April 23, 2015

Articles I and II of the Harmonized Uniform Business Organization Code (the Hub and META)

Garth B. Jacobson

In 2006, the Uniform Law Commission (ULC) Harmonization of Business Entity Acts Project (Harmonization Project) tackled the matter of organizing all business entity filing requirements into one legislative act. The project yielded an organized and succinct location for all the entity common filing requirements called the Harmonized Business Organization Code, otherwise known as the “Hub.” Thereafter, the ULC project harmonized all of the unincorporated business entities in its harmonization of business entities project. The Harmonization Project included the harmonization of the Model Entity Transactions Act (META) (2007). META provides the mechanism for entities to merge, transform, or morph into other entities, entity forms, or domesticate into another jurisdiction. This article provides a thumbnail sketch of Article I of the Hub and of Article II, META. While much more can be written about these acts, this article provides an introduction and some interesting features. 

The Hub 

Most attorneys know very little about how business entities documents get filed and the issues related to filing office procedures. Likewise, when business entity statutes are drafted, unless a filing office official or someone experienced with the filing procedure is present, the drafting committee may face resistance during the legislative process from the secretary of state’s filing office, because the proposed statutes don’t comport with the established procedures of the office. Those procedures are often driven by the computer system database and storage methods of the office and the office culture; perhaps called “tradition.” Regardless of the background for the procedures, they are generally set up to create a logical, efficient method to receive a business entity document and file it so it is preserved in the record. Ultimately, the public has access to the information contained therein. The procedures usually apply to all documents submitted and create the workflow. The Hub captures these commonalities of filing procedure and places it in one place for uniform application to all business filing entities. But at the very least, the Hub provides an attorney a valuable roadmap through entity filing procedures that are otherwise scattered throughout entity statutes. 

The Hub, as the name connotes, is the one place of commonality amongst all business filing entities. It is in essence the hub, and then each entity type is a spoke off the hub. While some may argue about harmonizing language of similar business entity types, no one on the committee disagreed about the value of placing all filing requirements in one location. The drafting committee relied heavily upon input from the representative from the International Association of Commercial Administrators (IACA) and the few attorneys on the committee familiar with filing procedures. The Hub serves two important functions. First, it creates an easily understandable, consistent, statutory location for the filing instructions and related matters. Second, it prevents the inconsistencies that now exist due to drafting committees or legislatures amending entity laws in erratic manors. Those errors may have been made in the past by drafting legislation attorneys who didn’t know better. Once enacted, the Hub filing procedure changes would go through the Hub and not the individual business entities statutes, and hopefully be reviewed by the filing office. It should be also noted that the Hub establishes the general methodology for the filing process. However, various jurisdictions may alter the procedures based upon their operational differences. For example, the name “filing standards” may be different from what is prescribed in the Hub. That is, some states may choose to use a “deceptively different name” standard instead of the “distinguishable on the record” standard prescribed in the uniform Hub legislation. Even though this is a uniform act, it is contemplated that alternative methods may be used in various filing offices. The result remains the same: that there will be internal consistency within the jurisdiction, but not necessarily total consistency between jurisdictions. 

The Hub consists of six substantive parts:

  • Part 1 provides basic definitions and grants authority to the filing office through rules and procedures not necessarily specified in the statutes.
  • Part 2 specifies the filing procedures and protocol. This creates the nuts and bolts of how to file a document.
  • Part 3 details the name standards for entities and the necessary nomenclature for entity identifiers.
  • Part 4 places the Model Registered Agent Act into the Hub. These provisions address the requirements for naming and maintaining a registered agent where service of process can be delivered and how service is made. It establishes an innovative feature that recognizes the commercial registered agents and their special needs and procedures they must abide.
  • Part 5 deals with the requirements for foreign entities registering with the filing office and the actions that need to be taken to qualify to do business in the jurisdiction.
  • Part 6 prescribes the procedures for involuntary dissolution of business entities. This function serves as a penalty for entities who fail to file their annual report or fees. The annual report provides some entity transparency and notifies the public certain information about who controls the entity. Additionally, it serves to remove the deadwood entities from the record that cease operations and simply walk away without following the proper dissolution procedures. 

