE; EFFECTIVE DATE.

(a) A statement of interest exchange must be signed on behalf of a domestic acquired entity and filed with the [Secretary of State].

(b) A statement of interest exchange must contain:

(1) the name and type of entity of the acquired entity;

(2) the name, jurisdiction of organization, and type of entity of the acquiring entity;

(3) if the statement of interest exchange is not to be effective upon filing, the later date and time on which it will become effective, which may not be more than 90 days after the date of filing;

(4) a statement that the plan of interest exchange was approved by the acquired entity in accordance with this [article]; and

(5) any amendments to the acquired entity’s public organic document approved as part of the plan of interest exchange.

(c) In addition to the provisions required by subsection (b), a statement of interest exchange may contain any other provision not prohibited by law other than this [act].

(d) A plan of interest exchange that is signed on behalf of a domestic acquired entity and contains all of the provisions required by subsection (b) may be filed with the [Secretary of State] instead of a statement of interest exchange and upon filing has the same effect. If a plan of

32

interest exchange is filed as provided in this subsection, references in this [act] to a statement of interest exchange mean the plan of interest exchange filed under this subsection.

(e) A statement of interest exchange becomes effective upon the date and time of filing or the later date and time specified in the statement of interest exchange.

SECTION 306. EFFECT OF INTEREST EXCHANGE.

(a) When an interest exchange becomes effective:

(1) The interests in the acquired entity that are the subject of the interest exchange cease to exist or are converted or exchanged, and the interest holders of those interests are entitled only to the rights provided to them under the plan of interest exchange [and to any appraisal rights they have under Section 108].

(2) The acquiring entity becomes the interest holder of the interests in the acquired entity stated in the plan of interest exchange to be acquired by the acquiring entity.

(3) The public organic document, if any, of the acquired entity is amended to the extent provided in the plan of interest exchange and is binding upon the interest holders of the acquired entity.

(4) The private organic rules of the acquired entity that are to be in a record, if any, are amended to the extent provided in the plan of interest exchange and are binding upon the interest holders of the acquired entity.

(b) A person that did not have interest holder liability with respect to the acquired entity and that becomes subject to interest holder liability with respect to a domestic entity as a result of an interest exchange has interest holder liability only to the extent provided by the organic law of the entity and only for those liabilities that arise after the interest exchange becomes effective.

(c) Upon an interest exchange, the interest holder liability of a person that ceases to hold an interest in a domestic acquired entity with respect to which the person had interest holder liability is as follows:

(1) The interest exchange does not discharge any interest holder liability under the organic law of the domestic acquired entity to the extent the interest holder liability arose before the interest exchange became effective.

(2) The person does not have interest holder liability under the organic law of the domestic acquired entity for any liability that arises after the interest exchange becomes effective.

(3) The organic law of the domestic acquired entity continues to apply to the release, collection, or discharge of any interest holder liability preserved by paragraph (1) as if the interest exchange had not occurred.

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(4) The person has whatever rights of contribution from any other person as are provided by the organic law or organic rules of the domestic acquired entity with respect to any interest holder liability preserved by paragraph (1) as if the interest exchange had not occurred.

[ARTICLE] 4 CONVERSION

SECTION 401. CONVERSION AUTHORIZED.

(a) Except as otherwise provided in this section, by complying with this [article], a domestic entity may become:

(1) a domestic entity of a different type; or

(2) a foreign entity of a different type, if the conversion is authorized by the law of the foreign jurisdiction.

(b) Except as otherwise provided in this section, by complying with this [article] a foreign entity may become a domestic entity of a different type if the conversion is authorized by the law of the foreign entity’s jurisdiction of organization.

(c) If a protected agreement contains a provision that applies to a merger of a domestic entity but does not refer to a conversion, the provision applies to a conversion of the entity as if the conversion were a merger until the provision is amended after the effective date of this [act].

[(d) The following entities may not engage in a conversion under this [article]:

(1)

(2)]

SECTION 402. PLAN OF CONVERSION.

