MINUTES OF THE
SENATE Committee on Judiciary
Seventy-First Session
February 9, 2001
The Senate Committee on Judiciarywas called to order by Chairman Mark A. James, at 8:30 a.m., on Friday, February 9, 2001, in Room 2149 of the Legislative Building, Carson City, Nevada. The meeting was videoconferenced to the Grant Sawyer State Office Building, Room 4401, Las Vegas, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Senator Mark A. James, Chairman
Senator Jon C. Porter, Vice Chairman
Senator Mike McGinness
Senator Maurice Washington
Senator Dina Titus
Senator Valerie Wiener
Senator Terry Care
STAFF MEMBERS PRESENT:
Brad Wilkinson, Committee Counsel
Allison Combs, Committee Policy Analyst
Heather Dion, Committee Secretary
OTHERS PRESENT:
Gardner Jolley, Attorney, Las Vegas,
Don W. Ashworth, Probate Commissioner, Eighth Judicial District Court
Robert L. DeLett, Chairman, Executive Committee, Business Law Section, State Bar of Nevada
John P. Fowler, Chairman, Business Law Section, State Bar of Nevada
Renee L. Lacey, Chief Deputy Secretary of State, Office of the Secretary of State
Chairman James opened the hearing on Senate Bill (S.B.) 33.
SENATE BILL 33: Revises various provisions governing probate. (BDR 12-853)
Gardner Jolley, Attorney, Las Vegas, testifying from Las Vegas via videoconference, began the testimony on S.B. 33. Mr. Jolley referred to a summary of the proposed revisions to particular probate provisions found in Titles 4, 12, and 13 of the Nevada Revised Statutes (NRS) (Exhibit C). He also introduced Don W. Ashworth, Probate Commissioner, EighthJudicial District Court. Mr. Jolley directed attention to his summary of chapter 53 of NRS, a provision that allows people to swear to a document under penalty of perjury, which eliminates subsection 2 of NRS 53.045 in order to make the statute consistent with the proposed amendment to NRS 133.050. He pointed out, however, under the provision there is an exclusion. The exclusion provides that when someone does a self-proving will, which means that there is an affidavit of the witnesses to the will, that cannot be done under penalty of perjury.
Mr. Jolley said this change to NRS 133.050 was introduced because of the existing law in California. In the past, California citizens were bringing wills to Nevada and stating that they were self-proving wills because they were being conducted under penalty of perjury. He said explanation was needed to clarify that the penalty of perjury difference in Nevada was a procedural matter not a substantive manner. He pointed out those coming to Nevada from California with these wills would need to get notarized signatures from the witnesses of the wills.
Mr. Jolley moved through his prepared summary (Exhibit C) to discuss NRS 137.140, and stated the recommended change would entail providing “an appeal from an order, determining a will contest must be taken within 30 days from notice of entry of the order, which is the rule governing appeals from orders in other civil matters.” He said, previously the Nevada Revised Statutes did not provide for this.
Mr. Jolley continued on, explaining his summary of NRS 139.010 where the proposed revision would “conform to the existing practice of allowing a nonresident of Nevada, who is otherwise qualified to act as an administrator, to serve upon associating a Nevada resident as coadministrator.” He said the administrator would be one who was not designated under the conditions of the will. The provision to the statute would actually provide for a remedy to the existing statute by providing a law to follow.
Continuing with the suggested provisions, Mr. Jolley directed attention to NRS 139.040 and stated Jared E. Shafer, Public Administrator, Clark County, wanted the provision enacted into the law. Mr. Jolley said the provision entails “giving the court discretion to grant letters of administration to the guardian of an incompetent or minor heir who would otherwise be entitled to appointment.” He said this change would be under the discretion of the court.
Mr. Jolley went on to explain NRS 143.170, commenting there had been many difficulties with the current statute. The current statute limits the ability for an individual to purchase property from an estate, even with the consent of all parties involved. Currently, the individual must resign as a personal representative. He stated, however, the proposed provision would authorize a personal representative to purchase estate property only with prior court approval after application, notice and hearing on the matter.
Chapter 145 of NRS, known as the Summary Administration of Estates, outlines the condition of estates under $200,000, Mr. Jolley said. Presently, the statute reads a person is to specifically state, in their order, the things that no longer need to take place if given a summary administration. The provision includes the sale of personal property, which does not have to be confirmed by the court under summary administration. The technical matters are done away with, with the exception of four areas.
Mr. Jolley said the exceptions are the result of four subsections being taken out of NRS 145.050 and moved to NRS 145.010. Mr. Jolley added to his explanation to the movement of the four areas, “We state that they do not have to specifically be put in the order, however, everybody understands by looking at the statute that those are the only things that need to be noticed, as far as the statute is concerned.” In addition, he explained, the proposed provision to NRS 145.060 would add the existing requirement of publication and mailing of notice to creditors. Although this requirement has been taking place and the court has been requiring it, the existing statute did not specifically require it.
