MODEL ENTITY TRANSACTIONS ACT
Drafted by the
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
AMERICAN BAR ASSOCIATION
WITH PREFATORY NOTE AND COMMENTS
Copyright © 2004, 2005
Jointly By
NATIONAL CONFERENCE OF COMMISSIONERS
ON UNIFORM STATE LAWS
and
AMERICAN BAR ASSOCIATION
ABOUT NCCUSL
The National Conference of Commissioners on Uniform State Laws (NCCUSL), now in its 114th year, provides states with non-partisan, well-conceived and well-drafted legislation that brings clarity and stability to critical areas of state statutory law.
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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
CULLEN M. GODFREY, 100 Congress Avenue, Suite 1100, Austin, TX 78701
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 E. CONAWAY, 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
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
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
TABLE OF CONTENTS
[ARTICLE] 1
GENERAL PROVISIONS
SECTION 103. RELATIONSHIP OF [ACT] TO OTHER LAWS
SECTION 104. REQUIRED NOTICE OR APPROVAL
SECTION 105. STATUS OF FILINGS
SECTION 107. REFERENCE TO EXTERNAL FACTS
SECTION 108. ALTERNATIVE MEANS OF APPROVAL OF TRANSACTIONS
[SECTION 109. APPRAISAL RIGHTS
[SECTION 110. EXCLUDED ENTITIES AND TRANSACTIONS
SECTION 201. MERGER AUTHORIZED
SECTION 203. APPROVAL OF MERGER
SECTION 204. AMENDMENT OR ABANDONMENT OF PLAN OF MERGER
SECTION 205. STATEMENT OF MERGER; EFFECTIVE DATE
SECTION 301. INTEREST EXCHANGE AUTHORIZED
SECTION 302. PLAN OF INTEREST EXCHANGE
SECTION 303. APPROVAL OF INTEREST EXCHANGE
SECTION 304. AMENDMENT OR ABANDONMENT OF PLAN OF INTEREST EXCHANGE
SECTION 305. STATEMENT OF INTEREST EXCHANGE; EFFECTIVE DATE
SECTION 306. EFFECT OF INTEREST EXCHANGE
SECTION 401. CONVERSION AUTHORIZED
SECTION 402. PLAN OF CONVERSION
SECTION 403. APPROVAL OF CONVERSION
SECTION 404. AMENDMENT OR ABANDONMENT OF PLAN OF CONVERSION
SECTION 405. STATEMENT OF CONVERSION; EFFECTIVE DATE
SECTION 406. EFFECT OF CONVERSION
SECTION 501. DOMESTICATION AUTHORIZED
SECTION 502. PLAN OF DOMESTICATION
SECTION 503. APPROVAL OF DOMESTICATION
SECTION 504. AMENDMENT OR ABANDONMENT OF PLAN OF
SECTION 505. STATEMENT OF DOMESTICATION; EFFECTIVE DATE
SECTION 506. EFFECT OF DOMESTICATION
SECTION 601. DIVISION AUTHORIZED
SECTION 603. APPROVAL OF DIVISION
SECTION 604. AMENDMENT OR ABANDONMENT OF PLAN OF DIVISION
SECTION 605. STATEMENT OF DIVISION; EFFECTIVE DATE
SECTION 606. EFFECT OF DIVISION
SECTION 607. ALLOCATION OF LIABILITIES IN DIVISION
[ARTICLE] 7
MISCELLANEOUS PROVISIONS
SECTION 701. CONSISTENCY OF APPLICATION
SECTION 702. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT
SECTION 703. CONFORMING AMENDMENTS AND REPEALS
SECTION A1-1. REQUIREMENTS FOR DOCUMENTS
SECTION A1-3. FILING, SERVICE, AND COPYING FEES
SECTION A1-4. EFFECTIVE TIME AND DATE OF DOCUMENT
SECTION A1-5. CORRECTING FILED DOCUMENT
SECTION A1-6. FILING DUTY OF [SECRETARY OF STATE]
SECTION A1-7. APPEAL FROM REFUSAL TO FILE A DOCUMENT
SECTION A1-8. EVIDENTIARY EFFECT OF COPY OF FILED DOCUMENT
SECTION A1-9. PENALTY FOR SIGNING FALSE DOCUMENT
SECTION A1-10. POWERS OF [SECRETARY OF STATE]
APPENDIX 2
CONFORMING AMENDMENTS AND REPEALS
SECTION A2-1. MODEL BUSINESS CORPORATION ACT
SECTION A2-2. MODEL NONPROFIT CORPORATION ACT
SECTION A2-3. UNIFORM PARTNERSHIP ACT
SECTION A2-4. UNIFORM LIMITED PARTNERSHIP ACT
SECTION A2-5. UNIFORM LIMITED LIABILITY COMPANY ACT
SECTION A2-6. PROTOTYPE LIMITED LIABILITY COMPANY ACT
MODEL ENTITY TRANSACTIONS ACT
1. Development of the Act
The Model Entity Transactions Act (META) is the result of a unique collaborative effort of the National Conference of Commissioners on Uniform State Laws (Conference) and the American Bar Association (ABA) to address an issue that cuts across their traditional areas of expertise.