Part 1 contains the very important definitions section. The committee spent much time and effort to establish effective definitions that carry throughout all of the other parts and into the other entity acts. This structure borrows from the Uniform Commercial Code. However, if the Hub is enacted as a separate act and used exclusively for the central location of the filing office provisions (such as pending 2015 legislation in Washington State Legislature (SB 5387)), then the definitions section is pared down to just the terms related to the Hub itself. In that case, the other business entity acts then stand alone with definitions not drawn from the Hub. But note, with the adoption of the Hub, the entity statutes reference back to the Hub the file provisions that otherwise would be included in that entity statute and remove any definitions related to filing matters. 

Part 2 drills down into the mechanics of filing documents. The legislation specifically authorizes electronic filing as determined by the filing office. While almost all filing offices permit electronic filing in some form or another, they all have different twists on the method and means. This legislation recognizes electronic filing and permits the filing office to set the requirements. Also of note is the modification of execution of documents. “The entity filing must be signed by an individual or on behalf of a person authorized or required under this [act] to sign” Section 1-201(4). This permits an entity to form another entity, but ultimately, there must be a human listed and identifying his or her capacity to sign. Part 2 also establishes the requirement for entities to disclose certain information in an annual report. This requirement may be well established in many states and lacking in others jurisdiction. The Hub specifies the minimum entity disclosure information include the name of one “governor” for transparency purposes. Likewise this named “governor” establishes a point of contact for secondary service, as explained later. 

Another interesting feature of Part 2 is the specifying the date and time applied to the filing. While the delivery determines the time of filing, the completion of filing will likely occur sometime after the recorded time of filing. This enables the filing office to complete the filing review process and to determine if the document information is complete. However, if the filing office creates expedited filing, then the potential exists for conflicts between the expedited filing and regular filings. While the delivery establishes the filing date, the filing office decides the order of processing. Conceivably, the first delivered would not get processed before the line-cutter expedited filing. The net result could be the expedited filing could beat out the regular filing in races to obtain a business entity name. However, the Hub does not contemplate expedited filing procedures; it just specifies the date and time given to the filing. Of note, Delaware has expedited filings as short as one half hour. Therefore, a conflict could exist in jurisdictions that create expedited filings. 

One other section that stands out concerns the opportunity to correct a filing after its submission. Section 1-205 permits the submitter to, at some later date, correct an inaccuracy or error in the original filing. A surprising number of filings are corrected due to mistakes made by attorneys or formation agents. This section permits a correction that reverts back to the filing date unless someone relied on the “uncorrected filed record and adversely affected by the correction.” 

Lastly, Part 2 provides for certificates of good standing. The committee debated for some time the need for certificates of good standing as opposed to certificates of existence or even a certificate at all. The committee decided that while “existence” probably better describes the certificate, “good standing” makes the due diligence people happier, or just sounds better. Even though it appears conclusive, the certificate is limited to the information contained within the filing office and may not reflect the status of other taxes or matters that could affect the entities standing with the state. Entity due diligence requires going beyond the simple certificate of good standing.

Part 3 discusses at length the requirements for business entity names. Parenthetically, it is my experience that the two biggest complaints among document filers are disputes over the use of business names and the attempt to use the name-filing process as a means to obfuscate the trademark process. Name filing under any standard is not a trademark per se. The name standard specifies that the name of an entity must be “distinguishable on the records” of the filing office from another business entity name. This standard replaces a prior widely-used standard of “deceptively similar.” The latter has already been phased out in most states because it required a judgment call by the filing office. The “distinguishable on the record” standard permits names with the slightest of variance to be filed. However, note that the Hub does not recognize the entity-type identifier as a distinguishable variance of a name. Additionally, just because the name was fileable does not protect it against a trademark infringement action. Alternatively, there are provisions for filing identical names upon the consent of the first filed entity. However, there must be a different identifier of the type of entity. Therefore, XYZ Inc. could consent to the filing of XYZ LLC. Generally, these circumstances occur between affiliated entities. 

Part 4 deals with registered agents by incorporating the Model Registered Agent Act (MoRAA), which was promulgated before the Hub. Many eyes have reviewed and refined MoRAA. The International Association of Commercial Administrators (IACA) initiated and developed MoRAA. The American Bar Association Business Law Section further refined the act and referred it to ULC. ULC organized the MoRAA Drafting Committee and developed the legislation into its final form, which in turn was integrated into the Hub. It should be noted that MoRAA has been enacted in 12 jurisdictions: Alaska, Colorado, District of Columbia, Hawaii, Idaho, Maine, Michigan, Montana, Nevada, North Dakota, South Dakota and Utah, with variations in Kansas and Wyoming. 

