Indiana Business Entity Harmonization: Part III

iStock-621263016-300x97[March 3, 2018. The General Assembly amended some of the provisions created the Business Entity Harmonization Bill, as discussed in a Postscript to this series.]

This is the third of a four-part series discussing the Business Entity Harmonization Bill passed by the Indiana General Assembly in 2017. The first two parts are here and here.

Senate Enrolled Act 443 creates, effective as of January 1, 2018, a new Article 0.6, the Uniform Business Organization Transactions Code, in Title 23 of the Indiana Code. In previous versions of the statute, provisions dealing with mergers, conversions, and domestications of business corporations, limited liability companies (LLCs), limited partnerships (LPs), limited liability partnerships (LLPs), and nonprofit corporations were scattered across several articles of Title 23. The Uniform Business Organization Transactions Code gathers most of them into one article that, in general, applies at least as broadly as each corresponding provision of the former statute, and in some cases more broadly. In addition, the new article provides for the acquisition of ownership interest (i.e., stock in a corporation or interest in a partnership or LLC) by another entity.

Conversions, mergers, and domestications effect changes in organization that could be accomplished by other means, but with different tax or legal consequences. For example, instead of converting to a limited liability company, a corporation could form a new LLC, transfer all its assets to the LLC, and dissolve, distributing the interest in the LLC to its shareholders. However, that process will have tax consequences that can often be avoided by conversion. In addition, all the corporation’s contracts will need to be assigned to the LLC, and those assignments may require the consent of the other parties to the contracts. In most cases, consent of the other party to a contract is not required for a conversion because a conversion preserves continuity of identity. Even though the converted entity has a different name and will be governed by different laws, it is treated as if it is the same entity that existed prior to conversion. The same is true for domestication and mergers, at least with respect to the entity surviving a merger.

REMINDER: Any merger, conversion, domestication, or interest exchange involving a foreign entity must comply with the laws of the jurisdiction in which the foreign entity is organized, in addition to complying with Indiana law, a principle that is acknowledged throughout Article 0.6. Accordingly, the provisions of Article 0.6 may be applied to foreign entities only if the law of the jurisdiction in which the entity is organized authorizes the transaction.

Chapter 1, General Provisions

The procedures set out in Article 0.6 are nonexclusive. Article 0.6 does not supersede any provisions that may be permitted under other laws.

Chapter 2, Mergers

The new article governs most mergers of all domestic and foreign entities, provided at least one of the merging entities or the surviving entity is domestic. Exceptions are mergers between domestic or foreign business corporations, which continue to be governed by I.C. 23‑1‑40, and mergers involving a domestic or foreign nonprofit corporation, which continue to be governed by I.C. 23‑17‑9. The heart of the process is a plan of merger that must include, among other things, the manner of converting the interest in non-surviving entities into interest in the surviving entity, other securities, obligations, cash, or rights to acquire securities or interest and the organic documents of the surviving entity. (i.e., if the surviving entity is a limited liability company, the articles of organization and operating agreement). After approval of the plan, the surviving entity must file articles of merger that include, among other things, any amendments to the surviving entity’s public organic document (e.g., articles of organization for an LLC).

Chapter 4, Conversions

The new article governs most conversions of one form of domestic entity into another form of a domestic entity or into a foreign domestic entity and most conversions of foreign entities into another form of a domestic entity, with no need for domestication of the foreign entity before conversion. Exceptions are the conversion of a mutual insurance company into an investor-owned insurance company, any conversion of a nonprofit corporation into another type of entity, or any conversion of another type of entity into a nonprofit corporation. A plan of conversion that includes, among other things, provisions for exchanging interest in the converting entity into interest in the converted entity and the organic documents of the converted entity must be proposed and approved. After approval of the plan, the conversion is completed by filing articles of conversion with the Secretary of State.

Chapter 5, Domestication

Chapter 5 applies to the domestication of foreign entities, in which the foreign entity becomes an Indiana entity of the same type. It also applies to the domestication of Indiana entities, in which the Indiana entity becomes a domestic entity of another jurisdiction. In other words, it applies to the transfer of entities both to and from Indiana. In contrast to the chapters on conversion and merger, the chapter on domestication has no exceptions. It applies to all types of entities, including nonprofit corporations. As with conversions and mergers, the heart of the domestication process is a plan of domestication that includes, among other things the organic documents of the domesticated entity, followed by approval and by filing articles of domestication with the Indiana Secretary of State.

Chapter 3, Interest Exchanges

Chapter 3, a new addition to the Indiana Code, applies to the acquisition of all of the ownership interest, or all of one class of ownership interest, in one entity by another, even if the two entities are of different types and even if one of the entities is a foreign entity. It would be more appropriately entitled “Interest Acquisitions” because it encompasses not only transactions in which interest in one entity is exchanged for interest in another, but also acquisitions in exchange for other types of consideration, including outright cash purchases. It excludes share exchanges between foreign or domestic corporations, which continue to be governed by I.C. 23‑1‑40. It has no applicability to nonprofit corporations. As with the other chapters, the procedure focuses on a plan of interest exchange followed approval of the plan and by articles of interest exchange filed with the Secretary of State.

As noted above under General Provisions, the procedures of the Uniform Business Organization Transactions Code are not exclusive. Other procedures permitted by law may be used, and new Chapter 3 covers transactions that have been routinely accomplished in its absence. One may ask why a company involved in a transaction covered by Chapter 3 would bother with complying with its specific requirements for a plan of interest exchange and the public filing of articles of interest exchange. The answer is not immediately obvious.

In Part IV, we will suggest some further revisions to the statute.

[Revised January 2, 2018 to revise the number of parts in the series.

Revised February 5, 2018 to eliminate reference to a planned Part V, which will not be written.]