For over 90 years, the Conference has prepared and periodically revised uniform laws governing unincorporated entities, such as general partnerships, limited partnerships, and limited liability companies. Similarly, for over 50 years committees of the ABA have prepared and periodically revised model laws for the incorporation of business corporations and nonprofit corporations.
During the past decade, three new types of business entities – limited liability companies, limited liability partnerships, and limited liability limited partnerships – have come into wide use; other forms of business entities once thought to be almost obsolete – most notably business trusts and cooperatives – have attained new prominence; and a form of entity previously organized only under the common law – unincorporated nonprofit associations – has been recognized by statute. Also during the past decade, restructuring transactions by and among all of the various types of entities began to occur with increased frequency. Because of a lack of clear statutory authority in most states, these restructuring transactions have often been completed in two or three indirect steps rather than directly in a single transaction.
The Conference included provisions permitting mergers among different forms of entities and authorizing the conversion of one form of entity to another in the Uniform Limited Liability Company Act (1996), Uniform Partnership Act (1997), and Uniform Limited Partnership Act (2001). The ABA added similar provisions to the Model Business Corporation Act in 2003. In each case, the new provisions only apply if an entity of the type formed under the statute is a party to the transaction. Both the Conference and the ABA recognized, however, that a better approach would be for states to enact a single statute covering all types of restructuring transactions by and among all types of entity forms. Thus, the Conference and the ABA independently began projects to prepare a comprehensive statute to meet this need.
After beginning their independent drafting projects, both the Conference and the ABA realized that combining their respective areas of expertise would produce the best product for enactment by the states. They have accordingly combined their efforts so that the Model Entity Transactions Act (2005) draws on the expertise of the Conference in the law of unincorporated entities and of the ABA in the law of corporations.
Prior to the development of this Act, state business organization statutes (both incorporated and unincorporated) varied in their approach to same-type and cross-type mergers, consolidations, divisions, conversions, share/interest exchanges, and domestications by or among domestic and foreign for-profit and nonprofit entities. The dissimilarities in state statutes included: (1) which transactions were authorized; (2) whether entities of more than one type could be parties to the same transaction; (3) inclusion of for-profit and nonprofit entities; (4) inclusion of incorporated and unincorporated organizations; and (5) single or dual status for converting, domesticating, or transferring entities. For example, The Uniform Partnership Act (1997) (“RUPA”) authorized the conversion or merger of partnerships or limited partnerships. RUPA did not, however, anticipate the conversion or merger of types of business entities other than partnerships or limited partnerships nor did it address divisions, interest exchanges, or domestications. The Uniform Limited Partnership Act (1976 with 1985 amendments) (“RULPA”) is silent regarding mergers and any form of cross-type transaction. A RULPA limited partnership could, however, effect a conversion or merger by “linking back” to the limited RUPA merger or conversion provisions. The Uniform Limited Partnership Act (2001) (“Re-RULPA”) anticipated for-profit and nonprofit cross-type conversions and mergers, but not cross or same-type interest exchanges, divisions, or domestications. The Uniform Limited Liability Company Act (1996) (“ULLCA”) authorized cross-type mergers and conversions but was silent regarding for-profit and nonprofit cross or same-type interest exchanges, divisions, and domestications.
