On May 8, 2023, New Jersey Governor Phil Murphy signed into law Senate Bill 142 (P.L. 2023, Chapter 38), which amends and supplements the New Jersey Business Corporation Act (BCA) to provide procedures for conversions (the process of converting one type of entity to another type of entity) and domestications (the process of converting a foreign—i.e., out-of-state—entity to a domestic—i.e., New Jersey—entity, or vice versa, without changing the type of entity). Although the text of the new law does not actually use the term “domestication,” the conversion provisions are written broadly enough to include the functional equivalent of a domestication. However, the new law does not cover all possible permutations of conversions, as (i) either the converting entity or the resulting entity (or both) must be a corporation under New Jersey law and (ii) neither the converting entity nor the resulting entity can be a New Jersey general or limited partnership due to the limitations of other governing laws.
The new law, which was enacted with unanimous support from the New Jersey’s Senate and General Assembly, brings the BCA into line with various states, such as Delaware and Texas, that have long provided for the conversion and domestication of corporations and other entities. Committee statements in support of this long overdue change to New Jersey corporate law indicate that the intent behind the change is to “make New Jersey a more attractive State for the incorporation of businesses.” The underlying Senate and Assembly bills, along with related legislative statements, are available online at https://www.njleg.state.nj.us/bill-search/2022/S142. The new law becomes effective on November 4, 2023 (180 days following its enactment).
Background
Some historical background is useful in understanding what the new law accomplishes (and what it fails to accomplish). For more than 10 years prior to the enactment of the new law, the New Jersey Revised Uniform Limited Liability Company Act (RULLCA) has included a limited menu of conversion and domestication transactions involving limited liability companies (LLCs). Specifically, under the RULLCA’s conversion procedures (as distinguished from RULLCA’s separate domestication procedures discussed below), (i) an “organization” other than a New Jersey or foreign LLC is permitted to convert to a New Jersey LLC and (ii) a New Jersey LLC is permitted to convert to an “organization” other than a foreign LLC, but in each case only if the other organization’s governing statute authorizes the conversion. The problem is that the BCA and the governing statutes for New Jersey general and limited partnerships do not currently authorize conversions. As a result, by way of example, even though a New Jersey LLC is permitted under current law to utilize the statutory conversion procedure to morph into a Delaware corporation, a New Jersey LLC cannot utilize this procedure to morph into a New Jersey corporation because the BCA does not currently authorize conversions a glitch that will be fixed by the new law for corporations (but not for general and limited partnerships).
Under the RULLCA’s separate domestication procedures, (i) a New Jersey LLC is permitted to domesticate as a foreign LLC and (ii) a foreign LLC is permitted to domesticate as a New Jersey LLC, in each case so long as the foreign LLC’s governing statute authorizes domestication. In contrast to the RULLCA, the BCA and the governing statutes for New Jersey general and limited partnerships do not currently authorize domestications. As a result, by way of example, even though a New Jersey LLC is permitted under current law to redomesticate in Delaware (i.e., to become a Delaware LLC) under the statutory domestication procedure, a New Jersey corporation cannot domesticate in Delaware by reason of the fact that the BCA does not currently authorize domestications_again, a glitch that will be fixed by the new law for corporations (but not for general and limited partnerships).
As a result of the shortcomings of current New Jersey law (i.e., before considering the effect of the new law), if a New Jersey or foreign LLC wants to become a New Jersey corporation, the conversion must be effected under some alternative deal structure, such as a statutory merger between the existing LLC and a newly formed New Jersey corporation. Another option under current law would be to transfer the existing LLC’s assets and liabilities to a newly formed New Jersey corporation and then dissolve the LLC. Similar alternative deal structures under current law must be considered in the event that a New Jersey corporation wants to redomesticate in Delaware or some other jurisdiction.
Overview of the New Law
The new law, which amends N.J.S. 14A:15-2 and supplements Title 14A of the New Jersey Statutes, addresses the following categories of conversion transactions:
- Conversion of Other Entity into New Jersey Corporation
An “other entity” (including, among other specified kinds of entities, a domestic or foreign LLC or a foreign corporation) can convert to a New Jersey corporation. In this scenario the converting “other entity” is required to adopt a plan of conversion and then file a certificate of conversion and a certificate of incorporation for the resulting entity with the Division of Revenue and Enterprise Services of the New Jersey Department of the Treasury (DORES). If the converting “other entity” is a foreign (i.e. non-New Jersey) entity, it is also required to file the documentation required by the governing statute of the foreign jurisdiction in the filing office of the foreign jurisdiction.
