Lexington, KY - Two bills passed the 2010 Kentucky General Assembly with an eye toward addressing some of the discrepancies and complexities in Kentucky business entities law, as well as modernizing and establishing uniform filing standards and procedures for business entities. Both were signed by Gov. Steve Beshear on April 13.
Senate Bill 150
Senate Bill 150, an omnibus revision bill, created more uniformity throughout the Kentucky laws governing business entities and addressed several state court cases arising from these laws. According to attorney Tom Rutledge of Stoll Keenon Ogden, the primary drafter of this bill, "Business organization laws exist to define the nature of a relationship - who may do what and when may they do it. Over time we identify fact situations for which the statute is either silent or confusing, and it is revised to provide clarity."
Senate Bill 150 (2010 Acts, ch. 133), was ushered through the legislature by Sen. Tom Jensen and Reps. John Tilley and Scott Brinkman. The provisions of the bill became effective on July 15.
One of the main provisions of the bill addressed a discrepancy, highlighted in the Barone v. Perkins (2007-CA-000838-MR) case, between the Business Corporation Act and the Limited Liability Company Act ("LLC Act"). In the Business Corporation Act, limited liability for shareholders was restricted by the caveat that shareholders are personally liable for their own tortious acts on behalf of the business entity. Until now, the LLC Act did not contain such a provision, leading the court in Barone v. Perkins to decide that the members of an LLC were not liable for their own actions, a result that gave LLC members more limited liability than shareholders of other business entities. SB 150 changed this by adding a personal liability provision to all business entities operating in Kentucky so that, regardless of the form of business organization, one acting on the organization's behalf is still responsible for their own tortious conduct.
Another provision concerning LLCs is a change to the rules governing who has the authority to initiate legal action on behalf of and in the name of an LLC. The former rule (KRS ß 275.340), as interpreted in Lourdes Medical Pavilion v. Catholic Healthcare Partners, Inc. (2006 U.S. District LEXIS 12550), disallowed a defense to suit by an LLC that there was no proper authority to bring the suit on the LLC's behalf. SB 150 repealed the Kentucky statute that precluded this defense, paving the way for other state law and the terms of operating agreements themselves to control in this situation.
Among the many changes to the business entities laws are sections concerning statutory limits on distributions by limited liability partnerships when the LLP is insolvent, foreign professional services corporations and their ability to operate in Kentucky, defaults on obligations undertaken in partnerships and other operating agreements, member resignations in member-managed LLCs, mergers of LLCs and partnerships, the express incorporation of the contractual obligation of good faith and fair dealing into every LLC operating agreement, and changes to the types of information required in different annual reports.
The changes set out in this newly enacted bill apply to all business entities operating in Kentucky, regardless of their date of organization.
The full text of SB 150 can be found here:
http://www.lrc.ky.gov/record/10rs/SB150/bill.doc.
Senate Bill 151 - The Kentucky Business Entity Filing Act
The purpose of this bill, filed and sponsored by the same legislators as SB 150, was to create a uniform system of requirements and procedures for business entity filings in Kentucky. The effective date of this bill is Jan. 1, 2011.
One of the perceived problems of the various filing procedures for business entities under Kentucky law was a lack of consistent limitations and requirements. This led to a variety of bizarre outcomes - for example, while a limited partnership could be the registered agent of a corporation, a limited partnership could not be the registered agent of a limited partnership. The objective of the Kentucky Business Entities Filing Act was to create a single set of rules applicable across all the different forms of business entities, rather than have a completely different set of filing prerequisites for each business form.
In addition to creating a uniform set of applicable filing and execution requirements, the requirements themselves have been simplified as much as possible. For instance, the complex rules as to who could or could not be a registered agent have been simplified to require that the registered agent be (1) an individual, (2) a domestic entity or (3) a foreign entity qualified to transact business in Kentucky. In a nod to modern business practices, the Secretary of State has also been given the ability to officially communicate with business entities via e-mail. The act centralizes the requirements for annual reports filed by domestic and foreign business entities and newly imposes an annual report requirement on certain limited partnerships. The Kentucky Business Entity Filing Act also adjusts the processes for administrative dissolution, amending entity filings after the expiration of their term and applications for a Certificate of Authority or Certificate of Existence.
The full text of SB 151 can be found here:
http://www.lrc.ky.gov/record/10rs/SB151/bill.doc.
(The author wishes to thank Tom Rutledge for his invaluable assistance in writing this article.)