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Pennsylvania's New Law on Entity Transactions

June 9, 2015

On July 1, 2015, Pennsylvania's new "Entity Transactions Law" will go into effect, providing a significant update to Title 15 of the Pennsylvania Consolidated Statutes. The new law amends Department of State filing procedures (Chapter 1 of Title 15) and establishes new provisions governing names (new Chapter 2), registration of foreign associations to do business in Pennsylvania (new Chapter 4) and adopts the Model Entity Transactions Act to simplify the process for certain fundamental transactions for all entity types (new Chapter 3).

Reorganization of Title 15 
The new law consolidates provisions in the preliminary chapters of Title 15, which are applicable to all entity types (e.g. business corporations, nonprofit corporations, general partnerships, limited partnerships, limited liability companies, etc.), and repeals similar provisions that apply only to individual entity types. These amendments are mostly technical in nature. 
 
Adoption of the Model Entity Transactions Act 
The new Chapter 3 of Title 15 is based on the Model Entity Transactions Act ("META"), a model act drafted by the National Conference of Commissioners on Uniform State Laws and the American Bar Association. The new law allows all entity types to engage in the following five fundamental transactions: 
 
1. Merger of one entity with or into another entity; 
2. Conversion of one type of entity to another type of entity (e.g., business corporation into a limited liability company); 
3. An interest exchange between two entities so that one of them is controlled by the other without actually merging the entities; 
4. Division of one existing entity into two or more entities; and 
5. Domestication of an entity originally organized in another state. 

Under prior law, entities involved in these fundamental transactions were required to dissolve first and eliminate any outstanding debts. The new law allows these transactions to occur without requiring dissolution.

Although each entity type will use its own process for approving fundamental transactions, the general steps are the same regardless of the type of entity or the type of transaction. Except for nonprofit corporations or where prohibited by an entity's own governance rules, there are various requirements for approval of the transaction, and this needs to be followed in order for the plan to be effective. If an Interest Holder is affected, it will at a minimum require his/her consent. After approval, a statement of the transaction or the plan itself is filed with the Department of State to make the transaction a matter of public record.

New Definitions 
In addition to the other changes, there are certain new definitions under the new law. Included among the new definitions are "Governor", meaning the person(s) managing the entity; "Interest", meaning the stock or membership ownership; "Interest Holder", meaning the shareholder or member; "Organic Law", meaning the law of the jurisdiction of formation of the association governing its internal affairs; "Organic Rules", meaning for instance the articles of incorporation, bylaws, certificate of formation, and operating agreement; "Private Organic Rules", meaning the agreements in which the members have entered into; and "Public Organic Record", meaning the articles of incorporation or certificate of formation. These terms are used throughout the new law.
 
Registration of Foreign Associations to do Business in PA
The new Chapter 4 of Title 15 consolidates the provisions for registration of foreign associations to do business in Pennsylvania. All foreign registration forms are now consolidated into a single "Foreign Registration Statement." These changes are also mostly technical, however the new law does specify that a foreign financial institution that is not an interstate bank will be treated like a foreign association, not a bank, and will be required to register.
 
Practice Pointer
Most of the forms filed with the Department of State will be changed as of July 1, 2015, and entities need to be careful to make certain to use the new forms.
 
As a matter of caution, even though the new law has simplified the ability of entities to engage in the five fundamental transactions, the new law is tax neutral. Entities still need to provide for the tax consequences of the various transactions.
 
Before entering into a transaction, entities should check the new Title 15. It is much more user friendly and sets forth the requirements in an easy to follow manner.

For more information, please contact Gary Zlotnick at gazlotnick@zarwin.com.


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