Corporate law

Here is a recent story I wrote for the Connecticut Law Tribune about changes to the law for corporations and LLCs that went into effect earlier this year:

While Delaware remains the hub of corporate law with a large number of publicly traded companies choosing to incorporate there, Connecticut is aiming to compete with the state and other large commercial jurisdictions, as recent reforms have been made to state laws governing corporations and limited liability companies.

Corporate law practitioners say these changes to Connecticut’s LLC and corporations law are part of the state’s effort to compete in being friendly to businesses and to entice corporate lawyers to advise their clients to incorporate in Connecticut.

When the Connecticut Uniform Limited Liability Company Act went into effect July 1, it was the first major update to Connecticut’s laws about LLCs since 1993. And major changes to the Connecticut Business Corporation Act went into effect Oct. 1.

These reforms are “mostly for the benefit of lawyers,” said John H. Lawrence Jr., a partner at Shipman & Goodwin in Hartford and a member of the American Bar Association committee that promulgates the model law on which Connecticut’s corporate law is based.

“Clients spend very little time focusing on these kinds of issues,” Lawrence said. “These are really tools to make advice on business matters easier and clearer. A lawyer has to have confidence that Connecticut will be as up-to-date as Delaware or New York or any other big commercial state.”

Before Connecticut adopted the new LLC law based on the Uniform Law Commission’s model law, “it was difficult to recommend to clients that Connecticut be the jurisdiction where they formed their LLCs if they were looking for outside investment,” said Matthew H. Gaul, a partner at Carmody Torrance Sandak & Hennessy in New Haven and a member of the Connecticut Bar Association’s Business Law Section committee that vetted the model law.

In terms of attracting corporations, Lawrence said Connecticut’s adoption of the latest changes to the ABA’s Model Business Corporation Act will make it competitive with other commercial jurisdictions.

The new Connecticut law allows corporations to correct prior “defective actions,” which is something Delaware law allows, said Lane T. Watson, a partner with Day Pitney in Hartford who represents companies in mergers and acquisitions and venture capital financing, and on other issues.

The most common situation in which a corporation has taken a defective action is when more stock has been issued than the articles of incorporation authorized, Lawrence said. That could scuttle a company’s effort to go public because some stockholders would not be able to sell their shares, Lawrence said.

The new law also allows companies to require that lawsuits regarding internal corporate matters be heard in Connecticut courts and thus prevent forum-shopping by plaintiffs, Lawrence said.

New legislation also allows corporations to eliminate a board of directors member’s responsibility to disclose when he or she has an investment opportunity that would be of benefit to the corporation, Lawrence noted.

The change in the law “eliminates a complicating factor in what is a national and international economy” to obtaining investments from venture capitalists, Lawrence said.

Connecticut corporations also can now undertake “two-step mergers” without getting the approval of shareholders, Watson said. Delaware law allows two-step mergers, in which an investor who accrues enough stock can gain control of a corporation. Once an investor’s control is in place, the investor merges the corporation into a new entity, even if other shareholders object.

Allowing two-step mergers without shareholder approval is seen as another way corporations can be acquired, giving businesses a reason to incorporate in Connecticut and not elsewhere, Watson said.

Marcel Bernier, a partner with Murtha Cullina in Hartford, was an active proponent of updating the LLC law in Connecticut. He said adoption of the model LLC law will make the state more competitive with other states. One benefit of adopting the model, he said, is that Connecticut judges and lawyers will be able to look to case law that has developed in other states to develop Connecticut’s own version of the law.

That’s important, Gaul said, because Connecticut previously had only a few court decisions involving LLCs, and there were gaps concerning the fiduciary duties of LLC members.

“Investors really don’t like uncertainty,” Gaul added.

The new LLC law also extends some concepts from corporate law into the realm of LLCs, Watson said. That includes a ban on LLCs making distributions to members if doing so would make them insolvent, he said. It also includes allowing LLC members to bring a “derivative” lawsuit claiming there has been a breach of fiduciary duty on behalf of the LLC itself, he said. The old statute was silent as to whether a member of an LLC claiming there has been a breach of a fiduciary duty may file that claim directly or on a derivative basis, Bernier said.

As a result, there have been conflicting Connecticut Superior Court decisions on whether LLC members may bring derivative lawsuits.

The new law also allows for LLC operating agreements to alter the duty of loyalty or the duty of care, which Bernier said is important to encourage investment. The new law also allows for the complete elimination of the duty of loyalty.

Allowing the parties to have the liberty to enter an operating agreement that changes these fiduciary duties will encourage hedge fund managers and other venture capitalists to invest in Connecticut LLCs knowing they are “not more exposed to liability than their comfort level,” Bernier said.

Another legal change, albeit from almost four years ago, also will encourage businesses to form LLCs in Connecticut, Gaul said. Following Connecticut’s enactment of the Connecticut Entity Transactions Act on Jan. 1, 2014, Connecticut LLCs are permitted to change into Delaware corporations, Gaul said. “That matters, because most venture capitalists want to be investing in Delaware corporations,” he noted. That means corporate practitioners can advise their clients to form their LLCs and attract investors in Connecticut, while retaining the option to eventually incorporate in Delaware.