Mr. Jolley continued with his testimony of the summary of proposed provisions (Exhibit C). He moved to NRS 146.080 subsection 2, paragraph (b), which currently does not allow nonresidents the opportunity to transfer by affidavit, without probate proceedings, assets in Nevada not exceeding $20,000 belonging to a nonresident. The proposal adds a provision requiring the affidavit to contain the date and place of the decedent’s death, along with the extension of ability to transfer by affidavit of nonresidents. He also stated that S.B. 33 adds to NRS 146.080, subsection 2, paragraph (d) the requirement that a certified copy of the decedent’s death certificate be attached to the affidavit. Mr. Jolley referred to a previous bill, Assembly Bill (A.B.) 400 of the Seventieth Session, (section 268, subsection 2, paragraph (j)), which states that filing a fallacious affidavit is a felony.
ASSEMBLY BILL 400 OF THE SEVENTIETH SESSION: Revises provisions concerning will, intestate succession, trusts and estates of decedents. (BDR 12-1138)
Following with the summary provisions (Exhibit C), Mr. Jolley explained that chapter 147 of NRS dealt with creditors’ claims, and under chapter 147 of NRS a person has 60 days to file an action in either civil court or probate court.
Moving the testimony on to NRS 148.220, Mr. Jolley explained that the current statute includes providing for publication of the sale of real property, not less than 8 days prior to the time of the sale. The proposal provides that if all of the heirs and beneficiaries under the estate agree that there is no need for a publication, then it is the discretion of the court to waive this publication notice.
Nevada Revised Statutes 150.075 included a provision to allow the court to waive any accounting requirement if all persons interested in the estate agree so in writing, Mr. Jolley said. However, NRS 150.180, subsection 3, would be eliminated because the right to contest an account is already contained in NRS 150.170, subsection 3. Mr. Jolley stated NRS 155.190 deals with the previously mentioned 30 days’ notice. Specifically, NRS 155.190 proposes the provision which provides that an appeal from certain probate orders must be taken within 30 days from notice of entry of order, which is the rule governing appeals from orders in other civil matters.
Mr. Jolley explained that NRS 164.025 is a part of Title 13, and is a split in the probate trust sections. All of the trust sections deal with revocable and irrevocable trusts. Inter vivos, meaning lifetime trust, is to what the provisions under NRS 164.025 apply. He read from this prepared summary, stating:
This amendment conforms the law concerning claims of trust creditors with existing law concerning estate creditors, by requiring prompt notification of the trustee’s rejection of a claim, and the filing of a suit by the claimant within 60 days after notice of rejection.
Moving to NRS 164.045 of his summary (Exhibit C), Mr. Jolley read his explanation, “this new provision fills in many gaps existing in Nevada’s trust law in Title 13 of the Nevada Revised Statutes by authorizing the probate court to apply, when appropriate (unless there is an inconsistency), estate law found in Title 12 of the Nevada Revised Statutes to trust proceedings.” Don W. Ashworth, Probate Commissioner, Eighth Judicial District Court, addressed the committee asking if there were any questions they might have over the proposals.
Senator Care cited the addition to NRS 137.140, subsection 3 of S.B. 33, “must be filed with the supreme court not later than 30 days after the notice of entry of a final order.” Senator Care, noting the Nevada Rules of Appellate Procedure, Rule 4, in order to make the provision consistent, questioned if it could be considered “no later than 30 days of service of written notice of the final order.” Mr. Ashworth asked if that was the wording that was provided currently in the appellate procedure. Senator Care cited appellate rule 4(a)1. Mr. Ashworth agreed to the change suggested by Senator Care, saying that the goal was to bring the statute into conformity with the civil statutes. Mr. Ashworth added if the wording from the appellate rule was consistent, the change could be made.
Senator McGinness cited NRS 148.220, section 12 of S.B. 33, waiver of the publication, and inquired how creditors would be protected if they had claims against the estate. Mr. Ashworth contended that he must have been misunderstood. He continued that he was not talking of waivers of publication of notice to creditors, but notice of publication for sale of real property, which does not concern creditors. Mr. Ashworth stated creditors would receive notice through the mail and the notices would also be published, which is required by the statute.
Senator McGinness further inquired if the proposed revisions were cleanup from the previous session’s bill, A.B. 400 of the Seventieth Session, noting that the revisions seemed more substantial that simple cleanup. Mr. Ashworth continued, “We do not want to mislead the committee in any way thinking that these do not have substantive effect, they do have substantive effect and we want to make sure you understand that. This bill is certainly nothing like A.B. 400 [of the Seventieth Session] was.”
Mr. Jolley asked Senator McGinness what he meant by his explanation of “cleaning up” A.B. 400 of the Seventieth Session. He said he believes that clarification is needed because certain probate courts in the state were allowing attorneys to do certain things, while in other parts of the state these certain things were not being allowed. For instance, Mr. Jolley stated:
We are using declarations instead of having a notary attached to every affidavit, which our statute allows under NRS 53 [chapter 53 of NRS], same thing under the notice of entry of order. I think that we already had the right, based on what we said in 1999. But in our committee meetings, as Senator Care brought up, there was different language in the Nevada Rules of Appellate Procedure (NRAP) on appealing, and we wanted to make the language the same so that no court later would say the Legislature adopted different rules for probate than they did for normal civil cases, and we were trying to conform those.
