MINUTES OF THE subcommittee of the
SENATE Committee on Judiciary
Seventy-First Session
March 6, 2001
The subcommittee of the Senate Committee on Judiciarywas called to order by Chairman Mark A. James, at 10:00 a.m., on Tuesday, March 6, 2001, in Room 2149 of the Legislative Building, Carson City, 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.
SUBCOMMITTEE MEMBERS PRESENT:
Senator Mark A. James, Chairman
Senator Valerie Wiener
Senator Terry Care
STAFF MEMBERS PRESENT:
Bradley A. Wilkinson, Committee Counsel
Allison Combs, Committee Policy Analyst
Carolyn Allfree, Committee Secretary
OTHERS PRESENT:
Renee Lacey, Chief Deputy Secretary of State
Scott W. Anderson, Deputy Secretary of State
John P. Fowler, Chair, Executive Committee, Business Law Section, State Bar of Nevada
Lauren Day, Student Body Vice President, B. Mahlon Brown Middle School, Henderson
Dylan Kesterson, Eighth Grade Class Representative, B. Mahlon Brown Middle School, Henderson
Tiffany Rumsey, Student, B. Mahlon Brown Middle School, Henderson
Amanda Lucero, Eighth Grade Class Representative, B. Mahlon Brown Middle School, Henderson
Jake Clove, Eighth Grade Class Representative, B. Mahlon Brown Middle School, Henderson
Nick Barlow, Student, B. Mahlon Brown Middle School, Henderson
Chairman James opened a combined hearing on Senate Bill (S.B.) 51 and Senate Bill 217.
SENATE BILL 51: Makes various changes concerning requirements for formation, maintenance and management of business associations. (BDR 7-255)
SENATE BILL 217: Revises various provisions governing the filing of organizational and related documents. (BDR 7-628)
Renee Lacey, Chief Deputy Secretary of State, Office of the Secretary of State, presented a proposed amendment to S.B. 51 that incorporates all the provisions of S.B. 217 into S.B. 51 (Exhibit C). She explained that some provisions of S.B. 217 are not included, since S.B. 51 already contains them; the cover letter to the proposed amendment (Exhibit C) explains the changes.
Chairman James said he would like to have the proposed amendment explained, section by section, to give the subcommittee good understanding of the changes proposed. Scott W. Anderson, Deputy Secretary of State, explained the proposed changes to S.B. 51, following the outline beginning on page 2 of the cover letter to the proposed amendment (Exhibit C).
John P. Fowler, Chair, Executive Committee, Business Law Section, State Bar of Nevada, explained that section 28, subsection 7, of S.B. 51 (page 21), amends Nevada Revised Statutes (NRS) 78.390 to permit a certificate of termination for terminating the effectiveness of an amendment to articles of incorporation.
Chairman James asked Mr. Fowler to explain the certificate of termination, and Mr. Fowler explained that the certificate of termination permitted by S.B. 51 allows a board to abandon an amendment approved by stockholders. The certificate of termination terminates an amendment that has been filed with the Secretary of State but has not yet become effective.
Chairman James asked if, previously, a board had to go back to the stockholders to have the amendment repealed. Mr. Fowler responded affirmatively. He explained that filing of a certificate of termination would occur only if the resolution approved by the stockholders allowed the board to terminate the amendment. He explained that this would be important if, for example, a financing required an amendment to the articles of incorporation. Then, if the corporation did not want to actually close the deal unless the price was right, the board would have the option to terminate the amendment and erase it from the public record.
Chairman James, referring to page 2, paragraph 3, of the cover letter, inquired if section 28 of S.B. 51 deals with a Chapter 78 type of corporation and section 58 deals with some other kind of corporation. Mr. Fowler answered that section 58 of S.B. 51 deals with Chapter 86 of NRS for a limited liability company (LLC).
Mr. Anderson explained that the amendment to S.B. 51, section 40, adds the certificate of correction to the limited liability company section. Currently, the certificate of correction applies only to corporations. This amendment also clarifies the kinds of corrections permissible under a certificate of correction.
