Subsection Report

By Robert R. Keatinge, Chair

The Business Entities Subsection has principally been focused on a review of the recently passed business entity legislation with an eye to some technical revisions and corrections. Many of the changes being considered are intended to clarify uncertainties in the statutes and to carry forward the ideas on which Article 90 of Title 7 (the "Colorado Corporations and Associations Act") were based: that where possible without violating an underlying policy, the rules governing each business form should be consistent. With the prodigious amount of business entity legislation over the past two years in the partnership, limited liability company, and nonprofit corporation area, our goal is to correct several inconsistencies among the various statutes.

PENDING BUSINESS ENTITY LEGISLATION

The Colorado Bar Association is supporting SENATE BILL 98 - 102 CONCERNING ENTITIES, which is being sponsored by Senator Doug Linkhart. This bill (the "Bill") is designed to provide technical consistency among the statutes governing business organizations in Colorado. The Bill generally clarifies technical rules governing entities. Among the more significant of the changes are:

Nonprofit Associations

Nonprofit associations organized as private foundations are prohibited from making certain expenditures that would subject the association to penalty taxes. This corrects a provision stating such an organization could not make "taxable expenditures."

Cooperatives

The fiduciary duties of directors of cooperatives are made consistent with those of directors under the Colorado Business Corporation Act ("CBCA"). This will enable the members and directors of cooperatives to have the benefit of common law interpreting the CBCA in determining the duties of directors of cooperatives.

As with corporations organized under the CBCA, the incorporator of a cooperative may appoint the initial board of directors if they are not named in the articles of incorporation.

Under the Bill a cooperative may adopt a trade name. As under the CBCA, the requirement for approval by the members of a parent cooperative is eliminated for the merger of a subsidiary cooperative into the parent cooperative. Because such a merger merely reflects the manner in which the parent cooperative is holding its investment (i.e., directly rather than through a subsidiary) it should not require member approval.

Limited Liability Companies (LLCs)

The fact that the members may, by agreement, set the necessary vote for approval of a merger or conversion is confirmed.

Colorado Corporations And Associations Act

Special purpose corporations such as ditch companies draw many of their rules from the laws governing nonprofit corporations. The Bill confirms that these organizations will be treated as nonprofit corporations under the Colorado Corporations and Associations Act ("CCAA") which governs mergers of entities and filing requirements.

The rules applicable to conversions or mergers involving foreign corporations and foreign nonprofit corporations are made consistent with those applicable to other entities to confirm that if the governing documents of the foreign corporation or foreign nonprofit corporation permit such a conversion or merger and such a provision is not inconsistent with the statute under which the entity is formed, it may convert to or from, or merge with, a Colorado entity.

Several definitions used in the CBCA and the Colorado Uniform Partnership Act (1997) are added to the CCAA to provide additional certainty. The fact that an entity that results from a merger or conversion is the same entity that converted is confirmed.

The requirements for filed documents are made more explicit.

Nonprofit Corporations

A provision similar to that provided for nonprofit associations described above is provided for nonprofit corporations that are treated as private foundations.

The manner of determining the identities of members may be determined by a procedure provided in the articles of incorporation, bylaws or board resolution. Eliminates references to publication by public broadcast.

The corporation may increase or decrease the voting percentage and quorum for meetings. This is simply to reflect that in many nonprofit corporations, such as those in public broadcasting, every contributor is known as a "member" while only a few actually participate in operating the corporation.

A director whose term has ended may file notice of that fact with the secretary of state.

Confirms that the signing of a consent to action without a meeting by a director constitutes a waiver of the director's right to demand that an action not be taken by written consent.

The ratification of an action that might be considered to be a conflicting interest transaction is determined by the members entitled to vote.

The incorporators may amend the articles of incorporation before the directors have been selected.

Like the articles of incorporation in the existing law, the bylaws do not create any vested property interests for members of nonprofit corporations.

The directors may not reduce quorum requirements or increase voting requirements for members in bylaws.

The rules for actions with respect to rights of a dissolved nonprofit corporation are conformed to those provided for dissolved business corporations.

If you have any suggestions or would copy of the final proposal, please contact Robert Keatinge at 303/295-8595 or rkeatinge@hollandhart.com.