Mr. Jolley pointed out that the major change made was the waiver of requirement of publication, which was discussed previously under real property. He said the creditor’s right is protected because of the discretion of the courts. Mr. Jolley went on to say that he believes that the proposed changes are substantial, and will rectify any discrepancies from the 1999 bill.
Senator Wiener addressed the testifiers, referring to NRS 139.040 regarding the heir who is either a minor or incompetent, and questioned what is being done currently in these circumstances. Mr. Jolley responded that there is a list of those people to have preference to serve, and currently the public administrator is not on the list, and would be added to the list under the provision. Senator Wiener then asked who the people on the existing list were. Mr. Jolley answered by citing NRS 139.040, and listed the members: the surviving spouse, the children, the father or the mother, the brother or the sister, the grandchildren, any other kindred entitled to share in the distribution, creditors, and other kindred not otherwise enumerated, and other persons otherwise qualified.
Mr. Jolley also responded that Mr. Shafer, as a legally qualified person under paragraph (j) of section 5 of S.B. 33, wanted to be noted on the list. Senator Wiener stated that Mr. Shafer was already on the list under paragraph (h), as public administrator. Mr. Ashworth then answered Senator Wiener’s statement, explaining that, for example, “under [paragraph] (b) the children can be appointed or nominate someone to take their priority. What was happening was because of being a minor heir the children were incapable [of] nominating.” Mr. Ashworth stated normally someone would qualify in paragraph (b), and then they could not be nominated, because of being the existing minor heir. Therefore, Mr. Shafer was attempting to move himself up to the point where, if he represented a minor child, he would therefore come before a brother, sister or grandchildren. Mr. Ashworth asserted that Mr. Shafer, acting as public administrator, takes the place of the minor, protecting that person’s rights as an heir. The order of priority becomes important in these particular cases.
Senator Wiener noted that under paragraph (g), there were creditors who had become such during the lifetime of the decedent, and asked if there could be a possibility of conflict of interest. Mr. Jolley responded that this particular case is when the heirs do not come forward. He explained that many times the heirs do not come forward and do not probate the matter, realizing that there are creditors. Therefore, the provision gives the creditors a possibility to act on their own interest, especially when there is debt involved.
Mr. Ashworth supported his explanation, “Down here [Las Vegas], the University Medical Center may have a bill for $200,000 that has not been paid, and the heirs do not do anything.” This provision allows for the creditors to file a petition to investigate into assets available. However, if the court believed that there was a conflict, it would be under their discretion to determine the priority.
Senator James addressed Senator Wiener’s concerns, stating the idea of order of priority is that creditors come ahead of the public administrator. He explained his understanding that the public administrator is the fiduciary who gets the appointment, in the event that someone who is part of the family or other kin is not available to act.
Senator James further questioned Mr. Jolley as to why the creditor of the decedent was placed ahead of the public fiduciary. Mr. Jolley explained that this could be taken out of the provision and explained that the inclusion in the statute was not changed because it was unknown how long ago the order of priority was adopted, although it would be an accepted change. Senator James responded that the provision states that the administration of the intestate estate of a decedent must be granted to one or more of the persons mentioned, and are respectively entitled to priority to appointment.
Senator James stated there was indication that there would be discretion on the part of the court, if the court believed the creditor had a conflict of interest they would not appoint them and would move on to the next beneficiary on the list. However, with the kind of language used in NRS 139.040, he questioned if the court possesses the discretion intended, and where it is discussed in the statute over conflict of interest. Mr. Jolley responded to Senator James by referencing a section (NRS 139.010), which deals with the appointment of a personal representative, who, for example, must meet certain requirements.
Senator James referred to NRS 139.010, which states “No person is entitled to letters of administration who: 1. Is under the age of majority; 2. Has been convicted of a felony; 3. Upon proof, is adjudged by the court disqualified by reason of drunkenness, improvidence, lack of integrity or understanding.” Senator James commented that the listed criteria encompass conflict of interest. And, he continued, if there were a great conflict of interest between the personal representative and the individual who is to be sued, the court would also have the jurisdiction under the statute.
Mr. Jolley resumed his response, suggesting a proposed amendment to NRS 139.010 to broaden the amendment to provide for a conflict of interest through the discretion of the court. He stated technically, today, the conflict of interest provision is not a disqualification under NRS 139.010. Therefore, the court would have to rule in the favor of the current statute. Mr. Ashworth added to Mr. Jolley’s statement:
Where I saw that come up was there was a person in the order of priority, and as I recall, the court looked at lack of integrity and said there is too much of a conflict to think that you can properly represent the estate. If the statute is too weak in terms of clearly defining who is capable of representing, changes could be made to strengthen the statute.
Mr. Ashworth continued his example by citing an old Nevada case, which dealt with the creditor who was also one of the blood heirs and this was not considered a conflict by the court because legislators said that it was possible to be a creditor and be an administrator of the estate. He asserted what courts have relied on, with the lack of integrity, is not to allow one to act in the position.
