Senate Bill 1410 ("SB 1410") was the product of a joint effort among many individual lawyers and the Arizona State Legislature, with cooperation from the Arizona Corporation Commission ("ACC"), to improve statutes governing Arizona's business entities. The changes are summarized below.
Noneconomic Membership in LLCs
SB 1410 amends A.R.S. § 29-601(12) to allow limited liability companies ("LLCs") to admit members who do not have any of the economic burdens (or benefits) of traditional LLC membership. A "noneconomic member" under the amended § 29-601(12) does not have a "Member's Interest" in the LLC and has no obligation to contribute capital to the company, no right to participate in or receive distributions of profits of the company, and no liability for the company's losses. The non-economic member may have voting rights and other rights and privileges of membership, as granted by the articles of organization or operating agreement of the LLC.
§ 29-601(12) "Member" means a person who is admitted as a member in a limited liability company pursuant to this chapter until an event of withdrawal occurs with respect to the person and, if reference is made to members, that reference means a member in the case of a limited liability company that has a single member. A Member may be a "noneconomic member" as a member of a limited-liability company who:
1. Does not own a Member's Interest in the company;
2. Does not have an obligation to contribute capital to the company;
3. Does not have a right to participate in or receive distributions of profits of the company or an obligation to contribute to the losses of the company; and
4. May have voting rights and other rights and privileges given to noneconomic members of the company by the articles of organization or operating agreement.
With this change to the LLC statute, Arizona joins states including Delaware and Nevada in allowing an LLC to have members who can participate in the governance of the entity without having an economic interest and without any obligation to make capital contributions. This change, in particular, will allow entities formed for the purpose of commercial loan transactions to protect lenders against bankruptcy filings by borrowers. Lenders can now require a borrower LLC to have an independent member, with no economic interest in the LLC, who would be able to vote against a bankruptcy filing.
No Financial Statements in Non-Profit Corporation Annual Reports
SB 1410 eliminates the requirement that financial statements be included in the annual report required to be filed with the ACC by nonprofit corporations (§ 10-11622).
Many supported this change for the following reasons: (1) the requirement to put financial statements in an annual report was onerous for many smaller nonprofit corporations; (2) the financial statement requirement was not needed in the case of larger nonprofit corporations, whose financial statements must already be provided to the public upon request and which are available on the organizations' annual Form 990, which can be obtained from the IRS; and (3) for-profit corporations have no obligation to file financial statements with annual reports, and non-profit corporations should not be treated differently.
Changes to Certificate of Disclosure
SB 1410 amends A.R.S § 10-202 to eliminate certain informational disclosures from the Certificate of Disclosure, which is a certificate that all corporations are required to file upon incorporation and with annual reports. The Certificate no longer requires the officers, directors, incorporators, trustees, or other persons holding over 20% of the corporation to disclose (1) their social security numbers or (2) all corporations that had their charters revoked when such persons served in a similar position of ownership or authority.
This change reflects the view that charter revocation is not a "bad act" that should necessitate disclosure on the Certificate of Disclosure, as many business owners allow a corporation's charter to lapse into revocation as an alternative to voluntary dissolution.
Optional Filing of Affidavit of Publication
SB 1410 removes all requirements that an affidavit of publication be filed with the Arizona Corporation Commission. An entity may file an affidavit of publication, but is not required to do so, as the entity can prove publication in another manner
(a copy of the newspaper publication, for example, would suffice). An affidavit will probably be useful for corporations who anticipate the need for a legal opinion on valid formation, and for that reason the ACC will still accept an affidavit for filing if a corporation elects to file one.
Clarification of LLC Termination Provisions
SB 1410 eliminates language suggesting that an LLC cannot terminate if assets are not available to pay all of its debts, as shown in the excerpted section below.
29-783. Articles of termination
... The articles of termination [of a limited liability company] shall be filed with the commission and shall state:
1. The name of the limited liability company.
2. That all debts, obligations and liabilities have been
paid and discharged or that adequate provisions have been made for
them.
3. That all of the known properties and assets
of the limited liability company have been applied and distributed
pursuant to this chapter.
4. That there are no suits pending against the company
in any court or that adequate provisions have been made for the
satisfaction of any judgment, order or decree that may be entered
against it in any pending suit.
These provisions were eliminated in accordance with the principle that a business should be entitled to dissolve when it runs out of assets, even if some creditors are not paid, as long as no assets are distributed to owners before creditors. This result is similar to the Arizona corporation statutes, which do not require that the articles of dissolution of a corporation contain a statement that all its debts are paid or provided for (except corporations that dissolve before they commence business or have shareholders under § 10-1401.)