Chairman James said he did not understand the language, “The secretary of state has no liability to any person if any document which this chapter authorizes to be filed is accepted for filing, examined and provisionally approved or filed and is inaccurate . . .” He asked if there is language after that, and what chapter they are referring to. Mr. Anderson responded that they are referring to chapter 86 of NRS.
Ms. Lacey, noting the handwritten words were missing from the bottom of the photocopied page, said the balance of the sentence reads, “. . . or defective in any way.” She said the words are included in the typewritten “Proposed Amendment to Senate Bill No. 51 Offered by the Business Section of the State Bar of Nevada and Secretary of State Dean Heller,” included in Exhibit C. She said they tried to make the same type of amendments to all sections that included provisions for certificates of correction; currently certificates of correction are provided for in chapter 78 of NRS; they are not provided for in chapter 87 of NRS.
Chairman James asked in what context was the Secretary of State concerned about liability for filing a document. Mr. Fowler responded, saying certificates of correction were created to allow corporations to correct things such as typographical errors or errors in signing or acknowledgment. Because of the wording of the statute, the Secretary of State became involved in trying to determine whether the correction being made was substantive. Mr. Fowler said he looked at the Delaware statute and cases. He said Delaware simply files the certificate of correction and, if someone was aggrieved, a judge in a subsequent lawsuit would sort it out. He said the wording comes directly from the Delaware statute [Delaware Corporation Law 103, subsections (f) and (g)], and Delaware judges will allow the Secretary of State to file anything that is called a certificate of correction as long as it complies with the statute.
Chairman James agreed with the intent, saying that, this way, the Secretary of State performs a ministerial function. Bradley A. Wilkinson, Committee Counsel, Legal Division, Legislative Counsel Bureau, asked if the same thing applies to any document, or only to certificates of correction.
Mr. Fowler replied that he knows of no case in Delaware that has determined that. He said he thinks it would apply to any document, but that would be a policy decision for this committee and the Legislature. He said his own feeling is that the Secretary of State’s function is ministerial and that the Secretary of State should not be responsible for statements made in documents filed. He said the Secretary of State has no way of knowing whether the statements made in a document accurately state what the stockholders approved. He added that he does not think anyone has implied they have liability, but no statute says they definitely do not.
Senator Wiener said it appears that the only liability under the language, “examined and provisionally approved or filed,” would be one created if the Secretary of State’s office did not perform its duties as determined by law. Ms. Lacey said that is correct.
Senator Wiener asked what cause of action someone might have to sue the Secretary of State, and who would have standing. Mr. Fowler offered the following scenario: Officers of a corporation amend their articles without seeking approval from the stockholders. Disgruntled stockholders sue the officers for the fraud and the Secretary of State for filing the fraudulent amendment. The Secretary of State’s defense would be that the document complied with the law as to form and there was no way of knowing it did not reflect the stockholders’ actual action. Mr. Fowler said that, as a practical matter, there is probably not a lot of liability. But it is instructive, he said, that Delaware saw a need to insulate its ministerial body [Secretary of State] from such liability.
Senator Care pointed out that the fact pattern Mr. Fowler described is similar to one Senator Ann O’Connell, Chairperson, Senate Committee on Government Affairs, was discussing. He said he did not want to duplicate her proposed legislation.
Ms. Lacey explained that the matter discussed in the Government Affairs committee involved the Stewart Indian School Museum, a case in which a forged list of officers was filed. A civil action resulted and the correct board members were reinstated by the court. She said a bill draft request is planned that would allow the Secretary of State to require additional information and documentation to prevent the theft of a corporation with the filing of a piece of paper. Ms. Lacey said, even with additional documentation, it would still be difficult for the Secretary of State to make a determination because if people forged one document they could forge another. She added that the Secretary of State’s staff would be meeting with Senator O’Connell to discuss the matter.
Chairman James said the bill would come to the Judiciary committee if it has to do with corporate statutes. “But,” he said, “you cannot give the [Secretary of State’s] office the job of trying to prevent every fraud from happening . . . There is just no way, prophylactically, to deal with all that; you have to go to court.” He asked Mr. Wilkinson how this would be codified. Mr. Wilkinson replied that it ought to be moved to a new section, standing alone, if it is meant to apply to any document and not just a certificate of correction.