Mr. Jolley furthered Mr. Ashworth’s testimony stating that the court would benefit from having a provision that suggested if there were a conflict of interest, the court would have the authority to decide to grant the position of administrator.
Senator James then cited a case, In re Taylor, saying the statutory preference does not allow for judicial discretion. He pointed out the head note from the case implies that the court must fit its decision into one of the three categories listed previously. Senator James inquired if the language is too strong because of the possibility of finding a creditor with a lack of integrity by the court in order to be disqualified. Therefore, the court should be given the discretion to simply find there is a conflict, and that it should not subject to a fiduciary in a conflicted position.
Senator James stated that although no action on the bill would take place at present, it would be considered by the committee to move the public fiduciary above the creditors. He also stated the need to provide language to give the court discretion in the cases of conflict of interest to prefer one of the persons lower on the priority list, or the public fiduciary over someone who is superior on the list.
Mr. Jolley directed attention to his summary of proposals (Exhibit C), referring to NRS 134.070. He noted that this is a convoluted problem, asserting that “no issue, surviving spouse, or no immediate family,” deals with succession, which means there is no will and the individual has died intestate. Therefore, the state makes the decision of what will happen to the estate. He pointed out the problem of NRS 134.070 is the last sentence of section 2 of S.B. 33 which states, “If any person dies leaving several children . . . ” The sentence is inconsistent with the heading. The heading of NRS 134.070 reads, “No issue, surviving spouse or immediate family.” The sentence should be moved from NRS 134.070 into NRS 134.080, which is entitled “Unmarried minor decedent.” The provision under NRS 134.070 would clarify the manner in which a deceased child’s inheritance is to be distributed.
Mr. Jolley, who said he has been a probate commissioner for 10 years, commented that he has yet to see such a situation occur. However, there is the possibility that the situation could arise and therefore the proposed amendment would clarify any discrepancy. He used the example, “a grandparent had passed inheritance to a minor who did not have a will (one cannot make a will until the age of 18 years), and the minor died before the age of 18.” Mr. Jolley contended then such a situation would come under the definition of “real children.” The statute keeps the estate within the context of “real children.” He furthered his example, and referred to NRS 134.070, which states “of the same parent.” This example coincides with the movement of NRS 134.070 to NRS 134.080, paragraph 2, titled “Unmarried minor decedent.” Mr. Jolley said he believes that the clause in its current place in NRS 134.070 would be difficult to locate and unusable.
Senator James directed Mr. Jolley to work with the Legislative Counsel Bureau (LCB) to work on the correct wording of NRS 134.070. Also, Senator James suggested contacting Allison Combs, Committee Policy Analyst, Legislative Counsel Bureau, to work through other proposed changes in the statutes.
Senator Wiener consulted Mr. Jolley on the public administrator and the new language regarding a minor child or incompetent, and looking toward appointing a guardian. Because it was stated that it was Mr. Shafer who had requested this additional language, with the reality of the courtroom situation would this automatically defer to an appointment of the public administrator or would other people be considered, asked Senator Wiener. Mr. Jolley responded it was a different subject altogether, and only refers to when Mr. Shafer has already been appointed by the guardianship, as there is no jurisdiction over guardianship.
Senator James furthered the explanation by saying “If he is the guardian for one of the people who is higher in priority, then he has that priority because he is the guardian for them -- they cannot do it, but he can. Instead of dropping down to the next person on the list, it is the public fiduciary in representation of that person he has under jurisdiction.” Mr. Jolley responded that the case is broader than Senator James described, and is not limited to Mr. Shafer. However, the proposal deals with anyone who is the guardian.
Robert L. DeLett, Chairman, Executive Committee, Business Law Section, State Bar of Nevada, directed attention to those persons who have joined from Northern Nevada to write the amendments for the bill. Those individuals who helped to put together the commencement of the bill included Pam Gullihur, Probate Commissioner, Washoe County, and Lynne K. Jones, Attorney, and himself.
Mr. DeLett addressed the committee with four statements. First, he stated the execution of a will under the penalty of perjury without a notary is a significant change. Mr. Ashworth noted it as a positive change in cases of California people who attempt to probate wills in Nevada. Mr. DeLett stated the amendment would eliminate the problem of being required to take a notary and locate witnesses in order to execute a will.
Second, Mr. DeLett made note of the change of having a nonresident individual that would otherwise be entitled to serve as an administrator of an intestate estate where there is not a will, the courts generally have allowed that person to associate with someone who is a resident and then go forward in the preceding, this is a legal fiction, and would codify the process.
Third, Mr. DeLett responded to the change considering the waiver of publication on the sale of real property and said he believes this to be a difficult provision. Many times a good portion of the estate will be left to a sole beneficiary, and that person is also the personal representative of the estate. He will have to go through the publication process, which is uncomfortable. People worry about the buyers, and the loss of a sale. The change in the statute would eliminate these problems.
Finally, Mr. DeLett stated that the waiver of an accounting on an estate is absolutely important. He noted that in California the practice of non-administrative estates is common, and he emphasized that the waiver of an accounting in an estate where the heir is the personal representative and the primary beneficiary would save a lot of money and would also be beneficial to the estate.
