The 2014 New Year will open with a strong message to business entrepreneurs that Connecticut is open for business. On Jan. 1, our state’s version of the Model Entity Transactions Act (META) will become effective, making it easier for businesses to merge, consolidate, engage in a share exchange, or domesticate in Connecticut.
Kudos to the General Assembly and the Connecticut Bar Association’s Business Law Section for recognizing the opportunity to adopt an innovative way to attract and retain business in Connecticut.
Meanwhile, the 2014 legislative session may also be the year the General Assembly passes Connecticut’s version of the Social Benefit Corporation Act, another business-friendly law which would permit officers and directors to run corporations which are not driven exclusively by profits as the sole business objective. This is a good bill, which the CBA is supporting.
With these two statutes on the books, Connecticut will usher in an era in which more choices are available for businesses domiciling in Connecticut. With this expanded legal framework, it is hoped that entrepreneurs will consider Connecticut a preferred place to organize among the small list of states they routinely choose.
Model Entity Transactions Act
The cross-entity merger and conversion statute means that beginning on Jan. 1 varying forms of entities will be permitted to merge, consolidate, enter into an interest exchange with one another, convert from one form of entity to another, or domesticate into Connecticut with a simple filing with the Secretary of the State’s Office. This will make Connecticut one of only a few states to offer this option.
Prior to passage of this act, there was no statute in Connecticut that dealt with these “cross-species” combinations other than certain entity-specific statutes, and those were very limited. The passage of META “goes a long way to enhance the efficiency and flexibility of dissimilar entity transactions under Connecticut Law,” says attorney Mark Sklarz, the drafter of META and an active member of the CBA Business Law Section.
According to Sklarz, the challenge in drafting the legislation was to create an act that enabled those entities which previously were not permitted to engage in these combinations or domestications to combine or restructure without having an impact on previously existing statutes already permitting certain other entities to do so. Connecticut’s META is a “junction box” approach for business restructurings that avoids modifying those pre-existing statutory sections already allowing entity combinations. Attorneys should be aware, however, that the tax implications of these combinations are not affected by this new statute. Companies must still consult with their tax advisors in planning their mergers and restructurings.
As Connecticut opens the door to this business-friendly approach, CBA’s Business Law Section will continue to look for more opportunities to make Connecticut a more competitive and attractive place for business.
Social Benefit Corporation Act
Over the last few years, the phenomenon of corporations existing for the purpose of accomplishing a social good rather than only for maximizing profits for shareholders has taken root.
The upcoming legislative session could see passage of “An Act Concerning Benefit Corporations And Encouraging Social Enterprise,” making Connecticut one of fewer than 20 states to enact such legislation. You may ask why the legislature would enact such a law, given ample statutory authority for the creation of various corporate structures. The answer is simple – the courts have made it clear that officers and directors of corporations are generally obligated to maximize shareholder returns. In fact, in assessing an officer’s or director’s business judgment and his or her fiduciary duty to shareholders, courts most often have analyzed whether the officer or director worked to maximize or maintain the profitability and fiscal health of the enterprise. Given that backdrop, shareholders have come to expect corporate leadership to focus on maximizing profits. But more and more entities also are concerned with such socially progressive values as environmental protection and sustainability; employee well-being; service to underserved populations; advancing human health; creating economic opportunities for the less privileged’ or promoting the arts, sciences or education.
The Social Benefit Corporation Act attempts to recognize this phenomenon and ease the pressure on officers and directors to make profitability the only priority, if their shareholders want them to be more socially conscious. After a working group of the Business Law Section made some considerable revisions to the draft, the CBA has endorsed this bill. The proposed act would require those corporations opting to convert or organize as benefit corporations to exercise a new form of business judgment that mandates a statement of socially beneficial goals and objectives and imposes processes to ensure transparency and accountability in measuring a company’s success toward reaching those objectives.
At the same time, the Benefit Corporation Act would protect officers and directors from claims brought by disgruntled shareholders seeking to impose the same old analysis and measurements in evaluating their performance. These benefit corporations will be obligated to designate a person as the “Benefit Director” who will prepare an annual report to shareholders opining as to whether the public benefit purpose established by the corporation has been met and, if not, how the directors have failed to comply with the corporation’s objectives.
While the details of the proposed legislation are well beyond the scope of this article, it is clear that the goal of the act is to remove the shackles from officers and directors when like-minded entrepreneurs come together to create a corporation that focuses on social good while also attempting to generate some profits.
These two initiatives underscore that the legal community is attuned to its clientele who want more flexibility in creating companies that can change with the times without substantial bureaucracy. Innovation such as this should benefit the Connecticut economy socially and fiscally in the year ahead.•