ARIZONA ENTITY RESTRUCTURING ACT
Part 1: Entity Conversions and Domestications
Arizona has made a big jump forward by enacting the Arizona Entity Restructuring Act (the â€œActâ€), which just became effective on January 1, 2015. While the Act may be found in Title 29 PARTNERSHIP of the Arizona Revised Statutes in Chapter 6, it applies across the board to limited liability companies and corporations, as well as to limited partnerships and other forms of entities. The Act seeks to make Arizona a more business law friendly state when it comes to a wide variety of transactions, including mergers, ownership interest exchanges, divisions and two other subjects which will be dealt with in Part 1 of this article, those being domestication and conversion of entities.
Previous to the enactment of this statute, Arizona law was not permissive in allowing some of these entity transactions to occur, thus causing clients to look to the laws of other states, such as Delaware, Nevada and similar states, to effectuate certain business transactions. I would view this as a positive change for effectuating business transactions in Arizona. Prior Arizona corporate law was more focused on transactions involving the same types of entities and not, for example, corporations being involved in restructuring transactions with limited liability companies.
With respect to Article 5 of Chapter 6 dealing with domestication of entities, we frequently run into situations where someone moved to Arizona with an entity formed in another jurisdiction. When they arrive in Arizona, there are often many tax and non-tax reasons why they wish to keep the old entity alive. This usually resulted in their maintaining the entity in the former state and qualifying it to do business as a foreign entity in the state of Arizona, which often led to additional expense each year or forming a new entity in Arizona and merging the out-of-state entity into the newly-formed Arizona entity at considerable expense.
The Act now enables the out-of-state entity to be transformed into an Arizona domestic entity, eliminating its existence in its state of formation (provided that the foreign state recognizes domestications in its statutes). The same concept applies to Arizona domestic entities being transformed to a domestic entity in another state. This greatly simplifies the ability to continue a previously formed entity regardless of changing its domicile from Arizona to that of another state which has appropriate legislation recognizing domestication of entities.
With respect to Article 4 of Chapter 6 on conversion of entities, we have run into situations over the years where there were tax and other reasons for operating under a particular form of entity. One example involved an entity operating as a corporation that needed to be converted to a limited liability company taxable as a partnership. They needed to allocate cash distributions to the owners differently than in strict proportion to their ownership interests. As the corporate entity had been formed in Delaware, it was easy to effectuate the conversion from a corporation to a limited liability company under the Delaware statute. Previously, that fix was not available under Arizona law.
Future articles will deal with the other transactions as permitted by the Act and can be found on our website under Business Blogs. But the two changes mentioned here have added a great deal of flexibility for Arizona entities.
Michael W. Margrave