Senator James closed the hearing on S.B. 33, and opened the hearing on S.B. 51.
SENATE BILL 51: Makes various changes concerning requirements for formation, maintenance and management of business associations. (BDR 7-255)
Senator James made opening remarks on S.B. 51, which he said grew out of the interim subcommittee on business formation and encouraging business in Nevada. It is a bill that is often referred to the Senate Committee on Judiciary by the business law subcommittee of the State Bar of Nevada.
John Fowler, Chairman, Executive Committee, Business Law Section, State Bar of Nevada, came forward to testify on S.B. 51. Mr. Fowler clarified that the executive committee had a large part in drafting the language that became S.B. 51. The process of obtaining formal endorsement from the State Bar of Nevada has not yet taken place. However, Mr. Fowler stated that a draft of the bill and a copy of the testimony given today have been sent to the board of governors. The testimony includes a brief letter submitted to Senator James describing the intentions of the executive committee toward S.B. 51. Mr. Fowler said along with the letter is an attachment detailing the specific proposed provisions to the bill (Exhibit D).
Mr. Fowler began his testimony with the highlights of the bill. As pointed out in the summary (Exhibit D), there are two new procedures that the proposed changes bring to corporate law in Nevada. The first change is a conversion, which encompasses the concept of merger. Merger is where two existing corporations combine, and one of the two survive. (There can be more than two.) However, he stated the concept of conversion is different than that of merger. This is one in which one kind of corporate entity can turn into another type of corporate entity, without the necessity of first forming the target entity, that which it wishes to become, and can simply become the new entity.
Mr. Fowler asserted conversion is a concept that many of the states have put into place in the last 4 or 5 years; however, it is a new concept to Nevada. The statute would allow any one of Nevada corporation types: limited-liability company (LLC), limited partnership, or business trust to convert into any one of the others. Most of the conversions being seen by the secretary of state’s office will be corporations turning into LLCs, but can go in any direction and among any of the entities. There is a question of how the conversions will be treated for the purposes of the Internal Revenue Code (IRC). Mr. Fowler stated that he was unaware of how the Internal Revenue Service (IRS) will deal with the conversions with relation to taxes.
The second item of domestication is also new Nevada law, stated Mr. Fowler. Domestication allows for a “non-United States entity,” to domesticate and become any one of the Nevada corporation types: Nevada LLC, Nevada limited partnership, or Nevada business trust. Mr. Fowler stated, “For instance, a business entity from Germany could, with this bill, domesticate and become a Nevada corporation.”
The provision of the bill concerning domestications is based on the Delaware formulation, Mr. Fowler stated. The statute had been reworded to be readable, as many Delaware statutes are not. Domestication has many characteristics. He pointed out first the business becomes an entity itself. There is not a process of having to form another entity and merge into it. Second, under the laws of some jurisdictions, entities are not allowed to die. He stated this allows for simultaneous consideration by the foreign jurisdiction to continue to be the type of entity it was before it left, and by Nevada law to be a resultant Nevada entity. Mr. Fowler stated that he was unsure how this matter would be litigated.
Mr. Fowler averred that all of the domesticating statutes that have been passed by the states have this provision whereby an entity can be two things at once. Mr. Fowler said he has received many requests for further information on domestication and he said he believes that the provision will produce substantial business for the secretary of state’s office and others involved in Nevada entities. Further, Mr. Fowler said he believes that the domestication will lead to placement of assets, mostly intangible assets, in the state from outside the country. Mr. Fowler said that Nevada is very favorable internationally because of its status on taxes. He said he believes that the domestication will produce substantial business internationally, over time.
Mr. Fowler continued with an explanation of the fees being imposed. He said he wanted to allay concerns that there are old fees being increased. The fees that are being charged are for new procedures that are available for the first time from the secretary of state’s office. New procedures, he continued, meaning not only the fees needing to be charged for conversions and domestications, but also there are provisions for certificates of termination. This is a procedure that gives corporations flexibility to call off a deal, even after it has been filed with the secretary of state’s office. Mr. Fowler made note of the current world of business moving quickly, and if the market is unfavorable to the market price of a certain stock the company might want to call off a conversion or merger. Mr. Fowler stated:
A corporation may wish to do a merger with another. They file the articles of merger, but provide for a late effective date. They may state that this is filed now, but is effective on a certain date. Meanwhile, the market goes to pieces and they want to call off the deal. Allowing them to terminate the deal allows the corporation the last bit of flexibility to avoid an economically disadvantageous transaction from occurring.
Mr. Fowler said the certificates of termination are provided in a number of different contexts throughout the bill. The fee had to be charged for filing the certificates of termination, and those fees are referred to in the letter that has been provided (Exhibit D). However, there are no fees being increased, only new fees being put into place for the new procedures and certificates.
Mr. Fowler stated there are a number of technical changes in the bill that are explained in the summary provided as an attachment to the letter (Exhibit D). There is a new statute for reverse stock splits with a relatively simpler procedure than is available now. It is especially useful for publicly held corporations, giving them flexibility they have under the laws of no other state.