Mr. Anderson pointed out a proposed change to section 68 of S.B. 51 not shown in the cover letter, in which the phrase, “including a sole member,” is added and refers to a sole member limited liability company.
Chairman James asked if this amendment to section 68 means that the death of a sole member in a sole member LLC does not cause the LLC to be dissolved. “Who winds up the affairs?” he asked, and Mr. Fowler answered that it could be a receiver, or a trustee, in a bankruptcy proceeding. Chairman James asked if that was the intent of the former law. Mr. Fowler replied in the affirmative, and stated:
With respect to . . . section 68 of [S.B. 51] . . . it was the intent to state that the death, resignation, expulsion, bankruptcy, et cetera, of any member does not terminate the status of the LLC . . . This has to do with the fact that rating agencies for sole member LLCs in financial deals . . . are specifically requesting Delaware LLCs, because the [Delaware] law is absolutely crystal clear that the dissolution . . . or bankruptcy of a sole member of a one-member LLC does not compel dissolution of the LLC . . . The words, “including a sole member,” underline the thought, so that the rating agencies will actually read the statute. It’s sort of like saying, “Dissolution of a sole member does not end the existence of an LLC, and we really mean it.”
Senator Care, referring to S.B. 51, section 68, subsection 1, paragraph (c), asked, “Is two-thirds in or out, right now? I don’t see the language scratched out in the attachment . . . as opposed to the letter of February 9.” (Exhibit D, letter dated February 9, 2001, to Senator Mark James, Chair, from John P. Fowler, Marshall Hill Cassas & de Lipkau.) Mr. Fowler said that it was overlooked. It should say “all” members must agree to the dissolution of an LLC, unless otherwise provided in the articles of organization or operating agreement.
Chairman James said all the language in paragraph (c) after “written agreement of members” is removed, according to the letter of February 9 (Exhibit D). Mr. Fowler said, “That is correct. This was done for estate planning purposes, to get the maximum discount permitted by the Internal Revenue Code.”
Mr. Anderson resumed explaining the proposed amendment to S.B. 51. He said section 78, regarding domestication, removes the requirement that an entity convert to a different type of entity when domesticating in Nevada.
Senator Care, noting that this is new material for Nevada, asked about section 78, subsection 2, paragraphs (c) and (d), regarding jurisdiction of the law governing the resulting entity and jurisdiction of the law governing the constituent entity. “How can you discuss jurisdiction . . . in articles of conversion?” he asked, adding that jurisdiction is something a court would decide.
Mr. Fowler answered that they want a plan of conversion to state the jurisdiction an entity starts in and the jurisdiction the entity ends in after conversion, which is Nevada. He said, in case of a dispute, a judge would decide which state has jurisdiction.
Mr. Fowler reiterated:
It tells the people who look at the plan of conversion . . . what jurisdiction they are starting out in and what jurisdiction they are going to end up in . . . The provisions of subsection 2 are really for the benefit of the owners of the entities, to make sure they understand the significance of this transaction.
Senator Care said, “It is not going to say, for example, ‘In the event of a dispute between shareholder X and shareholder Y, Nevada courts will have jurisdiction.’ Is it that kind of language?” Mr. Fowler replied that it is not; it simply states what jurisdiction they start in and what jurisdiction they end in.
Mr. Anderson continued, explaining proposed new section 81 relating to conversion of a domestic entity to a Nevada entity, and proposed new section 82 relating to domestication of a foreign entity to a Nevada entity.
Senator Wiener asked how sole proprietorships are handled, and Mr. Fowler explained that sole proprietorships are not covered by the conversion statute. General partnerships, corporations, limited liability companies, limited partnerships, and business trusts are covered by the statute. A sole proprietorship is an unincorporated entity, and nothing is filed with the Secretary of State.
Mr. Anderson said that a sole proprietorship, to convert to one of the entities covered under the statute, would file original organizing documents, and that would not be considered a conversion.
