Wednesday, April 10, 2013

2013 Technical Amendments to Business Entity Statutes

2013 General Assembly Adopts Technical Amendments to Various
Business Entity Statutes, Other References to Business Entities


      The 2013 General Assembly did not take up any new business entity statutes similar to the 2012 Kentucky Uniform Statutory Trust Act or the 2012 Kentucky Uniform Limited Cooperative Association Act.  Rather, it focused upon a pair of small bills that enacted technical amendments.
      The first of these bills was H.B. 343 (Ky. 2013 Acts, ch. 65), it requiring that various states agencies adopt a single identification number for business entities. Currently, corporations, LLCs and other forms of business organizations are assigned numerous identification numbers by numerous state agencies. For example, a business entity has an organizational number assigned by the Secretary of State while the Department of Revenue assigns an entirely independent Kentucky taxpayer identification number. An additional number is assigned for purposes of worker’s compensation coverage, and additional numbers may be assigned for particular regulatory purposes.
      Under H.B. 343, and as part of the One-Stop system being implemented by the Secretary of State, each business will be assigned a single identification number to be used across numerous state agencies, namely the Secretary of State, the Finance and Administration Cabinet, the Cabinet for Economic Development, the Commonwealth Office of Technology, and the Education and Workforce Development Cabinet. The various affected Cabinets have until December 31, 2013 to recommend a timeline for applying the new common identifiers to newly formed organizations, and there is an up to five year timeline for full implementation.
      The second bill at issue was S.B. 69 (2013 Ky. Acts, ch. 106), sponsored by Senator Sarah Beth Gregory. This legislation contained a number of distinct updates to either business entity statutes or other statutes referencing business entity law.
      Initially, in several instances this statute corrects references to the “limited liability corporation,” references that had accreted in a number of individual statutes. Of course, a “limited liability corporation” does not exist; there exist corporations - limited liability companies, but those are distinct organizational forms. For example, the secondary recycling “stolen copper” bill passed by the 2012 Kentucky General Assembly impose limitations upon “limited liability corporations.”  See KRS §§ 433.900(1) and 433.902(1)(d) as enacted by 2012 Ky. Acts, ch. 91, §§ 1, 2.  Another example appeared in the statutes governing the Executive Branch Ethics Commission.  See KRS § 11A.201(13) (prior to amendment by 2013 Ky. Acts, ch. 106, § 2).  Should, under the bill as enacted, an enforcement action be brought against a limited liability company, it could be argued that the statute does not extend to that organizational form. With the changes made in S.B. 69, that opportunity is no longer available.  See 2013 Ky. Acts, ch. 106, §§ 2, 8, 12 and 13.  Also, several of these statutes referred to “partnerships, limited liability partnerships”; they did not, in turn, reference “limited partnerships.”  See, e.g., KRS § 11A.201(13); id. § 433.900(1), prior to amendment by 2013 Ky. Acts, ch. 106.  In that every limited liability partnership is first a general partnership, a redundancy was created. Also, absent reference to additional statutory authority (see KRS § 446.010(30)), limited partnerships are arguably exempt from the statutory requirements. Again, the amendments address these deficiencies.

      A technical change made in the LLC Act addresses to whom a member’s request to inspect company books and records is to be addressed. While the statute did require previously that the member tender a request to inspect the company books and records, it did not specify to whom that request should be made. As such, ambiguity existed as to whether he should go to any or all managers, all other members, or only the entity itself. With the change made, the request is to be tendered to the limited liability company. See KRS § 275.185(2) as amended by 2013 Ky. Acts, ch. 106, § 7. Where the operating agreement in question does not specify how notice or request is to be tendered to the LLC by a member, such may be done through the registered agent.  KRS § 14A.4-040(1).
      Another change to the LLC Act expressly authorizes a written operating agreement to impose reasonable limitations on the inspection of LLC books and records.  See KRS § 275.185(5) as amended by 2013 Ky. acts, ch. 106, § 7.  Previously the LLC Act expressly sanctioned limitations upon the use of company records and information, but was silent as to limiting access ab initio.  While likely limits on access would have been enforced (see KRS § 275.003(1)) absent this amendment, it removes any question.
      Last on the LLC Act, a revision has been made as to the amendment of the articles of organization.  Under KRS § 275.175(2)(c), the approval of a majority-in-interest of the members was required to effect an amendment reversing the manager-managed or member-managed election.  The LLC Act was silent as to the required consent threshold for other amendments.  The substance of the amendment is to delete the reference as to the manager-managed versus member-managed election; now all amendments to the articles of organization will require the approval of a majority-in-interest of the members.  See KRS § 275.175(2)(c) as amended by 2013 Ky. Acts, ch. 106, § 6. 
      A global change made with respect to the names of business organizations makes express that the identifier (e.g., “Inc.,” “LLC,” “PSC”) must appear at the end of the name.  See KRS § 14A.3-010 as amended by 2013 Ky. Acts, ch. 160, § 3. This change is consistent with the filing procedures that have traditionally been employed by the Secretary of State’s office. To the extent the existing company name is inconsistent with these rules, it will be functionally grandfathered. Under the rule as now codified, “Widgets Incorporated of Lexington” will not be an acceptable name, but “Widgets of Lexington, Incorporated” will be acceptable.  These requirements apply only to “real names”; an assumed name may set forth the identifier, if used in the assumed name, other than at the end.
      A technical change made in the Kentucky Uniform Statutory Trust Act moves a single sentence between two adjacent sections of the act; it had been misplaced in the prior enactment. See KRS §§ 386A.6-030, 386A.6-040 as amended by 2013 Ky. Acts, ch. 160, §§ 10-11. No substantive change is effected.  A statement has been added to the Statutory Trust Act to make express that a statutory trust has continuity of life.  See KRS § 386A.3-050(6) as created by 2013 Ky. Acts, ch. 160, § 9.
      It has long been the rule that the qualification of a foreign entity to transact business is not a basis for Kentucky to regulate the foreign entities’ internal affairs.  See, e.g., KRS § 14A.9-050(3).  The issue left unresolved is the ability to regulate the internal affairs of either (i) foreign entities transacting business while exempt from the requirement to qualify or (ii) foreign entities in default of an obligation to qualify to transact business.  Might Kentucky regulate the internal affairs of either?  Obviously not, and a 2013 amendment makes that clear.  See KRS § 14A.9-050(3) as amended by 2013 Ky. Acts, ch. 160, § 4.
      All of these amendments are effective June 25, 2013.  See OAG 13-005 (April 5, 2013).

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