Senator James inquired whether a Nevada corporation has the ability to do a reverse split now. Mr. Fowler answered that a corporation can do a reverse split by amending its articles of incorporation, and that is under the jurisdiction of every state. However, the reverse split requires a stockholder vote. If it is a public company it is both expensive and time-consuming to ask for a meeting and hold a vote.
Mr. Fowler testified that a number of years ago the policy decision was made to allow reverse stock splits and stock splits without a stockholder vote, if the amount of issued and outstanding stock equaled the number of authorized shares in the articles. This means that if the reverse stock split of issued and outstanding shares occurs, the authorized amount must also be changed to avoid a stockholder vote (both must be brought down by the same proportion). Senator James inquired whether this was the reasoning for having the potential of future issues of those treasury shares that would result with dissolution. Mr. Fowler agreed.
Senator James asked if the bill provides that, as long as there is no dissolution, reverse stock splits could be done without a shareholders meeting. Again, Mr. Fowler agreed and stated that is the existing law. He went on to explain that there may be a circumstance where there may be a need to do a reverse stock split solely for a certain class of stock, for instance if there is a preferred stock issue outstanding. Preferred stock, in many instances, is issued by publicly held corporations. Mr. Fowler pointed out besides the wording and long documents that discuss them and provide for them, preferred stocks are similar to bonds and promissory notes. The banks may wish under certain circumstances to do reverse stock split of just that preferred stock. The new change in the law allows them to do a reverse stock split of their intended class of stocks, so long as the stockholders of that class approve.
Senator Wiener asked Mr. Fowler if there is a notification requirement to the shareholders when there is not a vote on the reverse split of a stock. Mr. Fowler responded that the corporation would be required to notify those entitled under the Securities Exchange Commission (SEC) rules. Senator Wiener continued with her questioning, inquiring whether there is a time limit to the notification. Mr. Fowler responded that the existing statute provides that if a person is a 10 percent stockholder and the person reverses down to no stock at all, at this point the person could compel a stockholder vote. He pointed out there are currently existing safeguards to protect the stockholders.
Mr. Fowler described an existing statute that clarifies what to do with interim lists of offices and directors. Also, there is a statute that allows alternate board members, which is specifically permitted by Delaware law. Adding to his description, Mr. Fowler stated that members of the Senate Concurrent Resolution 19 of the Seventieth Session subcommittee specifically reviewed Delaware corporation law to pick up particular rules to incorporate into Nevada’s corporate law. Many of the technical and procedural changes that were made and can be read about in the memo submitted (Exhibit D), come from Delaware General Corporation Law.
SENATE CONCURRENT RESOLUTION 19 OF THE SEVENTIETH SESSION: Directs Legislative Commission to conduct interim study of methods to encourage corporations and other business entities to organize and conduct business in this state. (BDR-534)
Mr. Fowler stated that the proposed provisions would make it easier for the corporation to issue uncertificated stock if it is discovered that someone has lost stock. This allows the issuing of uncertificated stock. Most shares now that are traded on the stock exchanges are uncertificated -- they are a notation on a supercomputer. He averred if it were necessary to transact and change the location and call back or reissue stock certificates for every stock exchange, the process would not be capable of keeping up. There is a statute that allows the Nevada corporations to issue uncertificated shares in place of certificated shares, where the certificates have been lost.
Mr. Fowler described an interesting problem with a statute on quorums for directors and stockholders meetings. The statute was changed several sessions ago to allow quorums of less than a majority. There are certain circumstances where corporations should be allowed to have quorums of less than a majority, stated Mr. Fowler. However, he said he believes that the problem exists because counsel wrote the statute and drew from other jurisdictions that did not agree. Nevertheless, the wording had to be changed from “different proportions” to “greater or lesser proportion” than a majority. He said the wording is changed, but the meaning is the same. The idea is simply to make sure that it is understood that the rule reads as it implies.
Mr. Fowler described technical changes made to the “control share statute.” Senator James asked Mr. Fowler, “Did they did not believe us, or were they litigating on a substantive issue, where there was question of whether or not our statute was appropriately protecting the minority, or those who were not present at the meeting?” Mr. Fowler responded that he had not heard anything about the litigation described, it was simply lawyers in the firms who wanted to put into place a quorum provision that would require less than majority in particular circumstances. Senator James responded to the answer, concluding that the provision was put into place to utilize that mechanism, therefore the legislative intent that less than the majority was allowed was not made clear.
Mr. Fowler continued with his testimony, describing the technical changes made to the control shares statutes, which is a set of statutes that is basically a takeover protection device for public corporations. He pointed out the technical changes made are discussed on pages 5 and 6 of the prepared summary of provisions (Exhibit D). The control shares statutes indicate if a person is a stockholder and passes an ownership threshold and then wishes to vote the shares, there must first be permission from the other stockholders. He said again, it is a takeover protection device, turning what would be a takeover into a proxy fight; thus, allowing the other stockholders to vote whether the takeover artist is going to assume control of the corporation. This set of statutes has been in the code since 1987, and is a relatively standard provision in corporate law, Mr. Fowler stated.