Senator Wiener asked for a layman’s distinction between a foreign organization and an undomesticated organization. Mr. Fowler said the domestication statute is designed only for non-United States entities. Conversion is for entities within the United States. There is a little overlap. A non-United States entity could use the conversion statute, but would probably use the domestication statute because it is designed specifically for non-United States entities. A California entity, on the other hand, must use the conversion statute.
Senator Wiener asked Mr. Fowler if he was using “conversion” to mean “foreign,” and Mr. Fowler answered that “foreign” does not mean non-United States. “The way they use it in the statutes, foreign means anything that is not Nevada.” He explained that any place other than the state of Nevada is foreign.
Senator Care asked Mr. Fowler whether he was aware of any foreign jurisdictions, outside the United States, that would prohibit a corporation from becoming a Nevada corporation without first dissolving in that foreign country. “I am trying to imagine a case where an undomesticated entity becomes a Nevada entity, something happens, and then it turns out that in the original country, the entity would not be permitted under those laws to do what they have done in Nevada.”
Mr. Fowler said he did not know of any, and it probably would be a question of which court got the dispute, if it went to litigation. “That is something we as people who draft statutes . . . cannot cover . . . There is no way the Nevada Legislature [can] affect the dispute, if it is heard in Germany.”
Chairman James interjected, “Once you have domesticated, aren’t you then a Nevada entity? So, it wouldn’t matter what some foreign court did to dissolve you; you are not dissolved.” Mr. Fowler concurred; the entity would not be dissolved in the eyes of Nevada law, he said.
Chairman James said, “So, if you are a shareholder . . . in this company and it is now a Nevada domesticated company, then you have jurisdiction, you have courts, you have remedies, you have everything you need . . . whether a foreign court had dissolved you or not.” Mr. Fowler agreed, saying it would then become a question of where the assets were and whether the court that had made the particular determination had power over the assets. “I can come up with all kinds of messy scenarios,” he said.
Senator Wiener asked if it is under conversion that both entities can exist at the same time, and Mr. Fowler answered that it is under domestication that both entities can exist. The idea of the conversion in Nevada, he said, is to dissolve one entity and create a new one.
Mr. Anderson resumed his explanation of the proposed amendments to S.B. 51. Additional provisions within sections 81 and 82 are related to requirements for the filing of other documents, such as a certificate of acceptance of resident agent, he said, so converted and domesticated entities would have the same requirements and filing fees as if they were filing a constituent document here in the state.
Chairman James asked Mr. Wilkinson where the domestication statute was codified, and Mr. Wilkinson said he thought it was in Chapter 92A of NRS, Mergers and Exchanges of Interest.
Senator Wiener pointed out to Mr. Anderson that earlier they had said they wanted to specifically address the fee and not make a reference to an NRS chapter. “Now we are going to make references to chapters?” she asked. Mr. Anderson answered that they chose to do it this way because of the broad spectrum of fees for corporations. “To put all those fees into [Chapter] 92A [of NRS] would be redundant, since once the conversion is completed, say for a corporation, then Chapter 78 [of NRS] would . . . govern that entity.
Senator Wiener said, “For the record, I have not had corporate law for about 25 years, and I do not practice law, because I am not an attorney.” She then asked for an explanation of exchanges.
Mr. Fowler responded, saying:
Exchanges are a way of having the majority compel the entire group of stockholders of a corporation to exchange their stock in corporation A for the stock of corporation B . . . In order to avoid extra pieces of paper required to form a corporation and then merge one of your entities into it, they came up with this exchange procedure.
Mr. Anderson explained that “Proposed Amendment to Senate Bill No. 51 Offered by the Business Section of the State Bar of Nevada and Secretary of State Dean Heller” (Exhibit C) incorporates a substantial portion of S.B. 217 into S.B. 51 by adding sections to S.B. 51. Mr. Anderson described this as being very similar to what has already been discussed. Most changes are made to simplify procedure and clarify confusing language.
