proposed Model Inter-Entity Transactions Act: A proposal to rationalize changes in forms of business organizations, The

Real Property, Probate and Trust Journal, Fall 2002 by Geu, Thomas, Keatinge, Robert

Editors' Synopsis: This Article provides an introduction to the Model Inter-Entity Transactions Act (MITA), a model statute that addresses mergers, statutory interest exchanges, and conversions between different types of entities. By way of example, the Article examines how MITA would affect an entity in one state that converts into a different type entity in another state. The Article may well aid state legislatures and other groups in beginning a broader public analysis of the issues created by the complexity of business forms.

I. THE PROLIFERATION OF BUSINESS FORMS AND NEED FOR RATIONALIZATION

In recent years the number of business entity forms has doubled, adding limited liability companies ("LLCs"), limited liability partnerships, and limited liability limited partnerships to corporations, general partnerships, and limited partnerships. Not only has the number of business forms grown, but the structures that those organizations may take have also become more flexible. For example, under many statutes, including the Uniform Limited Partnership Act (2001) ("ReRULPA"), recently promulgated by the National Conference of Commissioners on Uniform State Laws ("NCCUSL"), a limited partner is no longer statutorily constrained from participating in the management of the organization.1 Similarly, under the Uniform Partnership Act (1997) ("RUPA"), partners in a general partnership contractually may avoid dissolution upon the departure of a partner.2

The study of business forms has focused on identifying true policy-based distinctions between forms and accidental differences (i.e., differences between statutes in which no substantive term is intended).6

The policy-based distinctions and accidental differences among the statutes governing different forms of business, sometimes referred to as "organic statutes," became more significant as business organizations sought to change forms through mergers and conversions. Business owners and their advisors, observing that many objectives could be obtained with more than one form of organization under state law, sought to transform corporations into limited partnerships to avoid state franchise tax, or into LLCs to obtain flexibility, or to transform unincorporated businesses into corporations in the expectation of making a public offering of securities. These transforming transactions forced practitioners to compare the differences among the organic statutes governing the different entities. Moreover, and significantly, with the federal move to purely elective tax status for unincorporated business organizations,7 state statutory drafters wondered whether transporting this sort of rationality to other areas of the organic laws was possible. For example, Colorado began adopting statutes that would apply a single set of rules to all forms of organization.8 Many states first applied this approach to conversions and mergers involving more than one form of organization.9

nonprofit business organizations. Finally, the American Bar Association ("ABA") Business Law Section Committee on Corporate Laws has drafted a new Article 9 to the Model Business Corporation Act ("MBCA") dealing with mergers with noncorporate organizations.

II. AN INTRODUCTION TO THE PROPOSED MODEL INTER-ENTITY TRANSACTIONS ACT

The proposed Model Inter-Entity Transactions Act ("MITA") is a project of the ABA Business Law Ad Hoc Committee on Entity Rationalization (the "Ad Hoc Committee") with input from members of the Real Property, Probate and Trust Law Section and members of other Business Law Section Committees.10 As a joint project, the ABA Business Law Section Committees on Partnerships and Unincorporated Business Organizations and on Corporate Laws formed the Ad Hoc Committee about the same time that NCCUSL formed its drafting committee on the same subject. The Ad Hoc Committee became a Business Law Section Committee in its own right in 2001. Its purpose is to rationalize and harmonize the laws controlling the formation, operation, and dissolution of entities: profit and nonprofit, incorporated and unincorporated.

The first statute drafted by the Ad Hoc Committee is MITA. In 2002, the Ad Hoc Committee also released a Model Entity Governance Act ("MEGA"), which seeks to apply a single set of statutory provisions to all forms of business organizations.11 Whether the various elements-MITA, MEGA, and other suggestions of the Ad Hoc Committee-will continue to be separate acts or whether they will be combined into a single act, such as the one in Colorado, is unclear.

III. AN OVERVIEW OF THE PROPOSED MODEL INTER-ENTITY TRANSACTIONS ACT

A. Scope, Structure, and Organization

to the Revised Model Business Corporation Act ("RMBCA"),13 RUPA,14 Re-RULPA,15 the Prototype Limited Liability Company Act,16 and the Uniform Limited Liability Company Act.17 Importantly, MITA would govern transactions involving nonprofit corporations with other entities.18 Thus, it contains provisions amending the Model Nonprofit Corporation Act.19 While the transition rules and changes in the statutes governing particular forms of entity are important, in the interest of space and time, this Article and the attached provisions in the Appendix are limited to the substantive provisions of MITA.