Senator Wiener asked Mr. Fowler to briefly explain the three thresholds. Mr. Fowler explained that the first threshold is 20 percent. For example, “if you are a 10 percent stockholder, and you bought in up to 10 percent of a public corporation, then at 5 percent you have to report in a public filing to the SEC that you own 5 percent or more.” Mr. Fowler commented he has used the example of T. Boone Pickens. T. Boone Pickens buys 10 percent of the company, and management is frankly concerned. The statute provides that if Mr. Pickens increases his holdings to 20 percent, the stockholders get to vote on whether Mr. Pickens would get to vote the additional shares. Mr. Fowler said that turns a tender offer into a proxy fight, because Mr. Pickens then must go to the stockholders and request permission to vote the shares he owns, leaving discretion to the stockholders. Mr. Fowler said the ultimate end is slowing down the takeover artist. Slowing down the takeover artist is essential. Limiting the speed is how the statute provides protection to the corporation through the proxy fight.
Mr. Fowler said the changes to this statute are to ensure that a 10 percent stockholder whose desire is to merge the acquired shares into a merger, conversion, or some other transaction, is approved by stockholders. Contending that the transaction is not counted as a transaction subject to the control shares law, again, the stockholders must approve a merger or conversion.
Mr. Fowler commented on the amendments that allow for delayed effective dates and for certificates of termination, which can cancel a transaction if filed with the secretary of state’s office before the effective date.
Also he said, there were typographical errors found. Mr. Fowler stated that these have been corrected. For example, there was an erroneous cross-reference to another statute in NRS 78.751.
Mr. Fowler detailed a change to chapter 80 of NRS, dealing in significance with the Division of Financial Institutions, which requires the qualification of foreign corporations to do business in Nevada. The corporation that does business must qualify to do the business. There are a number of exemptions, Mr. Fowler stated. For example, NRS 80.015 states a long list of activities that can be done in the state of Nevada that do not have to go through the qualification process. But there is also an exception to the exemptions, which states that it is possible to do any one or more of the items listed. However, if there is an office here in the state that takes deposits, then qualification is necessary and the company must conform actions to the title that deals with banks and the savings and loan association.
Mr. Fowler stated that for some time the Division of Financial Institutions has taken the position that taking any kind of deposit (credit card, business transaction), the word “deposit” means more than the typical use of “deposit,” and can refer to other meanings. Thus, this meant that more corporations were dragged into the exception to the exemption statute. He pointed out the change has provided that the word “deposit” be defined by the meaning given in the banking statutes. In the banking statutes, “deposit” means time deposits, demand deposits, and savings deposits (bank accounts). The change of the meaning of “deposit” provides that if the deposits were taken, in the sense of opening a business to take bank accounts, the requirement would be necessary, Mr. Fowler averred.
Mr. Fowler indicated the Financial Institutions division has been notified that change has been proposed. Mr. Fowler said he wanted to inform the committee of this change because he believes it will be the subject of some discussion. Senator James commented that the committee would need to decide if the provision would be a good idea. He continued there seemed to be a protection built in, because if deposits are being taken the requirement to qualify to do business, which he noted is not an onerous requirement, may be appropriate. Senator James asked if this was exempt out of NRS 645. Mr. Fowler replied, “Yes, the statute which provides for the exception to the exemption excepts them out of conforming to the banking Title 55 [of NRS] and several other sections on mortgage companies.”
Senator James stated that there are cross-references on the exception, and utilizes several different chapters, not solely on chapter 80 of NRS dealing with foreign corporations. Mr. Fowler stated that he would send the exception, a copy of the letter (Exhibit D), and a copy of the attached summary to the Financial Institutions division, so they will be aware of the proposed changes taking place, and would have an opportunity to comment.
Senator Wiener inquired what impact this proposal would have on e-commerce transactions with merchant services done by credit card. Mr. Fowler responded that in the particular issue of deposit through credit card to an e-business, if the e-business’ computers are sitting in two separate states, neither of them in Nevada, but the deposit is made by credit card in the state of Nevada, the question is whether or not they have done business in the state of Nevada itself. Mr. Fowler stated he is not prepared to answer the question today. Also, he commented that the larger question is whether or not a person doing e-business in the state of Nevada, but with offices and phone banks elsewhere, is “doing business” in the state in order to be required to be qualified. Mr. Fowler determined he does not know of any court cases that have ruled on the issue at this time.
Senator Wiener commented that this issue is being discussed elsewhere in other legislation. She said she is familiar with the e-business complications, especially in the merchant services area. Senator Wiener requested Mr. Fowler provide, if possible, any further information he might obtain to the committee. She continued, stating that the opportunity to look into any information on the subject would be valuable, as Nevada is going in that direction. Mr. Fowler asked Senator Wiener about the other bill in the subject area. Senator Wiener referred to the privacy issues in S.B. 49, and how the two subject areas could come together. Mr. Fowler responded that the area would involve banking, and the Financial Institutions division would be very interested in Nevada resident banking.
