2005 Developments in Business Entity Law
| Publication year | 2021 |
| Pages | 81 |
80 CBJ 81. 2005 DEVELOPMENTS IN BUSINESS ENTITY LAW
This review will discuss developments in 2005 associated with Connecticut business entities: corporations, limited liability companies, limited partnerships, limited liability partnerships, general partnerships and statutory trusts. Since these entities raise capital, securities law cases in Connecticut in 2005 will be discussed.
I. SECRETARY OF THE STATE'S OFFICE
It is useful to set the stage by examining the number of entities formed under Connecticut law or qualified to transact business in Connecticut. The following table sets out these statistics:(fn1)
ENTITY
Entities Created in 2005
Total Number of Entities at Y/E
Corporation
Domestic
3,084
93,973
Foreign
2,273
28,761
LLC
Domestic
21,895
145,396
Foreign
1,815
8,970
LP
Domestic
83
10,181
Foreign
189
2,517
LLP
Domestic
96
879
Foreign
20
145
Statutory
Domestic
95
1,481
Trust
Foreign
10
65
These statistics are noteworthy in a few respects. The first is the sheer number of entities formed each year, and the number that exist in total. No doubt the number of active entities is lower, since the General Assembly removed the power of the Secretary of the State to dissolve entities no longer in good standing and there is limited incentive for inactive entities to remove themselves from the rolls. The
* Of the Stamford Bar.
1 These numbers were obtained from the Commercial Recording Division of the Secretary of the State's office.
second is the overwhelming preference for the limited liability company form. The number is so large that one suspects many sole proprietorships have reformed as single member LLCs. It cannot be determined how many of these are single-member LLCs, for which, unlike more complex LLCs, simple or no rules suffice, but, as will be discussed subsequently, the limited liability afforded by single-member LLCs is always at risk. A third is the strong preference for Connecticut domestic entities, presumably for businesses that operate primarily in Connecticut. In all, the effort the legislature has devoted to enact the underlying legislation, and the Secretary of the State's office to establish the infrastructure to support these entities, seems to be rewarded by these figures.
A. Backlog
It was not so long ago that the Commercial Recording Division had a large filing backlog. The introduction of "expedited service" provided some relief. Currently, there is no backlog for filings other than for annual reports. At an average rate of 1,000 per day, the backlog for annual reports is not surprising. Annual reports can now be filed online, and there is every reason that this should be encouraged. While this significant turnaround may not be responsible for the preference for forming Connecticut domestic entities, it is a necessary pre-condition. If the turnaround is due to the efforts of a number of people, it is still worth noting the contribution of the former Deputy Secretary, the capable Maria Greenslade, who in 2005 moved from the Secretary of the State's office to become Assistant Treasurer in charge of the State's second injury fund.
II. STATUTORY DEVELOPMENTS
The 2005 legislative sessions made little change in the statutory framework for Connecticut entities. Conn. Act 05- 216 allowed physicians and chiropractors to practice together in the same corporate or LLC form and is of interest mostly because the change points up differences between the practices that can be combined in a professional corporation and
those that can be combined in a professional LLC.
As will be noted below, cases continue to show the utility of basing the Connecticut statutes on model acts, particularly the relationship of the Connecticut Business Corporation Act ("CBCA") to the Model Business Corporation Act ("MBCA"). It is therefore disappointing that in 2005 another effort to adopt the MBCA amendments defining the liability of directors again failed.(fn2)
III. CASE LAW DEVELOPMENTS
A. Corporations
1. Federal Court
Frank v. LoVetere(fn3) is an action alleging breach of director's duties to shareholders of a Connecticut corporation and also included a shareholder derivative action. In response to a demand from a shareholder requesting an investigation into a particular transaction, the corporation convened a special litigation committee to make an inquiry under CONN. GEN. STAT. Section 33-724. It concluded that litigation was not warranted, and the derivative suit was brought. In an opinion filed on March 31, 2005, Judge Arterton concluded that the plaintiff had not made factual allegations sufficient to establish that the standard of Section 33-724 had not been met, that the committee was not independent, did not act in good faith, and did not conduct a reasonable inquiry upon which its conclusions were based. The court drew on the Official Commentary to the MBCA to avoid undertaking a more extensive review of whether the decision itself was reasonable and principled, as some courts have urged. The company then countered with a motion for attorney's fees, arguing that the dismissal of the derivative case entitled it to an award under CONN. GEN. STAT. Section 33 726. On December 29, 2005, Judge Arterton ruled the standard under Section 33-726 was the same as under Rule 11, drawing heavily on the Official Commentary to that effect accompanying the Model Business Corporation Act.(fn4) The
2 S. B. 1119 (2005 Reg. Sess.).
3 363 F. Supp. 2d 327 (D. Conn 2005).
4 2005 U.S. Dist. LEXIS 37977 (D. Conn. Dec. 29, 2005).
action continues based on a breach of the duties of the directors (or, perhaps, of controlling shareholders - it is not clear which). In the absence of a statutory change conforming the CBCA to the MBCA in this area,(fn5) this may provide an opportunity for a court to consider (but, since it is a federal court, not resolve) whether the elements of such an action follow the MBCA delineation, as some practitioners insist, or a negligence theory, which others assert.
In Mason Capital v. Kaman,(fn6) notable for the speed - barely six weeks from complaint to trial to decision - with which it was resolved, Judge Kravitz had an opportunity to construe for the first time one of the two "business combination" portions of the Connecticut Business Corporation Act.(fn7) The first provision, adopted in 1984, was carried over in 1994 into the new Connecticut Business Corporation Act without revision, and was a "fair price" statute originally aimed at front-end loaded two step acquisitions. Here, Kaman Corp. proposed a recapitalization of the company, which ordinarily requires a majority vote of shareholders of a public company. Because of Kaman's unusual capital structure, an argument was made that the transaction fell within the ambit of a "business combination" with interested persons that would require approval of a two thirds' vote of disinterested shareholders. The statute defines business combinations in intentionally broad terms. While the case is a useful reminder that transactions with Connecticut public companies need to be analyzed against the two antitakeover statutes, the case may be more useful as an exercise in the reading of Connecticut's compact but often confusing style of legislative drafting. Unlike federal and many state statutes, which are formatted to aid in the parsing of clauses and subclauses, the Connecticut style reduces even uniform statutes into run-on paragraphs, in which the placement of commas, the use of "and" and "or", parentheticals set off by commas, and interior romanette clauses can be difficult to follow. After such a parsing, Judge
5 Seetextatnote3.
6 No. 3:05CV1470(MRK) 2005 WL 2850083...
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