The new rules of business
Come January, a sweeping statute will modernize Louisiana corporate law. Here’s how it impacts your company.
After more than 40 years of following the same old rules, the game is changing for corporations in Louisiana.
Sweeping revisions to the state’s business corporation statute under House Bill 319, which was signed into law in May and takes effect January 1, 2015, repeals the existing Business Corporation Law and enacts the Louisiana Business Corporation Act. The new act was shaped by a nationally recognized statute, the Model Business Corporations Act, and recommended by the Louisiana State Law Institute.
What is in store for corporations under the new rules? Corporate lawyers and business leaders alike are asking this question. The answer: It depends on for whom you are working.
To a lawyer practicing only in Louisiana for the past 40 years, the new 282-page law will look completely foreign, considering the state’s Business Corporation Law has not changed since 1968.
However, for a multijurisdictional firm with clients around the country, the new rules may look a lot more familiar, given that it mimicks corporate laws in 30 other states.
“What it does is modernize corporate law in Louisiana,” says Mark Graffagnini, founder, president and CEO of Graffagnini Law. A corporate and securities lawyer by trade, Graffagnini says the new law eliminates many of the uncertainties that might have existed regarding corporate governance in the previous law, while allowing multi- jurisdictional firms like his to more easily handle corporate dealings in other states.
“It brings Louisiana law into the mainstream of American corporate law,” says LSU law professor Glenn Morris.
Morris chairs the Corporations Committee of the Louisiana State Law Institute. He and his committee were responsible for drafting the Louisiana modification of the Model Business Corporation Act, which is the standard national statute for corporate governance.
“The Model Act codifies leading thinking about corporate governance and practice in the United States,” Morris says. “It addresses a lot of issues that the Louisiana law is simply silent about.”
Because the Model Act is the foundation for corporate law, it will help Louisiana corporations that try to facilitate transactions in other states—even among those states that don’t use the Model Act.
Jones Walker partner Richard Wolfe is a member of the committee that drafted the Louisiana Business Corporation Act and says the new statute repeals the old statute in its entirety.
“Louisiana has a distinctive legal tradition, so it was thought prudent for the committee to go through it line by line to make sure we were not introducing ideas or terms that are not common in Louisiana,” Wolfe says.
Although the majority of the changes are merely technical in nature, some may alter the way corporate leaders operate within their businesses. Corporate lawyers and business leaders should take into account changes contained in the new rules.
For example, the longer, more elaborate new act includes more detailed provisions regarding director conflict-of-interest transactions, derivative shareholder suits and shareholder appraisal rights in a merger.
The act also changes the percentage of votes needed to make major decisions in a corporation, like amending articles or approving merger transactions, Morris says.
The existing law requires a two-thirds majority of the shares present at a meeting in order to allow such resolutions; under the Louisiana Business Corporation Act, a corporation will need only to win a simple majority of the shares permitted to vote on a particular issue.
According to Morris, one of the biggest changes is that for the first time, Louisiana law now provides a remedy to minority shareholders in the event that they are frozen out of any kind of participation in a corporation, characterized by the law as “oppression.”
“From the standpoint of the non-corporate lawyer, one of the most important provisions in this statute is that it provides a method by which a minority shareholder of a corporation can force the corporation to purchase his shares at fair value if he can prove that he has been oppressed by the corporation,” Wolfe says. “No such right has existed under Louisiana corporate law in the past.”
Wolfe says this gives minority shareholders a new advantage under the new statute.
On the other hand, most business executives will also be pleased with the new statute as it pertains to personal liability, given that it outlines more detailed provisions related to derivative shareholder suits against directors.
According to Wolfe, the new act offers extensive commentary about what is considered a conflict-of-interest transaction that can get a director in trouble. “Basically those new provisions are favorable to directors in the sense that they offer more procedural protections,” Wolfe says.
Another feature of the new statute that Morris says will be of particular interest to business planners is the approval of unanimous governance agreements.
Under traditional corporate law, owners of a business were limited in their ability to contract with one another about how they want to run their business. Morris says this concept is discredited in modern law, but Louisiana still follows the traditional approach, making the state a “hostile jurisdiction” for corporations that want to make contractual modifications to their governance rules.
However, with the new ability to issue unanimous governance agreements, shareholders can override the statutory rules of a corporation that would otherwise be mandatory.
For example, under a unanimous shareholder agreement, shareholders could abolish the rule that requires the corporation to be managed by a board of directors, allowing individual shareholders to run the company, or even appoint one “czar” to be responsible for managing the company, Morris says.
“Effectively, what we are doing is we are making it possible to do the same types of agreements in corporate law that you can do under limited liability corporations law,” Morris says. “It will provide greater contractual freedom to the owners of a corporation.”
Graffagnini’s firm often deals with the formation of new companies that are raising capital and rapidly growing, so the transition period between the old act and the new one is important for his clients.
“If you are starting a business now, you want to make sure that what you are doing will comply not only with the current law, but also with the new law that will be enacted in January,” Graffagnini says.
In the end, advocates say, the act will make Louisiana more compatible on a global scale.
Says Graffagnini: “It allows for a lot more certainty and consistency with the way companies do business in this day and age.”