SENATE BILL 49: Adopts Uniform Electronics Transaction Act. (BDR 59-258)
Moreover, Mr. Fowler stated, the Financial Institutions division would be considered with Title 55 of the NRS in dealing with banks and savings and loan. Mr. Fowler stated he was not familiar with the particular issue. Senator Wiener commented:
It also goes into the corporate arena because [it is] the corporation that is making the offer and getting the deposit. The benefit of the transaction will be filtered through the particular bank, but [primary] benefits of the transaction will go to the business that is selling the product over the Internet. But the bank is the merchant service operator that takes the deposit for the transaction. For example, I have a Web site that sells books and handbooks. My merchant service account is in California. Merchant service means the bank that receives the money of the credit card transaction that happens anywhere in the world. But there is also a facilitator involved, InterLan and Authorize.Net, which allows the transaction to go from the credit card to the bank in California.
Mr. Fowler stated the question is “Which of these entities does business in the state to require qualification?” Senator Wiener stated she did not know, but this scenario is not at all uncommon, and she believed that the corporate side is affected. Mr. Fowler agreed that the corporate side is affected, and all the statute states is “those corporations doing business” in the state. Senator Wiener recommended looking into this area more.
A brief discussion ensued between Senator Wiener and Mr. Fowler about the present difficulties of the “dot.com industry,” and the future of the e-commerce business in Nevada. To deal with these concerns, Mr. Fowler recommended that chapter 80 of NRS be changed to be more specific as to e-commerce. However, a policy decision would need to be reached as to how and where the changes would take place. Mr. Fowler described the proposed statutory changes of chapter 86 of NRS, dealing with the concept of noneconomic members. He said the business world wishes to have bankruptcy-remote entities, special entities set up to hold a “bag of assets” like airplanes or a pool of loans. The reason for being is to hold the assets apart from the corporation that holds the assets. Mr. Fowler cited an example of airplanes:
A large airline has a large number of airplanes they wish to lease. The financiers are interested in financing it, but they realize that airlines are cyclical -- there are up periods and down periods. If the airplanes are taken into formal ownership in an entity that does ownership only, the income strain from the leases comes from the airlines into the entity, and from the entity out to the investors.
Mr. Fowler said, however, the entity that holds title to the airplanes needs to be separate from the airlines. And thus, if the airline would declare bankruptcy then the airplanes would not get mixed up in the bankruptcy proceedings, protecting the investors. Mr. Fowler referred to this as a “lift stay order,” to lift the automatic stay that prevents the airplanes from being foreclosed upon.
Mr. Fowler stated that this is a common form of transacting business. The bankruptcy-remote entities are often limited-liability companies (LLC), and the mechanism to make sure that the entity does not get caught up in the business’ bankruptcy is the noneconomic member.
Mr. Fowler reminded the committee that members are to LLCs what stockholders are to corporations, they are owners. The noneconomic member is a special member who has all the powers of a member (or limited powers), but has no economic ownership interest in the company, and is appointed by the lenders to vote. He said there is not a specific provision in the statute for a noneconomic member for LLCs, but it has been requested by a number of different financial institutions, which would use Nevada entities for other reasons, if they had the provision written into the statute. There is also a definitional section and other sections that are affected, all which permit LLCs to have noneconomic members. He pointed out that this allows LLCs to be proper bankruptcy-remote entities.
Senator Care commented that when LLCs first began, they were based on a letter opinion received from the Internal Revenue Service (IRS). He recalled that through the IRS it was possible to take some of the properties of a partnership and some partnerships of a corporation, and this would become the LLC. Senator Care questioned Mr. Fowler if Delaware has noneconomic members, and if it is necessary for Nevada to have a noneconomic-member provision. Mr. Fowler answered that Delaware does have noneconomic members, because Delaware LLCs are used more than any other LLC.
Mr. Fowler continued, stating the effect of noneconomic members on LLCs is that there should not be an effect on the ability to operate as a partnership for tax purposes as to the things that the IRS checks. Moreover, tax treatment usually does not have effect, because with the LLC money comes in and money goes out with no gain or loss, therefore there is nothing to report to the IRS. Mr. Fowler contended he believed that the IRS would not object to a LLC being treated as a corporation.
Senator James referred the bill to a subcommittee composed of himself, Senator Wiener, and Senator Care.
Renee Lacy, Chief Deputy Secretary of State, Office of the Secretary of State, came forward to testify on the behalf of Dean Heller, Secretary of State. Ms. Lacey commented that they are in general agreement with many of the provisions of the bill, and the secretary of state’s office looks forward to offering the services required to facilitate the new conversion and domestication provisions. She furthered that the secretary of state’s office does have a similar bill, which incorporates many of the provisions and some conforming changes to the secretary of state’s statutes for filings. Ms. Lacey said she has spoken with Mr. Fowler and they intend to work together in an attempt to incorporate the appropriate provisions from both bills and return to the committee with a consensus.
There being no further business, Chairman James adjourned the meeting at 10:23 a.m.
Heather Dion,
Committee Secretary
APPROVED BY:
Senator Mark A. James, Chairman
DATE: