Preview: Arizona Entity Restructuring Act

By December 15, 2014 Articles, Business
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Arizona will offer a more business-friendly legal framework next year, thanks to new law for entity restructuring transactions, law that will take effect on January 1, 2015. The result will be that these transactions will be more efficient and available at a lower cost.

Background: What is an Entity Restructuring Transaction?

Your company may reach a point in its life where it needs to undergo an “entity restructuring transaction,” a transaction to change its form or location. For instance, you might have started your family-owned business as a partnership, and now the business has attracted an angel investor, someone who may require your business to convert to a corporation to facilitate an outside investment. Or perhaps your real estate investment company needs to divide into one or more new limited liability companies, to settle a dispute among the owners. In total, there are five such entity-restructuring transactions.

To briefly catalog them: a merger occurs when two entities combine into one surviving entity; a conversion occurs when a single entity changes form — for example, when a limited liability company converts into a corporation; an interest exchange occurs when owners trade their ownership in one company for ownership in another company; a domestication occurs when an entity formed in one state changes its state of incorporation to another state; and a division occurs when one entity divides into two or more entities.

The Problem: Obsolete Law Governing Intricate, Multi-Step Transactions

Historically, entity-restructuring transactions have required multiple steps to accomplish, ratcheting up your risk and expense. Your business may have even needed to dissolve to change its form or location. In that case, you would have needed to wind down, satisfying creditors and interest holders, potentially incurring adverse tax consequences. Those consequences erode your profitability. And those consequences are counterproductive to a company that simply wants to continue in another form or location.

Compounding the problem, Arizona has not had a comprehensive statutory framework for these transactions. Our entity restructuring laws were hard to find, scattered throughout Titles 10 and 29 among the twenty-two types of Arizona business entities. And our entity restructuring laws were incomplete, leaving out domestications and divisions. And those laws were procedurally inconsistent, imposing different requirements for the same transaction on different entity forms.

The Solution: Arizona Entity Restructuring Act and its One-Step Transactions

The Arizona Bar and Arizona lawmakers recognized those issues and have been working over the last four years to implement a solution: the Arizona Entity Restructuring Act (“AERA”), which will take effect January 1, 2015.

In sum, AERA universally applies to all kinds of business entities. And the law will allow your company to change form or location, without dissolving and winding down. Cross-entity transactions are available. And the statute fits with our existing law for business entities, meaning that our current corporate and partnership statutes will remain intact. Moreover, these new procedures will not extinguish creditors’ interests as a debtor-entity changes form. Therefore, AERA allows for seamless, non-disruptive transitions between the old and new companies. Entity restructuring transactions will be more efficient and available at a lower cost.

Here is the simple process under AERA.

First, each kind of transaction requires a written plan, one approved by the company’s interest holders. The plan will describe the details and effect of the transaction. You approve that plan according to your company’s organizational documents, such as its bylaws or operating agreement, or AERA’s default rules. Second, once the plan is approved, a statement concerning the transaction must be filed with the appropriate filing authority, which is the Arizona Corporation Commission for corporations, business trusts, and limited liability companies, and the Arizona Secretary of State for limited partnerships and limited liability partnerships. That statement notifies the public of the transaction and identifies the surviving business entity.

To round out this discussion, AERA does not apply to government agencies, trusts, or estates — and does not displace relevant regulatory statutes, dissenters’ rights, or appraisal rights.

Application

You wisely chose to form a business entity to limit your personal liability and to aggregate capital and assets, such as your residential or commercial real estate. Beginning next year, you will be better equipped to change your company’s form or state of incorporation. AERA is straightforward and comprehensive. Overall, it will encourage new businesses to incorporate or organize or in Arizona and will make it easier for existing out-of-state companies to relocate to Arizona.

Bibliography:

  1. Terence W. Thompson and Raj Gangadean, “Coming Attractions for Arizona M&A Practitioners: Preview of the Arizona Entity Restructuring Act” (November 19, 2014).
  2. The National Conference of Commissioners on Uniform State Laws, ed., Entity Transactions Act Summary (available at: uniformlaws.org/ActSummary.aspx?title=Entity Transactions Act, accessed May 20, 2013).