iJust as soon as you think you have things figured out, they change. Only a few years ago, a corporation could not change its jurisdiction of incorporation. As a practical matter, a similar result could be achieved through a rather cumbersome reincorporation process. Thus, if I wanted to convert Ray Inc. from a New York corporation to a Delaware corporation, I had to create a new (different) Delaware corporation named Ray Inc., then transfer the assets of the old New York Ray Inc. corporation to it, and then dissolve old Ray Inc. The UCC Article 9 rules that my secured lender would use to maintain perfection of its security interest in the assets of old Ray Inc. were the collateral transfer rules and not the debtor jurisdiction change rules.
Thus, under UCC § 9-316(a)(3) & (b), the secured creditor had a full year to file a new financing statement in Delaware if it wished to avoid a lapse in perfection or loss of priority as to the items of collateral that old Ray Inc. transferred to new Ray Inc. The 2013 amendments to Article 9 (currently awaiting the Governor’s signature in New York) created a four-month grace period for after-acquired property – i.e., assets that the new Delaware Ray Inc. acquired in the gap period before the Delaware filing was made. See UCC § 9-316(i) (creating a four-month grace period for “new debtor”).
That changed when Delaware added the ability to “convert” a non-Delaware entity into a Delaware one in 2009. Now many other states and the Model Business Corporations Act provide for such interstate conversions. These laws vary from state to state and do not all provide clear answers to the questions that arise in the perfection context, but it is now possible to convert a New York corporation directly into a Delaware one.
While reincorporation and conversion offer two very different ways to replace a New York corporation with a Delaware one, the only difference from a perfection perspective is that the grace period for pre-existing collateral is reduced from one year to four months. For a conversion, continuation of perfection is pretty simple under the debtor jurisdiction change rules. The secured creditor has four months to file a new Delaware financing statement to avoid lapse with respect to the pre-conversion collateral (see UCC § 9-316(a)(1 & 2) & (b), and, in those states adopting the 2013 amendments, an identical four-month grace period to avoid lapse with respect to after-acquired property. See UCC § 9-316(h) (creating a four-month grace period for same debtor).
Simple enough, right? But what if the law is not clear whether the new corporation is the same entity as the old one? A new Official Comment 5 to UCC 9-512 (added in 2013) addresses this issue in the context of an in-state conversion from one type of entity to a different type of entity. For an interstate conversion, this issue generally won’t be as important since a careful secured creditor will refile within four months in both cases.
A bigger problem is presented by the possibility that conversion might not terminate the entity’s corporate status in the converted-out state. If the entity is simultaneous both a New York and Delaware corporation, then the entity ceases to be a “registered organization.” See UCC 9-102(a)(71) (requiring entity be organized “solely under the law of a single State …”). Loss of registered organization status means that the proper filing jurisdiction is determined by the location of the place of business or chief executive office, and not by the state of incorporation. Compare UCC 9-307(a) with UCC 9-307(e). Thus, refiling in Delaware will do no good if the chief executive office or place of business is in Akron, Ohio. Until this gets sorted out in the state corporate laws, beware!