The Hub/MoRAA focuses on the required element that all filing-created business entities have in common, namely, the registered agent. Initially, it is important to understand the function of a registered agent. A registered agent is the person or entity designated to receive service of process on behalf of a business entity. Because business entities are treated as separate from the people who own and operate them, there is a need to establish a portal where the entity can be found and served. The Hub/MoRAA requires the business entity to have an agent for service of process. Entities can either self-represent themselves or delegate that duty to someone else, such as a law firm or service company. This is the basis for “commercial registered agents,” that is, persons who represent many other entities as their registered agent. MoRAA creates the recognition and guidelines of the activities of commercial registered agents. 

The Hub/MoRAA establishes procedures for handling the registration of commercial registered agents. It prescribes how they can change their name or address; or merge, convert, or cease doing business. These procedures greatly reduce the number of filings and improve the efficiency of the filing process that has occurred due to electronic filing and improved data management. 

Notable to litigation attorneys is the substitute service provision if the registered agent cannot be found. The legislation bypasses service of process on the secretary of state and directs the plaintiff to serve by registered or certified mail, an entity’s governor (officer, director, manager, etc.) at the address of the listed principal office in the last annual report. The assumption is that service on the secretary of state (SOS) is unnecessary if the service would be performed the same way anyway. Likewise, service on the SOS would fare no better or worse in a due process challenge to vacate a default judgment. However, some states may want to keep that requirement of service on the SOS for the sake of tradition or legal culture of that state. 

Section 5 prescribes the procedures for registration of a foreign entity. In most states, this requirement formerly referred to “qualification to do business” in that jurisdiction. Please note the term “foreign entity” refers to any business formed outside the state. The Hub specifies that the internal affairs of the foreign entity are governed by its formation jurisdiction. Generally, the SOS is the gatekeeper for foreign entities seeking to do business in the state. The Hub requires that all foreign business entities “doing business in the state” must register the entity with the SOS’ office. The difficult question is, “What constitutes doing business in the state?” The Hub in Section 1-505 defers to the long existing language found in corporation and LLC statutes that provide a laundry list of exceptions to the registration requirement. The white paper, What Constitutes Doing Business (CT Corporation System/Wolters Kluwer, 2012), explains the exceptions, so there is no need to discuss them here. The state’s attorney general’s office prosecutes injunctive enforcement for the failure to register a business. This replaces prior procedures that include accumulating stiff fines. The failure to register does not impair any contracts, but precludes initiating an action in that state’s court. However, an entity can still defend itself in an action in that jurisdiction. 

The Hub establishes a straightforward registration process. It should be noted that if name of the foreign entity is already in use in the state, then the foreign entity can complete its registration, but must use an assumed business name in the state it enters. Trademark law controls name disputes, but the registration process still controls what name is permitted in that state. In that case, the foreign entity cannot use its name in that state. No doubt it would it would challenge the name in a trademark infringement suit, but that would not control the initial registration process. 

Section 6 contains the provisions for administrative dissolution of a business entity. The Hub permits the administrative dissolution of an entity for failing to pay annual fees, taxes or licenses, or for failing to file an annual report or maintain a registered agent in the state. The SOS provides notice to the entity of the deficiency, and if not cured within 60 days, is administratively dissolved. Thereafter, the administratively dissolved entity can reinstate by filing for reinstatement and curing the deficiency. This usually means submitting annual reports with unpaid annual fees. Thereafter, it is restored with all the rights and duties as if it had not been dissolved, with the exception as to persons who acted in reliance of the dissolution before the person knew of the reinstatement. Note that if another entity registered the dissolved entity’s name during the dissolution gap period, the dissolved entity would need to reinstate with a new name. The period permitted for reinstatement varies from state to state. Most states will opt to retain their existing time standards. However, after that period expires, reinstatement may not be possible without judicial relief. This becomes a rude awakening if years after a company is dissolved it wants to transfer property associated with the entity and needs to reinstate the entity for the purpose of making that transfer. 