(a) A domestic entity may convert to a different type of entity under this [article] by approving a plan of conversion. The plan of conversion must be in a record and contain:

(1) the name and type of entity of the converting entity;

(2) the name, jurisdiction of organization, and type of entity of the converted entity;

(3) the manner and basis of converting the interests in the converting entity into interests, securities, obligations, rights to acquire interests or securities, cash, or other property, or any combination of the foregoing;

(4) the proposed public organic document of the converted entity if it will be a filing entity;

(5) the full text of the private organic rules of the converted entity that are proposed to be in a record;

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(6) the other terms and conditions of the conversion; and

(7) any other provision required by the law of this state or the organic rules of the converting entity.

(b) A plan of conversion may contain any provision not prohibited by law other than this [act].

SECTION 403. APPROVAL OF CONVERSION.

(a) A plan of conversion is not effective unless it has been approved:

(1) by a domestic converting entity:

(A) in accordance with the requirements, if any, in its organic rules for approval of a conversion;

(B) if its organic rules do not provide for approval of a conversion, in accordance with the requirements, if any, for approval of a merger in its organic law and organic rules as if the conversion were a merger; or

(C) if neither its organic law nor organic rules provide for approval of a conversion or a merger, by all of the interest holders of the entity entitled to vote on or consent to any matter; and

(2) in a record by each interest holder of a domestic converting entity that will have interest holder liability for liabilities that arise after the conversion becomes effective, unless:

(A) the organic rules of the entity provide in a record for the approval of a conversion in which some or all of its interest holders become subject to interest holder liability by the vote or consent of fewer than all of the interest holders; and


(b) A foreign converting entity shall approve the conversion in accordance with the law of the foreign entity’s jurisdiction of organization.

SECTION 404. AMENDMENT OR ABANDONMENT OF PLAN OF CONVERSION.

(a) A plan of conversion of a domestic converting entity may be amended:


(2) by the governors or interest holders of the entity in the manner provided in the plan, except that an interest holder that was entitled to vote on or consent to approval of the conversion is entitled to vote on or consent to any amendment of the plan that will change:

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(A) the amount or kind of interests, securities, obligations, rights to acquire interests or securities, cash, or other property, or any combination of the foregoing to be received by any of the interest holders of the converting entity under the plan;

(B) the public organic document or private organic rules of the converted entity that will be in effect immediately after the conversion becomes effective, except for changes that would not require the approval of the interest holders of the converted entity under its organic law or organic rules; or


(b) After a plan of conversion has been approved by a domestic converting entity and before a statement of conversion becomes effective, the plan may be abandoned:



(c) If a conversion is abandoned after a statement of conversion has been filed with the [Secretary of State] and before the filing becomes effective, a statement of abandonment, signed on behalf of the entity, must be filed with the [Secretary of State] before the statement of conversion becomes effective. The statement of abandonment takes effect upon filing and the conversion is abandoned and does not become effective. The statement of abandonment must contain:

(1) the name of the converting entity;

(2) the date on which the statement of conversion was filed; and

(3) a statement that the conversion has been abandoned in accordance with this section.

SECTION 405. STATEMENT OF CONVERSION; EFFECTIVE DATE.

(a) A statement of conversion must be signed on behalf of the converting entity and filed with the [Secretary of State].

(b) A statement of conversion must contain:

(1) the name, jurisdiction of organization, and type of entity of the converting entity;

(2) the name, jurisdiction of organization, and type of entity of the converted entity;

(3) if the statement of conversion is not to be effective upon filing, the later date and time on which it will become effective, which may not be more than 90 days after the date of filing;

36

(4) if the converting entity is a domestic entity, a statement that the plan of conversion was approved in accordance with this [article] or, if the converting entity is a foreign entity, a statement that the conversion was approved by the foreign converting entity in accordance with the law of its jurisdiction of organization;

(5) if the converted entity is a domestic filing entity, a copy of its public organic document, as an attachment; and

(6) if the converted entity is a domestic limited liability partnership, a copy of its [statement of qualification], as an attachment.

(c) In addition to the provisions required by subsection (b), a statement of conversion may contain any other provision not prohibited by law other than this [act].

(d) If the converted entity is a domestic entity, its name must satisfy the requirements of the law of this state.

(e) A plan of conversion that is signed on behalf of a domestic converting entity and contains all of the provisions required by subsection (b) may be filed with the [Secretary of State] instead of a statement of conversion and upon filing has the same effect. If a plan of conversion is filed as provided in this subsection, references in this [act] to a statement of conversion mean the plan of conversion filed under this subsection.

(f) A statement of conversion becomes effective upon the date and time of filing or the later date and time specified in the statement of conversion.

SECTION 406. EFFECT OF CONVERSION.

(a) When a conversion becomes effective:

(1) The converted entity is:

(A) organized under and subject to the organic law of the converted entity; and

(B) the same entity without interruption as the converting entity.

(2) All property and contract rights of the converting entity continue to be vested in the entity without assignment, reversion, or impairment.

(3) All liabilities of the converting entity continue as liabilities of the entity.

(4) Except as provided by law other than this [act] or the plan of conversion, all of the rights, privileges, immunities, powers, and purposes of the converting entity remain in the converted entity.

(5) The name of the converted entity may be substituted in any pending action or proceeding for the name of the converting entity.

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(6) Unless otherwise provided by the organic law of the converting entity, the conversion does not cause the dissolution of the converting entity.

(7) If a converted entity is a filing entity, its public organic document is effective and is binding upon the interest holders of the converted entity.

(8) If the converted entity is a limited liability partnership, its [statement of qualification] is effective simultaneously.

(9) The private organic rules of the converted entity approved as part of the plan of conversion are effective and are binding upon the interest holders of the converted entity.

(10) The interests in the converting entity are converted, and the interest holders of the converting entity are entitled only to the rights provided to them under the plan of conversion [and to any appraisal rights they have under Section 108].

(b) A person that did not have interest holder liability with respect to the converting entity and that becomes subject to interest holder liability with respect to a domestic entity as a result of a conversion has interest holder liability only to the extent provided by the organic law of the entity and only for those liabilities that arise after the conversion becomes effective.

(c) When a conversion becomes effective:

(1) The conversion does not discharge any interest holder liability under the organic law of a domestic converting entity to the extent the interest holder liability arose before the conversion became effective.

(2) A person does not have interest holder liability under the organic law of a domestic converting entity for any liability that arises after the conversion becomes effective.

(3) The organic law of a domestic converting entity continues to apply to the release, collection, or discharge of any interest holder liability preserved by paragraph (1) as if the conversion had not occurred.

(4) A person has whatever rights of contribution from any other person as are provided by the organic law or organic rules of the domestic converting entity with respect to any interest holder liability preserved by paragraph (1) as if the conversion had not occurred.

(d) A foreign entity that is the converted entity:

(1) may be served with process in this state for the collection and enforcement of any of its liabilities; and


(e) If the converting entity is a qualified foreign entity, the certificate of authority or other foreign qualification of the converting entity is canceled when the conversion becomes effective.

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[ARTICLE] 5 DOMESTICATION

SECTION 501. DOMESTICATION AUTHORIZED.

(a) Except as otherwise provided in this section, by complying with this [article], a domestic entity may become a domestic entity of the same type in a foreign jurisdiction if the domestication is authorized by the law of the foreign jurisdiction.

(b) Except as otherwise provided in this section, by complying with this [article] a foreign entity may become a domestic entity of the same type in this state if the domestication is authorized by the law of the foreign entity’s jurisdiction of organization.

(c) When the term domestic entity is used in this [article] with reference to a foreign jurisdiction, it means an entity whose internal affairs are governed by the law of the foreign jurisdiction.

(d) If a protected agreement contains a provision that applies to a merger of a domestic entity but does not refer to a domestication, the provision applies to a domestication of the entity as if the domestication were a merger until the provision is amended after the effective date of this [act].

[(e) The following entities may not engage in a domestication under this [article]:

(1)

(2)]

SECTION 502. PLAN OF DOMESTICATION.

(a) A domestic entity may become a foreign entity in a domestication under this [article] by approving a plan of domestication. The plan of domestication must be in a record and contain:

(1) the name and type of entity of the domesticating entity;

(2) the name and jurisdiction of organization of the domesticated entity;

(3) the manner and basis of converting the interests in the domesticating entity into interests, securities, obligations, rights to acquire interests or securities, cash, or other property, or any combination of the foregoing;

(4) the proposed public organic document of the domesticated entity if it is a filing entity;

(5) the full text of the private organic rules of the domesticated entity that are proposed to be in a record;

(6) the other terms and conditions of the domestication; and

39

(7) any other provision required by the law of this state or the organic rules of the domesticating entity.

(b) A plan of domestication may contain any provision not prohibited by law other than this [act].

SECTION 503. APPROVAL OF DOMESTICATION.

(a) A plan of domestication is not effective unless it has been approved:

(1) by a domestic domesticating entity:

(A) in accordance with the requirements, if any, in its organic rules for approval of a domestication;

(B) if its organic rules do not provide for approval of a domestication, in accordance with the requirements, if any, for approval of a merger in its organic law and organic rules as if the domestication were a merger; or

(C) if neither its organic law nor organic rules provide for approval of a domestication or a merger, by all of the interest holders of the entity entitled to vote on or consent to any matter; and

(2) in a record by each interest holder of a domestic domesticating entity that will have interest holder liability for liabilities that arise after the domestication becomes effective, unless:

(A) the organic rules of the entity in a record provide for the approval of a domestication in which some or all of its interest holders become subject to interest holder liability by the vote or consent of fewer than all of the interest holders; and


(b) A foreign domesticating entity shall approve the domestication in accordance with the law of the foreign entity’s jurisdiction of organization.

SECTION 504. AMENDMENT OR ABANDONMENT OF PLAN OF DOMESTICATION.

(a) A plan of domestication of a domestic domesticating entity may be amended:


(2) by the governors or interest holders of the entity in the manner provided in the plan, except that an interest holder that was entitled to vote on or consent to approval of the domestication is entitled to vote on or consent to any amendment of the plan that will change:

40

(A) the amount or kind of interests, securities, obligations, rights to acquire interests or securities, cash, or other property, or any combination of the foregoing to be received by any of the interest holders of the domesticating entity under the plan;

(B) the public organic document or private organic rules of the domesticated entity that will be in effect immediately after the domestication becomes effective, except for changes that would not require the approval of the interest holders of the domesticated entity under its organic law or organic rules; or


(b) After a plan of domestication has been approved by a domestic domesticating entity and before a statement of domestication becomes effective, the plan may be abandoned:



(c) If a domestication is abandoned after a statement of domestication has been filed with the [Secretary of State] and before the filing becomes effective, a statement of abandonment, signed on behalf of the entity, must be filed with the [Secretary of State] before the statement of domestication becomes effective. The statement of abandonment takes effect upon filing and the domestication is abandoned and does not become effective. The statement of abandonment must contain:

(1) the name of the domesticating entity;

(2) the date on which the statement of domestication was filed; and

(3) a statement that the domestication has been abandoned in accordance with this section.

SECTION 505. STATEMENT OF DOMESTICATION; EFFECTIVE DATE.

(a) A statement of domestication must be signed on behalf of the domesticating entity and filed with the [Secretary of State].

(b) A statement of domestication must contain:

(1) the name, jurisdiction of organization, and type of entity of the domesticating entity;

(2) the name and jurisdiction of organization of the domesticated entity;

(3) if the statement of domestication is not to be effective upon filing, the later date and time on which it will become effective, which may not be more than 90 days after the date of filing;

41

(4) if the domesticating entity is a domestic entity, a statement that the plan of domestication was approved in accordance with this [article] or, if the domesticating entity is a foreign entity, a statement that the domestication was approved by the foreign domesticating entity in accordance with the law of its jurisdiction of organization;

(5) if the domesticated entity is a domestic filing entity, a copy of its public organic document, as an attachment; and

(6) if the domesticated entity is a domestic limited liability partnership, a copy of its [statement of qualification], as an attachment.

(c) In addition to the provisions required by subsection (b), a statement of domestication may contain any other provision not prohibited by law other than this [act].

(d) If the domesticated entity is a domestic entity, its name must satisfy the requirements of the law of this state.

(e) A plan of domestication that is signed on behalf of a domesticating domestic entity and contains all of the provisions required by subsection (b) may be filed with the [Secretary of State] instead of a statement of domestication and upon filing has the same effect. If a plan of domestication is filed as provided in this subsection, references in this [act] to a statement of domestication mean the plan of domestication filed under this subsection.

(f) A statement of domestication becomes effective upon the date and time of filing or the later date and time specified in the statement of domestication.

SECTION 506. EFFECT OF DOMESTICATION.

(a) When a domestication becomes effective:

(1) The domesticated entity is:

(A) organized under and subject to the organic law of the domesticated entity; and

(B) the same entity without interruption as the domesticating entity.

(2) All property and contract rights of the domesticating entity continue to be vested in the entity without assignment, reversion, or impairment.

(3) All liabilities of the domesticating entity continue as liabilities of the entity.

(4) Except as provided by law other than this [act] or the plan of domestication, all of the rights, privileges, immunities, powers, and purposes of the domesticating entity remain in the domesticated entity.

(5) The name of the domesticated entity may be substituted in any pending action or proceeding for the name of the domesticating entity.

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(6) Unless otherwise provided by the organic law of the domesticating entity, the domestication does not cause the dissolution of the domesticating entity.

(7) If the domesticated entity is a filing entity, its public organic document is effective and is binding upon the interest holders of the domesticated entity.

(8) If the domesticated entity is a limited liability partnership, its [statement of qualification] is effective simultaneously.

(9) The private organic rules of the domesticated entity approved as part of the plan of domestication are effective and are binding upon the interest holders of the domesticated entity.

(10) The interests in the domesticating entity are converted to the extent and as approved in connection with the domestication, and the interest holders of the domesticating entity are entitled only to the rights provided to them under the plan of domestication [and to any appraisal rights they have under Section 108].

(b) A person that did not have interest holder liability with respect to the domesticating entity and that becomes subject to interest holder liability with respect to a domestic entity as a result of a domestication has interest holder liability only to the extent provided by the organic law of the entity and only for those liabilities that arise after the domestication becomes effective.

(c) When a domestication becomes effective:

(1) The domestication does not discharge any interest holder liability under the organic law of a domesticating domestic entity to the extent the interest holder liability arose before the domestication became effective.

(2) A person does not have interest holder liability under the organic law of a domestic domesticating entity for any liability that arises after the domestication becomes effective.

(3) The organic law of a domestic domesticating entity continues to apply to the release, collection, or discharge of any interest holder liability preserved by paragraph (1) as if the domestication had not occurred.

(4) A person has whatever rights of contribution from any other person as are provided by the organic law or organic rules of a domestic domesticating entity with respect to any interest holder liability preserved by paragraph (1) as if the domestication had not occurred.

(d) A foreign entity that is the domesticated entity:

(1) may be served with process in this state for the collection and enforcement of any of its liabilities; and

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(e) If the domesticating entity is a qualified foreign entity, the certificate of authority or other foreign qualification of the domesticating entity is canceled when the domestication becomes effective.

[ARTICLE] 6 DIVISIONS [RESERVED]

[ARTICLE] 7 MISCELLANEOUS PROVISIONS

SECTION 701. UNIFORMITY OF APPLICATION. In applying and construing this [act], consideration must be given to the need to promote uniformity of the law with respect to its subject matter among states that enact it.

SECTION 702. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT. This [act] modifies, limits, and supersedes the federal Electronic Signatures in Global and National Commerce Act (15 U.S.C. Section 7001, et seq.), but does not modify, limit, or supersede Section 101(c) of that act (15 U.S.C. Section 7001(c)) or authorize electronic delivery of any of the notices described in Section 103(b) of that act (15 U.S.C. Section 7003(b)).

SECTION 703. CONFORMING AMENDMENTS AND REPEALS. [See Appendix 2.]

SECTION 704. EFFECTIVE DATE. This [act] takes effect [January 1, 200___.]

SECTION 705. SAVINGS CLAUSE. This [act] does not affect an action or proceeding commenced or right accrued before the effective date of this [act].

323018.1 323196.1

SPEAKER BIOGRAPHY JOAN MACLEOD HEMINWAY

ASSOCIATE PROFESSOR AT THE UNIVERSITY OF TENNESSEE COLLEGE OF LAW

Joan MacLeod Heminway is an associate professor at The University of

Tennessee College of Law, where she teaches business law courses (Business

Associations, Corporate Finance, Securities Regulation, and Representing Enterprises)

and a seminar on animals and the law. Her research and writing interests include insider

trading law, corporate governance, and business combinations. Before starting her law

teaching career in 2000, she was counsel in the Boston, Massachusetts office of Skadden,

Arps, Slate, Meagher & Flom LLP, specializing in corporate and securities law, mergers

and acquisitions, and corporate finance. Joan's law teaching and law practice both have

involved significant pro bono work and advising. Among other things, she currently

serves as faculty advisor to the Animal Law Project, part of a student-run pro bono effort

at The University of Tennessee College of Law. Joan received her J.D.

from New York University School of Law and her A.B., magna cum laude, in

International Relations and History from Brown University.

SPEAKER BIOGRAPHY RICHARD R. SPORE, III

BASS, BERRY & SIMS PLC

Richard Spore is a Member of Bass, Berry & Sims PLC in its Memphis office. He

graduated from The University of the South summa cum laude and from The University

of Virginia Law School. Richard also received an M.B.A. in finance from Christian

Brothers University.

Richard practices in the areas of commercial real estate development and finance,

business planning for business and real estate owners, partnerships and joint ventures,

general corporate law and healthcare transactions. He also is active in developing

legislation in the business law area. He currently chairs the Tennessee Bar Association’s

Revised LLC Act Committee, and he also chaired the Tennessee Bar Association’s

Revised Uniform Partnership Act Task Force and served as the reporter for Tennessee’s

Revised Uniform Partnership Act. He also is a past chair of the Tennessee Bar

Association’s Business Law Section and a past member of the board of directors of the

Memphis Bar Association. He is a frequent writer and speaker on business and

commercial law topics and has authored two books, “Business Organizations in

Tennessee” and “The Partnering Paradigm: An Entrepreneur’s Guide to Strategic

Alliances.” He is also an adjunct professor of business planning at The University of

Memphis Law School.

SPEAKER BIOGRAPHY THOMAS E. RUTLEDGE

OGDEN NEWELL & WELCH PLLC Thomas E. Rutledge is a member of Ogden Newell & Welch PLLC (Louisville,

Kentucky), where his practice is devoted to business and securities law with a

specialized focus on the law of business organizations. He was a member of the

committee that drafted the Kentucky Limited Liability Company Act and the Limited

Liability Partnership amendments to the Kentucky Partnership Act. Tom is also

involved in the ABA Committee on Partnerships and Unincorporated Business

Organizations, where he serves as editor of the PUBOGRAM (the committee newsletter)

and as co-chair of the Prototype Limited Liability Company Act subcommittee.

Previously he served as co-chair of the subcommittee that drafted the Prototype Limited

Liability Partnership Agreement. He is also active with the Ad-Hoc Committee on

Entity Rationalization, and is an ABA Section of Business Law advisor to the National

Conference of Commissioners of Uniform State Laws project to update the Uniform

Limited Liability Company Act as well as to the drafting committees for the Uniform

Entity Transactions Act and the Uniform Statutory [Business] Trust Act. A frequent

speaker and writer on business entity law, Tom has published in the Kentucky Law

Journal, the LLC Reporter, the LLC Advisor, Bench & Bar, Business Entities, Corporate

Counsel Weekly, The Delaware Journal of Corporate Law and The Business Lawyer.

Tom is named in CHAMBER’S USA - AMERICA’S LEADING BUSINESS LAWYERS and is a

member of the American Law Institute.

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