Upon the conversion of an “other entity” to a New Jersey corporation, the resulting New Jersey corporation will (i) be deemed to be a continuation of the converting “other entity” for all purposes of New Jersey law; (ii) have all rights, privileges, powers, and property of the converting “other entity”; and (iii) be subject to all debts, liabilities, and duties of the converting “other entity.” Interestingly, the rights, securities, or interests in the converting “other entity” may be exchanged for or converted into cash, property, or securities of the resulting New Jersey corporation or another entity or be canceled, which may provide additional flexibility in structuring certain types of entity reorganizations.
- Conversion of New Jersey Corporation into Other Entity
A New Jersey corporation can convert to an “other entity.” To effect this type of conversion, the New Jersey corporation is required to adopt a plan of conversion and then file a certificate of conversion with the DORES. If the resulting “other entity” is foreign, the converting New Jersey corporation is also required to file the documentation required by the governing statute of the foreign jurisdiction in the filing office of the foreign jurisdiction.
Upon the conversion of a New Jersey corporation to an “other entity,” the resulting “other entity” will (i) be deemed to be a continuation of the converting New Jersey corporation for all purposes of New Jersey law; (ii) have all rights, privileges, powers, and property of the converting New Jersey corporation; and (iii) be subject to all debts, liabilities, and duties of the converting New Jersey corporation. As in the case of a conversion of an “other entity” to a New Jersey corporation, the rights, securities, or interests in the converting New Jersey corporation may be exchanged for or converted into cash, property, or securities of the “other entity” or another entity or be canceled.
- Conversion of Other Business Entity into Foreign Corporation
In the event that an “other business entity” (having substantially the same meaning as an “other entity”) that is authorized to transact business in New Jersey converts to a foreign corporation, the resulting foreign corporation (assuming that it intends to continue to transact business in New Jersey) is required to file an application with the DORES to obtain a certificate of authority to transact business in New Jersey as a foreign corporation. In contrast to the types of conversion transactions discussed above, a conversion transaction contemplated by this section of the new law involves only a foreign entity and occurs pursuant to the laws of a jurisdiction other than New Jersey. This section of the new law provides a procedure whereby the foreign corporation that results from such a conversion transaction and will continue to transact business in New Jersey can remain authorized to do so.
Tax Considerations
Conversion transactions should not be undertaken without considering the income tax consequences of the transaction, which will depend (among myriad other factors) on the tax classification of the converting and resulting entities. For example, the conversion of a corporation to a flow-through entity (such as an LLC classified as a partnership) generally is treated as a taxable liquidation of the corporation. Conversely, the conversion of a flow-through entity to a corporation may be eligible for tax-deferred treatment, but only if specific requirements in the Internal Revenue Code are satisfied. Different rules kick in where a flow-through entity has made a “check-the-box” election to be classified as a corporation for tax purposes. There are numerous exceptions, limitations, and special rules that must be evaluated on a case-by-case basis.
General Partnerships, Limited Partnerships, and Other Unincorporated Entities
Except to the limited extent already permitted by the RULLCA as noted above for certain conversions or domestications involving LLCs, the RULLCA does not, and the new law will not, authorize (i) the conversion of one type of unincorporated entity into another type of unincorporated entity (such as a conversion of a general partnership into an LLC or vice versa) or (ii) the domestication of a New Jersey unincorporated entity in another jurisdiction or vice versa. In addition, although a partnership is included in the new law’s definition of “other entity,” the new law does not allow for the conversion of a general or limited partnership into a corporation or vice versa because, the New Jersey statutes governing general and limited partnerships (the Uniform Partnership Act and the Uniform Limited Partnership Law, respectively) do not currently permit conversions.
However, there are identical bills pending in the General Assembly (A3831) and Senate (S134) which, if enacted in their present form, would appear to cure the foregoing omissions by providing, among other things, that general and limited partnerships may convert to or from other types of entities. The pending bills are available online at https://www.njleg.state.nj.us/bill-search/2022/A3831 and https://www.njleg.state.nj.us/bill-search/2022/S134.
What Does This Mean for Corporations and LLCs?
Come November 2023, once the new law is effective, the new conversion provisions will provide corporations and LLCs with additional flexibility in structuring certain types of common business and investment transactions. It remains to be seen how the DORES will administer the various filing requirements for a conversion and how quickly (if ever) the New Jersey Legislature will be able to address the omissions noted above.
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