Mr. Fowler said he wanted to describe two further changes. He presented a proposed statute relating to limited liability companies, dealing with charging orders (Exhibit E). An identical statute for limited partnerships is being faxed to Mr. Wilkinson’s office, he said. He further explained:
Charging orders are a way of allowing judgment creditors to collect their judgments against the interest of a member . . . This gives that person a procedure to collect on that judgment by imposing a charging order against the limited liability company interest . . . This statute makes the charging order procedure, which is described here, the exclusive remedy for a judgment creditor to collect against the interest a judgment debtor has in a limited liability company. The reason this is important is . . . (1) this provides a detailed procedure where he can actually get his money; but, (2) it doesn’t allow the court to compel the dissolution of the limited liability company . . . and selling off of the assets to provide a pool of money against which the judgment creditor can collect his judgment. This was put in place by Delaware in August of 2000; it is now in a number of states . . . I revised this wording . . . to make sure that the terminology used is the terminology used in our statute, not the defined terms and terminology used in the Delaware statute.
The procedure spelled out allows the court to appoint a receiver who takes charge of the membership interest in a limited liability company owned by the judgment debtor, and allows that receiver to collect the money as it comes in and give it to the judgment creditor . . . It is thought by . . . estate planning and probate practitioners, especially, that this would attract more people to forming Nevada limited liability companies and Nevada limited partnerships . . . It puts the owners of interests in limited liability companies and the owners of partnership interests in limited partnerships on the same playing field as stockholders in corporations . . . with respect to this particular aspect of their liability.
Referring to the language in subsection 6 of Exhibit E that states, “This section provides the exclusive remedy,” Senator Care asked Mr. Fowler what other remedies exist.
Mr. Fowler replied:
It would be a charging order, but the charging order would compel the dissolution of the entity. This limits the liability. This whole procedure comes from partnership law . . . There is case law that would allow an order from a judge in a supplemental proceeding to the main action, after a judgment has been obtained . . . to dissolve a general partnership to compel the production of money to satisfy a judgment against one of the partners . . . In a general partnership it is a little bit different situation . . . With a general partnership you have joint and several liability of the partners for partnership debts . . . So, that kind of procedure would still be permitted for general partnerships.
Senator Care observed that the judgment has nothing to do with the LLC’s affairs and that this is designed to prevent disturbing the continuity of the LLC when a member himself gets into trouble. Mr. Fowler said that is correct.
Chairman James requested a motion to recommend to the full committee a vote to amend and pass Senate Bill 51 with the amendments that have just been described.
SENATOR WIENER MOVED TO RECOMMEND TO THE FULL COMMITTEE TO AMEND AND DO PASS AS AMENDED SENATE BILL 51.
SENATOR CARE SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
*****
Chairman James welcomed visitors from B. Mahlon Brown Middle School in Henderson, and invited them to speak. The students introduced themselves and said they were here to learn about the Legislature and understand government. They expressed concerns about alcohol abuse, smoking in public places, and gun violence.
Lauren Day, Student Body Vice President, B. Mahlon Brown Middle School, Henderson, said keeping violence out of schools and the community was a big issue, and the students had recently written essays on the subject in English class. She said she was sometimes afraid to go to school because someone might bring a gun.
Dylan Kesterson, Eighth Grade Class Representative, B. Mahlon Brown Middle School, Henderson, said he would like to see alcohol banned.
Tiffany Rumsey, Student, B. Mahlon Brown Middle School, Henderson, said she does not think people should have access to guns; she said it is dangerous for parents to have them.
Amanda Lucero, Eighth Grade Class Representative, B. Mahlon Brown Middle School, Henderson, said she agrees with the whole gun issue.
Jake Clove, Eighth Grade Class Representative, B. Mahlon Brown Middle School, Henderson, asked why the state allowed cigarettes at all.
Nick Barlow, Student, B. Mahlon Brown Middle School, Henderson, said he does not like to go into smoky places and would like to see smoking stopped.
Senator Wiener told the students that their opinions are important and public officials want to hear from them. Chairman James described to the students some of the issues being considered by the Legislature and told them they can listen to the hearings on the Internet. He asked them to think about solutions to the problems, and said legislators want to hear their ideas about how some of the problems can be solved.
There being no further business, the meeting was adjourned at 11:00 a.m.
RESPECTFULLY SUBMITTED:
Carolyn Allfree,
Committee Secretary
APPROVED BY:
Senator Mark A. James, Chairman
DATE: