Representative Newberry Introduces the Rhode Island Business Climate Reform Act
State House, Providence, RI – Today, Rhode Island House Representative Brian C. Newberry (R. North Smithfield/Burrillville) introduced the Business Climate Reform Act, significantly restructuring corporate law in the Ocean State — with the goal of stimulating the economic climate while at the same time providing new state revenue streams. The bi-partisan bill is co-sponsored by Speaker K. Joseph Shekarchi; Representative Alex S. Finkelman
BRIAN NEWBERRY
; Minority Leader Michael W. Chippendale; Co-Vice-Chair of Finance, Representative Alex D. Marszalkowski; Co-Vice-Chair of Finance, Representative Scott A. Slater; Representative Robert D. Phillips; Representative Jon D. Brien; Representative Paul M. Santucci; and Corporations Chair, Representative Joseph J. Solomon, Jr., with Senate Minority Leader Jessica de la Cruz sponsoring the companion bill in the Rhode Island Senate.
The goal of the Business Climate Reform Act is to systematically make changes throughout our corporate, trust, and estate laws so that Rhode Island is the best state in which to form business entities and hold economic assets. The changes will generate new revenue from companies and other organizations that currently do not transact business or pay taxes to Rhode Island, but which will now be incentivized to form under Rhode Island law and pay franchise fees to the state. The Business Climate Reform Act adopts best practices from other states, including Delaware (corporate law), Texas (corporate law and business courts), and South Dakota (trusts).
“Rhode Island has an opportunity to dramatically change the way we handle corporate law and organizations in such a way as to create both economic activity and provide new revenue sources for the State that we can use to offset our existing tax burden,” said Newberry. “Delaware had for decades cornered the market on corporate registrations but for several years now, thanks to some well-documented public missteps, they are losing ‘market share’ in this area to other states.”
The comprehensive business law reform effort includes:
Change the Limited Liability Company Act to allow for anonymous limited liability companies (members and owners do not have to provide their information in filings), allow “protected series” LLCs with statutory asset-segregation (as is in Delaware), and allow for the governing documents of limited liability companies and limited partnerships to eliminate any duties, including fiduciary duties, and related liabilities that a member, manager, and officer owe to such entity.
Create a “Court of Chancery” modeled off Delaware’s system to hear disputes at equity. This court will handle fiduciary duty, M&A, governance, appraisal, books-and-records inspection demands, and other equitable or statutorily assigned matters. It will sit without a jury, will move statutory summary proceedings on compressed schedules, and will publish detailed written opinions. The court would be composed of five Chancellors, one serving as Chief, who will serve 10-year terms and be subject to advice and consent. Additionally:
Entities will be permitted to include provisions in their governing documents that (i) designate the Court of Chancery as the exclusive venue for resolving internal disputes and (ii) waive the right to a jury trial for internal claims. Internal claims shall cover a broad scope of claims, including derivative claims and allegations of breaches of fiduciary duty. A jury trial waiver shall be enforceable even if the entity’s members, owners, officers or governing people did not individually sign such waiver.
This court is to be self-sustaining, funded out of the court fees it generates. This is modeled off the recent Texas Business Court enabling legislation.
Create a Complex Commercial Litigation Calendar (CCLD) in Superior Court, which shall take over the functions of the current Business Calendar. Also a model the Delaware system, the calendar is designed for large commercial/contract cases not in Chancery’s equity jurisdiction; assignment to a single judge through final disposition; early, customized case-management orders; firm trial settings; standing orders to keep cases moving.
Create the Rhode Island Rapid Arbitration Act model based on the Delaware Rapid Arbitration Act.
Provide for no limitation of value on homestead protection for your primary home. This means that the value of your house, without limitation, is free from attachment from any creditor (not taxing authority) who may be going after you. This is not for exemption from taxation, but rather from attachment by creditors.
