81 CBJ 109. 2006 DEVELOPMENTS IN CONNECTICUT BUSINESS ENTITY LAW.

• Author: BY ERNEST M. LORIMER*

Connecticut Bar Journal

Volume 81.

81 CBJ 109.

2006 DEVELOPMENTS IN CONNECTICUT BUSINESS ENTITY LAW

CONNECTICUT BAR JOURNALVolume 81, No. 2June 20072006 DEVELOPMENTS IN CONNECTICUT BUSINESS ENTITY LAWBY ERNEST M. LORIMER*This article will discuss developments in 2006 relating to Connecticut business entities: corporations, limited liability companies, limited partnerships, limited liability partnerships, general partnerships and statutory trusts.

I. SECRETARY OF THE STATE'S OFFICE

It is again 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 Total Number of

in 2006 Entities at Y/E

Corporation Domestic 3,149 95,286

Foreign 2,464 30,231

LLC Domestic 22,584 159,649

Foreign 1,912 10,235

LP Domestic 50 9,988

Foreign 183 2,555

LLP Domestic 78 905

Foreign 16 153

Statutory Domestic 159 1,560

Trust Foreign 9 65 These numbers are in line with last year's data, and continue to demonstrate the overwhelming preference to form new entities as limited liability companies.

110A. Backlog

There continued to be no backlog for filings with the Commercial Recording Division other than for paper filings of annual reports. Approximately 46,000 annual reports were filed online in 2006. This favorable situation stands in contrast to that of Delaware, where significant year-end delays occurred.

Note also, that it is now possible to obtain certificates of legal existence online as well. II. STATUTORY DEVELOPMENTS

The 2006 legislative sessions made a few improvements in the statutory framework for Connecticut entities.

First, PA 06-68 adopted amendments to the Model Business Corporation Act in the area of director's conflicting interest transactions and similar self-interested situations. Specifically, it revised the definition of what constitutes a conflicting interest transaction and clarified the procedures by which a subset of the board can approve such a transaction. It also clarified the process of obtaining approval of indemnification and advancement of expenses of a director, and of dismissal of a derivative action. It also clarifies what constitutes a "corporate opportunity" and the process by which a director can receive clearance to proceed with such an opportunity on his or her own. These changes are useful but incremental improvements, and of course there is value in maintaining the stock and nonstock corporate laws in line with the Model Business Corporation Act provisions as they evolve. However, Connecticut corporations that have written these procedures into their bylaws or into codes of conduct or codes of ethics should now consider revising those provisions to avoid having two sets of rules to follow, one statutorily imposed and the other self-imposed.

Second, PA 06-57 addressed a gap that had been created in the ability of general and limited partnerships to convert to limited liability companies. Because this gap illuminates a significant trap for practitioners, it is worth exploring

111in some detail. As can be seen from the statistics above, the limited liability company form is the preferred form for most entities. In 1994, the Connecticut Limited Liability Company Act,(fn2) which had gone into effect the prior year, was amended to allow general partnerships formed under the Uniform Partnership Act(fn3) to convert to limited liability company form.(fn4) By implication, a general partnership formed prior to the adoption of the Uniform Partnership Act in 1961 could not convert into a limited liability company. When the Uniform Partnership Act (1994)(fn5) was adopted effective July 1, 1997, this conversion section of the Connecticut Limited Liability Company Act was revised to refer to this new act instead of the prior Uniform Partnership Act. At the same time, the applicability of the Uniform Partnership Act (1994) provisions was transitioned, so that after January 1, 2002 it governed all partnerships.(fn6) Until January 1, 2002 it applied only to partnerships formed after July 1, 1997 or those that elected to adopt its provisions early.(fn7) Together these changes had the unintended effect of enlarging the class of general partnerships apparently not authorized to convert into a limited liability company form to include all those formed under the prior Uniform Partnership Act, even though these partnerships were once eligible to convert to a limited liability company form. Public Act 06-57 cured this situation by allowing the conversion of partnerships formed or governed by the Uniform Partnership Act (1994), and also validated any conversions by any general partnerships after July 1, 1997.(fn8) Thus any general partnership can now convert into a limited liability company form.(fn9)

A similar situation existed for limited partnerships, which

112can be divided into three classes: those formed prior to 1961, those formed between 1961 and October 1, 1979, and those formed on or after October 1, 1979. The first category continues to be governed by Chapter 609 of the General Statutes,(fn10) since repealed, unless a limited partnership elects to be governed by the Uniform Limited Partnership Act as it became effective in 1979 (which also causes it to be `formed' under it).(fn11) The second category continues to be governed by the Uniform Limited Partnership Act as it stood in 1979 before it was amended, unless a limited partnership elects to be governed by the amended version (which also causes it to be "formed" under it). (fn12) The third category is both formed under and governed by the Uniform Limited Partnership Act, as amended in 1979. This third category can clearly convert into a limited liability company form. It is probably also the case that limited partnerships in the second category may convert into a limited liability company form, because they also were formed under the Uniform Limited Partnership Act provisions (just not the version in effect today). A limited partnership in the first category can only convert if it first elects to be governed by the Uniform Limited Partnership Act. It is not clear why in PA 06-57 the conversion provisions were made retroactive to all general partnerships, validating conversions that took place while the gap was in effect, but not made retroactive to all limited partnerships with similar validating action. Perhaps the class of pre-1961 limited partnerships is too small. Still, one can envision the possibility that pre-1961 limited partnerships exist that have converted into limited liability form without first electing to be governed by the Uniform Limited Partnership Act.

This all might seem to be vanishingly unimportant, except that as will be seen below in the case of Brennan v. Lehn, the issue of the applicability of provisions...