New Chapter 9 of the Revised Model Business Corporation Act (“MBCA”), approved in 2003, authorized a domestic business corporation to become a different type of entity and permitted a non-domestic business entity to become a domestic business corporation. The transactions addressed in Chapter 9 of the MBCA include: (1) domestication (a procedure in which a corporation may change its state of incorporation, either domestic to foreign, or foreign to domestic); (2) nonprofit conversion (a procedure that permits a domestic business corporation to become either a domestic nonprofit corporation or a foreign nonprofit corporation); (3) foreign nonprofit domestication and conversion (a procedure that permits a foreign nonprofit corporation to become a domestic business corporation); and (4) entity conversion (procedures that authorize a domestic business corporation to become a domestic or foreign other entity or that permit a foreign other entity to become a domestic business corporation). Chapter 9 of the MBCA authorized only those transactions that involve a domestic business corporation either at the outset or at the termination of the transaction.
2. Scope of the Act
Article 1 of this Act sets forth general provisions applicable to the other articles. It defines terms that are used throughout the Act, specifies the general procedures for the filings required under other articles, and provides specific rules dealing with all transactions.
Article 2 governs mergers. Article 2 is derived in large part from existing corporation and unincorporated entity laws. Certain provisions dealing with necessary approvals, information required in the plan of merger, and some filing requirements represent an amalgamation of existing law.
Article 3 governs interest exchanges. The interest exchange transaction is derived from the share exchange in corporate law and reflected in Chapter 11 of the MBCA. Interest exchanges are not authorized as a separate form of transaction in any uniform unincorporated entity act.
Article 4 governs conversions. A conversion is a statutory procedure authorizing an entity to change its form of organization to another type of entity.
Article 5 governs domestications. It authorizes a foreign entity to become a domestic entity of the same type and authorizes a domestic entity to become a foreign entity of the same type so long as the laws of the foreign jurisdiction authorize the domestication.
Article 6 governs the division of an entity. The effect of a division is the reverse of a merger. A division permits the dividing entity to subdivide itself into two or more separate and distinct entities.
Article 7 sets out certain miscellaneous provisions, including: (1) consistency of application; (2) e-sign language; (3) effective date; and (4) savings clause.
Appendix 1 is an optional set of provisions relating to the processing of filings under the Act by the Secretary of State. Enacting these provisions will only be necessary if a state’s existing filing provisions cannot easily be made applicable to filings under META.
Appendix 2 is a series of amendments and repeals to the various model, uniform, and prototype entity laws that show an adopting state how to integrate this Act and those entity laws into one coherent statutory system. Because of the incompleteness and diversity of existing entity statutes with respect to the five types of restructuring transactions dealt with in META, it is extremely important that an enacting state thoroughly review the legislative guide in Appendix 2 as well as the state’s existing entity statutory framework before a bill incorporating META is drafted. In most cases, several amendments to existing entity statutes will have to be made in order to avoid gaps and possible conflicts with META. Where a potential conflict exists, the enacting state will have to determine whether to continue the existing rule or to adopt the META rule and draft the bill accordingly.
3. Approach of the Act
Mergers of two or more corporations into a surviving corporation have been an accepted part of corporation law for a long time and are found in all state corporation laws. On the other hand, mergers are a more recent development in unincorporated entity laws. Following the lead of the MBCA, some states have begun to authorize cross-type mergers in their corporation laws. States that have adopted RUPA, Re-RULPA, or ULLCA also have provisions on cross-type mergers and conversions in those laws. This Act is drafted on the assumption that states will not be comfortable repealing mergers completely out of their corporation laws or those unincorporated entity laws where merger provisions have begun to appear. To create a consistent pattern across their various entity laws, it is recommended that states limit the existing provisions on mergers in their entity laws to same-type mergers and add provisions on same-type mergers to those entity laws where they are currently missing. It is not necessary, however, for a state to add same-type merger provisions to those entity laws that do not already contain them because this Act has been drafted to authorize same-type mergers for those entities not currently authorized to engage in such mergers. See Section 201.
The same approach taken with respect to mergers is incorporated into the design of the interest exchange and division provisions in this Act. It is therefore recommended that enacting states limit their existing statutory provisions for these types of transactions to same-type transactions. It will not be necessary, however, for an enacting state to add same-type provisions to interest exchange and division statutes that do not already contain such provisions since this Act contains default rules that will cover same-type as well as cross-type transactions. See Sections 301 and 601.
A different approach is taken with respect to domestications. A domestication is a same-type transaction where an existing entity moves its jurisdiction of organization to another state but retains whatever form it had before the domestication. See Section 501. Only a limited number of states currently have domestications statutes. Therefore, in order to avoid having to enact separate domestication provisions for all of the various entity statutes in virtually every state, META includes a separate chapter governing domestications. It is recommended that states repealing existing domestication provisions. See Appendix 2.
Conversions are by definition cross-type transactions. Thus any conversion provisions outside of META should be repealed, leaving META as a state’s only general entity conversion statute. Many states have specialized conversion statutes such as, for example, converting a mutual insurance company to a stock company. Those special conversion statutes should be preserved. See Section 110.
Finally, because merger statutes have stood the test of time and business lawyers are used to working with these provisions, a policy decision was made to incorporate basically the same requirements and substantive law rules in the chapters dealing with interest exchanges, conversions, domestications, and divisions. Thus, although there are differences because of the different nature of each type of transaction, the provisions in Sections 302 – 306 (interest exchanges), 402 – 406 (conversions), 502 – 506 (domestications), and 602 – 606 (divisions) are patterned after and look quite similar to Sections 202 – 206 (mergers).
MODEL ENTITY TRANSACTIONS ACT
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 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) “Dividing entity” means a domestic entity that approves a plan of division pursuant to Section 603 or a foreign entity that approves a division pursuant to the law of its jurisdiction of organization.
(8) “Division” means a transaction authorized by [Article] 6.
(9) “Domestic entity” means an entity whose internal affairs are governed by the law of this state.
(10) “Domesticated entity” means the domesticating entity as it continues in existence after a domestication.
(11) “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.
(12) “Domestication” means a transaction authorized by [Article] 5.
(13) “Entity” means a person that has a separate legal existence or has the power to acquire an interest in real property in its own name other than:
(A) an individual;
(B) a testamentary, inter vivos, or charitable trust, with the exception of a business trust or similar trust;
(C) 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;
(D) a decedent’s estate; or
(E) a government, a governmental subdivision, agency, or instrumentality, or a quasi-governmental instrumentality.
(14) “Filing entity” means an entity that is created by the filing of a public organic document.
(15) “Foreign entity” means an entity other than a domestic entity.
(16) “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.
(17) “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.
(18) “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.
(19) “Interest exchange” means a transaction authorized by [Article] 3.
(20) “Interest holder” means a direct holder of an interest.
(21) “Interest holder liability” means personal liability for a liability of an entity that is imposed on a person:
(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.
(22) “Jurisdiction of organization” of an entity means the jurisdiction whose law includes the organic law of the entity.
(23) “Liability” means a debt, obligation, or any other liability arising in any manner, whether or not it is secured.
(24) “Merger” means a transaction authorized by [Article] 2.
(25) “Merging entity” means an entity that is a party to a merger and exists immediately before the merger becomes effective.
(26) “Organic law” means the statutes, if any, other than this [Act], governing the internal affairs of an entity.
(27) “Organic rules” means the public organic document and private organic rules of an entity.
(28) “Person” means an individual, corporation, estate, trust, partnership, limited liability company, business or similar trust, association, joint venture, public corporation, government, or governmental subdivision, agency, or instrumentality, or any other legal or commercial entity.
(29) “Plan” means a plan of merger, interest exchange, conversion, domestication, or division.
(30) “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.
(31) “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 which is unpaid, in whole or in part, on the effective date of this [Act];
(B) an 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) an agreement that is binding on any of the governors or interest holders of an entity on the effective date of this [Act].
(32) “Public organic document” means the public record the filing of which creates an entity, and any amendment to or restatement of that record.
(33) “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].
(34) “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.
(35) “Resulting entity” means an entity that continues in existence after, or is created by, a division.
(36) “Sign” means, with present intent to authenticate or adopt a record:
(A) to execute or adopt a tangible symbol; or
(B) to attach to or logically associate with the record an electronic sound, symbol, or process.
(37) “Surviving entity” means the entity that continues in existence after or is created by a merger.
(38) “Transferable interest” means the right under an entity’s organic law to receive distributions from the entity.
(39) “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 are subject to provisions of that law that create different categories of the form of entity.
Comment
General – This section defines the terms that will be used in other parts of the Act. Many of the definitions describe attributes that are significant in some forms of entity and not in others. For example, the concept of separate “transferable” and “governance” interests are inherent in unincorporated entities but have no counterpart in corporations. In addition, because some statutes use different terms to describe the same transaction, the definitions are intended to be broad enough to encompass those similar transactions, regardless of how described. See, for example, “domestication” below.
“Acquired entity” [(1)] – This definition recognizes that an interest exchange may involve only the acquisition of a particular “class” or “series” of interests in an entity. Model Business Corporation Act § 6.01 does not expressly define “classes” or “series.” Because the interests of members in an unincorporated business organization often tend to be distinctive, it may be that each member’s interest will comprise a separate class or series.
“Acquiring entity” [(2)] – An “acquiring entity” is an entity that acquires the interests of the acquired entity in an interest exchange governed by Article 3.
“Approve” [(3)] - The term “approve” encompasses all of the steps necessary for an entity to propose a transaction, adopt and approve the terms and conditions of the transaction, and obtain the necessary action on the transaction by the governors and interest holders of the entity. The term includes procedural requirements such as notice to interest holders, preparation of voting lists, etc.
“Conversion” [(4)] - The term “conversion” means a transaction authorized by Article 4 pursuant to which an entity of one type is converted into an entity of another type. As used in this Act, the term “conversion” does not include a transaction in which an entity changes the jurisdiction in which it is organized but does not change to a different form of entity; that type of transaction is referred to in this Act as a “domestication” and is governed by Article 5.
“Converted entity” [(5)] - This term is used in Article 4 to describe the entity that results from a conversion.
“Converting entity” [(6)] – A converting entity is the entity that becomes the converted entity under Article 4. This definition is patterned in part after Model Business Corporation Act § 9.50(f)(1) (“converting entity”).
“Dividing Entity” [(7)] – In a “division” [Section 102(8)], there will be one or more “resulting entities” [Section 102(35)] that are created from the “dividing entity.” The dividing entity may or may not survive. It will survive in what are known as a spin-off or split-off division but will not survive after a split-up division. See the Comment to Section 601.
“Division” [(8)] – See the Comment to Section 102(7).
“Domestic entity” [(9)] - The term “domestic entity” in this Act means an entity whose internal affairs are governed by the organic laws of the adopting jurisdiction. Except in the case of general partnerships, this will mean an entity that is formed, organized, or incorporated under domestic law. In the case of a general partnership organized under the Uniform Partnership Act (1997) (“RUPA”), it will mean a general partnership whose governing law under RUPA § 106 is the law of the adopting state. Under RUPA § 106 the governing law is determined by the location of the partnership’s chief executive office, except for limited liability partnerships where the governing law is the state where the statement of qualification is filed.
“Domesticated entity” [(10)] – This term is used in Article 5 and means the entity that is domesticated pursuant to Article 5. By its nature, the domesticated entity will be of the same type as the domesticating entity.
“Domesticating entity” [(11)] – This term is used in Article 5 and means the entity that is domesticated pursant to Article 5.
“Domestication” [(12)] - The term “domestication” means a transaction of the kind authorized by Article 5 pursuant to which an entity may change its jurisdiction of formation but not its type so long as the laws of the foreign jurisdiction permit the domestication. The legal effect of the domestication of an entity out of an adopting state will be governed by the laws of both the adopting state and the foreign jurisdiction. Some statutes include what is described in this Act as “domestication” in their definition of a “conversion.” See, e.g., Colo. Rev. Stat § 7-90-201(2) and (3). It is intended that the domestication provisions of this Act will apply to a transaction that may be characterized under another act as a “conversion” if it meets the definition of “domestication” under this Act.
“Entity” [(13)] - This definition determines the overall scope of the Act because only an “entity” may participate in the transactions authorized by Articles 2, 3, 4, 5, and 6. See Sections 201, 301, 401, 501, and 601.
The term “entity” includes:
•Business corporation.
•Business trust.
•General partnership, whether or not a limited liability partnership.
•Limited liability company.
•Limited partnership, whether or not a limited liability limited partnership.
•Nonprofit corporation.
•Unincorporated nonprofit association.
The term does not include a sole proprietorship.
This definition is intended to include all forms of private organizations, regardless of whether organized for profit, and artificial legal persons other than those excluded by paragraphs (A) through (E). Thus, this definition is broader than the definition of “business entity” in e.g., Code of Ala. § 10-15-2(2) which does not include nonprofit entities. This definition does not exclude regulated entities such as public utilities, banks and insurance companies. Should a state desire to exclude certain types of regulated entities from participating in transactions permitted by the Act for policy reasons, that may be done by listing those types of entities in Section 110(a), or by permitting those type of entities to engage in transactions under this Act generally but prohibiting certain types of transactions by listing those transactions in Section 110(b).
Inter vivos and testamentary trusts are treated in many states as having a separate legal existence, but they have been excluded from the definition of “entity” (and thus are not within the scope of this Act) because of a decision that for public policy reasons they should not be able to engage in transactions under this Act. Trusts that carry on a business, however, such as a Massachusetts trust, real estate investment trust, Illinois land trust, or other common law or statutory business trusts are “entities.”
Section 4 of the Uniform Unincorporated Nonprofit Association Act gives an unincorporated nonprofit association the power to acquire an estate in real property and thus an unincorporated nonprofit association organized in a state that has adopted that act will be an “entity.” At common law, an unincorporated nonprofit association was not a legal entity and did not have the power to acquire real property. Most states that have not adopted the Uniform Act have nonetheless modified the common law rule, but states that have not adopted the Uniform Act should analyze whether they should modify the definition of “entity” to add an express reference to unincorporated nonprofit associations.
There is some question as to whether a partnership subject to the Uniform Partnership Act (1914) (“UPA”) is an entity or merely an aggregation of its partners. That question has been resolved by Section 201 of the Uniform Partnership Act (1997) (“RUPA”), which makes clear that a general partnership is an entity with its own separate legal existence. Section 8 of UPA gives partnerships subject to it the power to acquire estates in real property and thus such a partnership will be an “entity.” As a result, all general partnerships will be “entities” regardless of whether the state in which they are organized has adopted RUPA.
Paragraph (C) of this definition excludes from the concept of an “entity” any form of co-ownership of property or sharing of returns from property that is not a partnership under RUPA. In that connection, Section 202(c) of RUPA provides in part:
In determining whether a partnership is formed, the following rules apply:
(1) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property.
(2) The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived.
Limited liability partnerships and limited liability limited partnerships are “entities” because they are general partnerships and limited partnerships, respectively, that have made the additional required election claiming LLP or LLLP status. A limited liability partnership is not, therefore, a separate type of entity from the underlying general or limited partnership that has elected limited liability partnership status. Thus, for example, the election of a general partnership to become a limited liability partnership is not a conversion subject to Article 4.
“Filing entity” [(14)] - Whether an entity is a filing entity is determined by reference to whether its legal existence is attributable to the filing of a document with the state filing officer. While the statute refers to an entity that is “created,” it is intended to encompass corporations which are “incorporated,” limited liability companies which are “organized,” and limited partnerships which are “formed” by a filing required by the organic law governing the entity. Business trusts present a special problem. In some states, for example, a business trust is a filing entity, while in other states business trusts are recognized only by common law.
The term does not include a limited liability partnership because an election filed by a general partnership claiming that status (e.g., a statement of qualification under Uniform Partnership Act (1997), § 1001) does not create the entity. A limited liability limited partnership, on the other hand, is a filing entity because the underlying limited partnership is created by filing a certificate of limited partnership.
This definition is patterned after Model Business Corporation Act § 1.40(9A) (“filing entity”).
“Foreign Entity” [(15)] - The term “foreign entity” includes any non-domestic entity of any type. Where a foreign entity is a filing entity, the entity is governed by the laws of the state of filing. A nonfiling foreign entity is governed by the laws governing its internal affairs. It is a factual question whether a general partnership whose internal affairs are governed by the Uniform Partnership Act (1914) (“UPA”) is a domestic or foreign partnership. A UPA partnership will likely be deemed to be a domestic entity where the greatest nexus of contacts are found. The domestic or foreign characterization of partnerships under the Uniform Partnership Act (1997) (“RUPA”) that have not registered as limited liability partnerships will be governed by RUPA § 106(a) (“state where the partnership’s chief executive office is located”).
“Governance interest” [(16)] - A governance interest is typically only part of the interest that a person will hold in an entity and is usually coupled with a transferable interest (or economic rights). However, memberships in some nonprofit corporations and unincorporated nonprofit associations consist solely of governance interests and in others may not include either governance interests or transferable interests. In some unincorporated business entities, there is a more limited right to transfer governance interests than there is to transfer transferable interests. An interest holder in such an unincorporated business entity who transfers only a transferable interest and retains the governance interest will also retain the status of an interest holder. Whether a transferee who acquires only a transferable interest will acquire the status of an interest holder is determined by the definition of “interest holder.”
Shares in a business corporation that are nonvoting nonetheless have a governance interest because they entitle the holder to certain rights of access to information and to certain statutory voting rights on amendments of the articles of incorporation.
Governors of an entity have the kinds of rights listed in the definition of “governance interest” by reason of their position with the entity. For a governor to have a “governance interest,” however, requires that the governor also have those rights for a reason other than the governor’s status as such. A manager who is not a member in a limited liability company, for example, will not have a governance interest, but a manager who is a member will have a governance interest arising from the ownership of a membership interest.
“Governor” [(17)] - This term has been chosen to provide a way of referring to a person who has the authority under an entity’s organic law to make management decisions regarding the entity that is different from any of the existing terms used in connection with particular types of entities. Compare Colo. § 7-90-102(35.7) which uses the term “manager” to refer to this concept, even though “manager” is also a term of art in connection with limited liability companies. Depending on the type of entity or its organic rules, the governors of an entity may have the power to act on their own authority, or they may be organized as a board or similar group and only have the power to act collectively, and then only through a designated agent. In other words, a person having only the power to bind the organization pursuant to the instruction of the governors is not a governor. Under the organic rules, particularly those of unincorporated entities, most or all of the management decisions may be reserved to the members or partners. Thus, if a manager of a limited liability company were limited to having authority to execute management decisions made by the members and did not have any authority to make independent management decisions, the manager would not be a governor under this definition.
Except as described above, the term “governor” includes:
•Director of a business corporation.
•Director or trustee of a nonprofit corporation.
•General partner of a general partnership.
•General partner of a limited partnership.
•Manager of a limited liability company.
•Member of a member-managed limited liability company.
•Trustee of a business trust.
“Interest” [(18)] - In the usual case, the interest held by an interest holder will include both a governance interest and a transferable interest (or economic rights). Members in certain nonprofit corporations or unincorporated nonprofit associations generally do not have any transferable interest because they may not receive distributions, but they nonetheless may hold a governance interest in which case they would have the status of interest holders under this Act. An interest holder in an unincorporated business entity may transfer all or part of the interest holder’s transferable interest without the transferee’s acquiring the governance interest of the transferor. In that case, whether the transferor will retain the status of an interest holder will be determined by the applicable organic law and the transferee will have the status of an interest holder under paragraph (B) of this definition. That paragraph will also apply to subsequent transferees from the original transferee.
The term “interest” includes:
•Beneficial interest in a business trust.
•Membership in a nonprofit corporation.
•Membership in an unincorporated nonprofit association.
•Membership interest in a limited liability company.
•Partnership interest in a general partnership.
•Partnership interest in a limited partnership.
•Shares in a business corporation.
“Interest exchange” [(19)] – The term “interest exchange” means a transaction authorized by Article 3 pursuant to which an entity may acquire interests in another entity. The consideration that may be provided to the interest holders whose interests are being acquired in an exchange may consist in whole or part of interests in a third party that is not one of the two parties to the exchange itself. See Section 301(a).
“Interest holder” [(20)] - This Act does not refer to “equity” interests or “equity” owners or holders because the term “equity” could be confusing in the case of a nonprofit entity whose members do not have an interest in the assets or results of operations of the entity but only have a right to vote on its internal affairs. Compare Code of Ala. § 10-15-2(4) (“equity owner”).
The term “interest holder” includes:
•Beneficiary of a business trust.
•General partner of a general partnership.
•General partner of a limited partnership.
•Limited partner of a limited partnership.
•Member of a limited liability company.
•Member of a nonprofit corporation.
•Member of an unincorporated nonprofit association.
•Shareholder of a business corporation.
This definition has been patterned after Model Business Corporation Act § 1.40(13B) (“interest holder”).
“Interest holder liability” [(21)] - This term is used to describe the vicarious liability of an interest holder, by virtue of being an interest holder, for liabilities of the entity. The term includes only personal liability of an interest holder for a debt of the entity imposed on the interest holder either by statute or by the organic rules to the extent authorized pursuant to the organic law. Liabilities that an interest holder incurs in any other fashion are not interest holder liabilities for purposes of this Act. Thus, for example, if a state’s business corporation law makes shareholders personally liable for unpaid wages because of their status as shareholders, that liability would be an “interest holder liability.” If, on the other hand, a shareholder were to guarantee payment of an obligation of a corporation, that liability would not be an “interest holder liability” because it is a direct liability and not based on the status of being a shareholder. Similarly, the liability to make contributions to the entity or to return an improper distribution is not an interest holder liability because it is a direct liability of the interest holder even though creditors of the entity might be able to recover from the interest holder.
This definition is patterned after Model Business Corporation Act § 1.40(15C) (“owner liability”). See also Uniform Limited Partnership Act (2001), § 1101(11) (“personal liability”).
“Jurisdiction of organization” [(22)] - The term “jurisdiction of organization” refers to the jurisdiction whose laws include the organic law of the entity. The scope of this Act is not limited to United States jurisdictions, although for practical purposes that will largely be the case since a transaction that impinges on a foreign country may be conducted under this Act only if the laws of the foreign country authorize the transaction. See Sections 201(b), 301(b), 401(b), 501(b), and 601(b) and (c).
“Liability” [(23)] - The term “liability” is intended to be all-inclusive and includes all obligations of whatever description or kind.
“Merger” [(24)] - The term means a transaction authorized by Article 2 pursuant to which two or more entities are combined into a single entity. The term “merger” in this Act includes the transaction known as a consolidation in which a new entity results from the combination of two or more pre-existing entities.
Because the term “merger” is defined with reference only to transactions authorized by Article 2, it has a more limited meaning than the usual usage of the term. Thus, references in this Act to a “merger” refer only to a transaction under Article 2. But a reference in the organic rules of an entity to a “merger” will include not only transactions under Article 2, but also similar transactions under the organic law of the entity, for example a merger under Chapter 11 of the Model Business Corporation Act (“MBCA”). The limited scope of the term “merger” in this Act explains why the rules on approval of transactions in Sections 203, 303, 403, 503, and 603 refer to the rules for approval “of a transaction that has the effect of a merger” as found in the organic law or organic rules of an entity, rather than just to the rules for approval of a “merger.” Chapter 11 of the MBCA provides rules for approval of a merger transaction, using the term “merger” within its meaning under the MBCA, but not within its meaning under this Act. The rules in Chapter 11 of the MBCA, however, will apply under Section 203, 303, 403, 503, and 603 because a transaction under that Chapter has the effect of a transaction under Article 2.
The phrase “transaction that has the effect of a merger” should be read narrowly to refer only to a transaction in which more than one entity is combined into a single entity as a result of a statutorily required public filing. The acquisition of the assets and liabilities of one company by another company has the effect of merging the businesses of the companies, but that type of transaction is not what is contemplated by this Act when it uses the phrase “transaction that has the effect of a merger.”
“Merging entity” [(25)] - The term “merging entity” refers to each entity that is in existence immediately before a merger and is a party to the merger. It will include the surviving entity if the surviving entity exists before the merger becomes effective. It does not include an entity that provides consideration to be received by interest holders if that entity is not a party to the merger.
“Organic law” [(26)] – Organic law includes statutes other than this Act that govern the internal affairs of an entity. To the extent these other statutes should be applicable to a transaction under this Act, their effect is preserved by Section 103.
Entity laws in a few states purport to require that some of their internal governance rules applicable to a domestic entity also apply to a foreign entity with significant ties to the state. See, e.g., Cal. Gen. Corp. Law § 2115, N.Y. N-PCL §§ 1318-1321, 15 Pa.C.S. § 6145. Such a “sticky fingers” law is included within the definition of “organic law” for purposes of this Act.
“Organic rules” [(27)] - The term “organic rules” means an entity’s public organic document and the private organic rules. The organic rules, together with this Act, the organic law, and the common law provide the rules governing the internal affairs of the entity.
“Person” [(28)] – The term “person” has the standard meaning of that term in uniform acts.
“Plan” [(29)] - The term “plan” refers to the plan of merger, interest exchange, conversion, domestication, or division, as the case may be, depending on which form of transaction is taking place. See Sections 202, 302, 402, 502, and 602.
“Private organic rules” [(30)] - The term private “organic rules” is intended to include all governing rules of an entity that are binding on all of its interest holders, whether or not in written form, except for the provisions of the entity’s public organic document, if any. The term is intended to include agreements in “record” form as well as oral partnership agreements and oral operating agreements among LLC members. Where private organic rules have been amended or restated, the term means the private organic rules as last amended or restated.
The term “private organic rules” includes:
•Bylaws of a business corporation.
•Bylaws of a business trust.
•Bylaws of a nonprofit corporation.
•Constitution and bylaws of an unincorporated nonprofit association.
•Operat