Eliminate the minimum corporate tax, currently $400 for every entity, even if they do not have any profits, and eliminate annual report fees for all LLCs, partnerships, and corporations. Replace these fees with a franchise fee which shall apply to entities which are formed under Rhode Island law. The franchise fee shall apply to all LLCs, partnerships, corporations, and statutory trusts, and can be deducted from any corporate income tax owed. This provides for more revenue created by a larger base, as companies without a presence in Rhode Island will still choose to domicile here, and pay the franchise fee to the state. The franchise fee will be collected by the Secretary of State in the same form and manner as the annual report fee is currently collected. The franchise fee shall be set as follows:
Minimum for all entities (for corporations – 5,000 authorized shares or less): $450
5,001 – 10,000 authorized shares: $75010,000 and above authorized shares: $1,000
Allow the Secretary of State to serve as registered agent for foreign entities and eliminate the requirement for any foreign LLC registering in Rhode Island to provide a certificate of good standing from their home jurisdiction when forming a Rhode Island entity.
Add a new section at R.I. Gen. Laws § 7-1.2-815 to codify the Business Judgment Rule.
Allow imposition of minimum ownership requirements for nitiating corporate derivative actions. Specifically, publicly traded entities and private entities (i) with 500 or more owners and (ii) that have elected the statutory business judgment rule may impose a minimum ownership threshold of up to 5% of the outstanding equity for owners to initiate derivative actions. Attorneys’ fees in awarded derivative actions would be limited by specifically disqualifying mere disclosure-only settlements as “substantial benefits” for the purpose of such awards, regardless of the materiality of such disclosures.
Make several reforms to the Business Corporation Act, including:
Providing advanced determinations of director independence, by permitting publicly traded corporations and corporations that elected the statutory business judgment rule to petition Rhode Island courts to hold an evidentiary hearing to determine the independence of a special committee of directors tasked with reviewing related party transactions, such as those involving the corporation and a controlling shareholder, director, or officer. Prior to such evidentiary hearing, the corporation must notify each of its shareholders to provide them with the opportunity to participate in the proceeding. Once the court validates the independence of the committee, that decision will be binding absent facts, which were not presented to the court, that prove one or more directors are not independent and disinterested with respect to the applicable transaction.
Allowing corporations to include language in their governing documents allowing the corporation to waive class-by-class share voting in certain circumstances, permitting all classes of its stock vote as a single class.
Clarifying that shareholders, members, and partners are not entitled to review certain communications, such as emails, text messages, social media posts, and similar electronic communication, unless such communication effectuates an official action of the entity. Permit publicly traded entities and entities that elected the statutory business judgment rule to deny inspection demands if the entity is involved, or expects to be involved, in a derivative proceeding or other litigation proceeding involving the entity.
Make several reforms to trust laws, including:Permit the allocation of trustee duties to different parties, which allows family members or trusted advisors to retain control of investment and distribution decision, and allow the grantor of a trust to be the beneficiary.
Allow for trusts to last forever.
Adopt the Uniform Directed Trust Act.
Allow beneficiary notice requirements to be modified or eliminated (silent or “quiet” trusts).
Create nominee realty trusts, which are currently allowed in Massachusetts.
The effective date for the reforms adding the Court of Chancery and the addition of the Complex Commercial Litigation Calendar is July 1, 2027. The effective date for the elimination of the minimum corporate tax and the creation of the franchise fee is January 1, 2027. The remaining changes will take effect upon passage.
“While we may not be able to recreate what Delaware once had, we should be able to grab a piece of it with some imagination and creative marketing –but to do so requires a deep overhaul of our legal structures,” said Newberry. “This is not something that should be rushed in a few months, but at the same time we shouldn’t dawdle. My hope in introducing this bill now is to get a conversation going over the next several months and build support while giving plenty of time for input from all sources with a goal of hopefully passing something on a bipartisan basis at the beginning of 2027. Regardless of political ideology everyone should be able to get behind this concept and the group of co-sponsors who signed on is proof of that.”