Some people walk away from their entity and effectuate administrative dissolution instead of using the formal dissolution process. However, this could result in problems other than the one described above. It should be noted that one of the latest trends is for people not associated with the dissolved entity to reinstate it and then use it for money laundering or other nefarious purposes. Presumably, only a person authorized by the entity can reinstate the entity. But the filing office has no way of knowing who is or is not authorized to reinstate the entity. This opens the door for someone to hijack the entity through the reinstatement process. While there may be penalties for submitting false documents, the disreputable individual will simply add that to his or her list of crimes. So for those who intentionally or unintentionally let their company become administratively dissolved, there may be a potential need to explain the circumstances to law enforcement. 

META 

Closely related to the Hub is the Harmonized Model Entity Transaction Act (META). META is the junction box that enables business entities to transform into some other entity through the process of a merger, interest exchange, conversion, or domestication. Without the junction box, the transaction would likely be more difficult, with many extra steps. 

During my time at the Montana SOS office I served on the Montana State Bar LLC Drafting Committee. At the time, the newness of LLCs created many uncertainties and potential traps for the unwary. Our committee took the paternal approach to prohibit corporations merging into LLCs because of the potential adverse tax consequences. While the corporate law would permit the merger, the LLC law prohibited it. This sort of baked-in prohibition or incongruity between entity statutes is what META seeks to eliminate. In most states, the statutes regarding META transactions are inconstant, incomplete, and often scattered throughout the state’s entity statutes. META cures this problem because it deals comprehensively with same-type and cross-type merger, interest exchange for all types of for profit and nonprofit type entities. This is all placed in one central location. 

Part 1 of META provides the definitions and matters potentially related to all transactions specific to the act, such as regulation approval, compliance with anti-takeover laws, protection provisions against diversion of property held for charitable purposes, and member appraisal rights. It also enables carve outs that may be particular to that jurisdiction. 

Part 2 contains the roadmap for mergers. Mergers can be unfettered or limited based upon the desires of the business/legal culture of the enacting jurisdiction. The limitations may include only mergers of the same entity type or other limitations thereto. The part lays out the requirements and resulting consequences of a merger. This includes merger filings plan approval, filing statements, consent requirements, and plan abandonment. While META generally permits and prescribes mergers, the organic entity law or organization rules may establish other limitations in the form of supermajority or unanimous consent to a merger. 

Part 3 specifies the requirements for interest or share exchanges. This establishes exchange transactions not necessarily recognized in many jurisdictions. The provisions of this part parallel the requirements specified for mergers in Part 2. The part provides one more tool for complex transactions. It permits a triangular merger being collapsed into one transaction. 

Part 4 permits internal conversions of business entities from one type into another, either foreign or domestic. While there may be tax implications associated with a conversion of a corporation into a LLC, the process is much easier than forming a target organization and merging into it to create the same result. 

Part 5 enables a foreign entity to domesticate into a similar entity in another jurisdiction. Domestication requires the reciprocity authority between the two jurisdictions. This again collapses and simplifies the process of changing the jurisdiction of a business entity. This could come about due to more favorable business treatment or tax reductions in a certain state, or the discovery that the formation state and the state where the business operates should be collapsed into only one state, because the entity is paying taxes or fees in two states and submitting duplicate annual reports. META enables this in a simple filing transaction. 

In conclusion, the Hub and META create consistency and streamlined operations for all forms of business entities. These acts approach the ultimate goal to create easily understood, reliable, and predictable instructions regarding the public record and for creating, maintaining, transforming, or terminating business entities. Hopefully, attorneys and the public will not have to call the filing office and seek answers due to confusion in the entity filing laws. Enactment will be beneficial to lawyers, entrepreneurs, and the filing offices.

Garth B. Jacobson

Garth B. Jacobson, Senior Attorney, Government Relations for CT Corporation, served as an observer/advisor to various Uniform Laws Commission business entity drafting committees. Currently he assists as an “observer” on the Series LLC Drafting Committee and ABA advisor to the Wage Garnishment Drafting Committee. He is a member of the ABA Business Law and the Science and Technology Sections where he serves as Co-chair on both ULC Committee and E-filing Committee and LLC Committee Subcommittee Chair.