Under the old subsections .2 and .4, the manager or member of a dissolving LLC was required to state that all debts, obligations and liabilities have been paid and discharged or that adequate provisions have been made for them, and that there are no suits pending against the company in any court or that adequate
provisions have been made for the satisfaction of any judgment, order or decree that may be entered against it in any pending suit. These statements went beyond the requirement in § 29-783.3 to state that "all of the known properties and assets of the limited liability company have been applied and distributed pursuant to this chapter." Although the statement that "adequate provisions have been made" for obligations and liabilities or for the satisfaction of any judgment, order or decree that may be entered against the company in any pending suit, does not necessarily mean that known properties and assets or the company are sufficient to pay for such obligations, liabilities, or satisfaction, such an inference was possible is now precluded.
Parent and subsidiary LLCs may be formed at the same time.
SB 1410 adds § 29-631.B, which states that a "parent limited liability company and its subsidiary limited liability companies may be formed at the same time." This provision was added to clarify the previous laws governing LLCs, which could have been interpreted to require a waiting period between the formation of the subsidiary and the formation of the parent.
"Trustee" language in the LLC termination provision eliminated
SB 1410 eliminates language in § 29-784 which could have suggested that the managers in office at the time an LLC terminates (or, if none, the members) were "trustees" for the members and creditors of the LLC. The changes that SB 1410 made to § 29-784 are shown below:
29-784. Effect of filing articles of termination
On the filing of the articles of termination the existence of
the limited liability company ceases, ... . The managers in office
at the time of termination or, if none, the members are
thereafter trustees for the members and creditors of the terminated
limited liability company and as such may distribute any
of the limited liability company's property discovered after
termination, may convey real estate and may take other action as
necessary on behalf of and in the name of the terminated limited
liability company for winding up and liquidating the business
and affairs of the limited liability company.
This change clarifies the law to conform to the well-established rule relating to corporations (see A.R.S. § 10-1405), that after an entity terminates, winding up activities continue. The change also eliminates any suggestion that managers or members have ongoing "trustee" liability after the LLC terminates.
No need to record a fictitious name certificate in all counties in which business is conducted
SB 1410 amends A.R.S. § 44-1236 to make clear that if a person or entity files a trade name certificate with the Secretary of State or obtains authorization from the ACC to conduct business as a foreign corporation using a fictitious name, there is no need to record a fictitious name certificate in all counties in which such person or entity conducts business.
After a state trade name filing with the ACC or the Secretary of State, anyone can determine online that a name has been registered, so there should be no additional requirement to record in a county. Before the amendment, § 44-1236 could be read to require a company doing business under a d/b/a (with a properly filed trade name at the Secretary of State), to record in every county in which it does business. This was unnecessarily duplicative and not useful, because county recordings are not searchable online. The state trade name filing is sufficient.
LLCs can serve as statutory agents for limited partnerships
SB 1410 amends § 29-304 to allow LLCs (both domestic and foreign) to serve as statutory agents for service of process on limited partnerships. This change to § 29-304 makes this section consistent with § 29-1104, which allows an LLC to serve as a statutory agent for an LLP. Corporations, also, can have a statutory agent that is an individual, a corporation or an LLC. With the passage of SB 1410, LLCs can now serve as statutory agents for corporations, limited partnerships, and limited liability partnerships.
Acknowledgements: The Business Law Section of the Arizona State Bar would like to thank Senator Vershoor for sponsoring SB 1410 and the ACC Director of Corporations Division, Linda Fisher, for working to clarify the ACC's position on certain matters. The author would like to acknowledge the contributions of Chanda DeLong, an associate in the Corporate Practice Group at Lewis and Roca LLP, in drafting portions of the bill and this article.
A Wish List for Future Arizona Statutory Amendments:
Do you believe there are important revisions needed in Arizona's business entity laws? If so, contact Scott DeWald at sdewald@lrlaw.com. The following is a list of suggestions that have already been made:
1. Technical corrections to SB 1410: the provision making the filing of the affidavit of publication optional was accidentally omitted in certain places the original filing of articles of incorporation of a corporation, the amending of articles of organization of an LLC, and all filings by nonprofit corporations.
2. Clarification with respect to the Commission's ability to make rules that go beyond statutory requirements.
3. Corporation/LLC/Limited Partnership/LLP conversion: each entity should be able to convert freely from one form to another without merger. (A draft of legislation has been prepared.)
4. The remedy for breach of contribution obligations in LLCs should not be limited to contract remedies; specifically authorize forfeiture of LLC interest for any reason to which the parties agree.
5. Institutionalize the process of annually reviewing the business entity statutes (as Delaware does). Every year have a meeting with legislative leaders to discuss what changes to make to the business entity laws that year.
6. Explicit guidance about notice to LLC creditors or ability of creditors to bring suit within X years after the filing of termination (like corporate law, but compare with other LLC Acts)
7. Review Uniform Limited Liability Company Act for provisions to "borrow" for our state law.
8. Disputes over LLCs and corporations and limited partnerships would not be settled by juries, but by trained judges in special business courts.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
