House Bill 2191 – Shell Entity Legislation
Governor Kate Brown signed House Bill 2191 (the “Bill”) into law on August 15, 2017. This bill makes many changes to the Oregon corporate laws in an attempt to thwart fraud and illegal activities commissioned with Oregon companies. The changes in these laws will become operative on January 1, 2018. This bill is Oregon’s response to The Portland Business Journal’s article entitled The Shell Game that was published in October 2015.
The Bill defines a “Shell Entity” as:
An entity that was used or created for an illegal purpose, was used or created to defraud or deceive a person or governmental agency, or was used or created to fraudulently conceal any business activity from another person or governmental agency
This definition is quite different from how I have heard the term used in the legal profession. It has moved from being an innocuous term for a company that has been formed but not yet organized to a rather sinister creature.
How does a Shell Entity become labeled as such? The Attorney General may make a prima facie showing that an entity is a Shell Entity by stating in an affidavit that:
- The entity did not provide a name or address required by the Secretary of State, or the name or address provided was false, fraudulent or inadequate;
- The entity’s Articles, a record the entity must keep under ORS 60.771/63.771 or the entity’s annual report is false, fraudulent or inadequate;
- A public body as defined in ORS 174.109 (state government bodies, local government bodies and special government bodies) attempted to communicate with, or serve legal process upon, the entity at the address or by means of other contact information provided to the Secretary of State, but the entity failed to respond; or
- The Attorney General has other evidence that shows that the entity was used or created for an illegal purpose, was used or created to defraud or deceive a person or a governmental agency or was used or created to fraudulently conceal any business activity from another person or governmental agency.
Once an entity has been deemed a “Shell Entity”, a circuit court may force the dissolution of the Shell Entity; a public body (governmental bodies) may prevent the participants in the Shell Entity from engaging in commercial activity in the State of Oregon or creating a new entity; and the participants in a Shell Entity are liable for damages to a person that suffers an ascertainable loss of money or property as a result of the participant’s fraudulent activity, and are subject to civil action.
For those of you who form corporations and limited liability companies, please note that there are new additional requirements for the Articles of Incorporation and Articles of Organization. You must now include the initial physical street address of the entity’s principal office, and that address cannot be a mail forwarding business, a virtual office, or a commercial mail receiving agency like the UPS Store or Postal Annex. In addition, the name and address of at least one individual who is an authorized representative of the entity with direct knowledge of the operations and business activities of the entity must be included in the Articles.
As we discussed at the Corporate Specialty Group meeting on September 13, 2017, these additional requirements for the Articles of Incorporation and Articles of Organization may pose some challenges for clients and the paralegals who draft and file these documents. Many times entities do not have a physical street address prior to its incorporation or organization. In the case of an LLC created to hold a real estate investment, there may never be a physical principal office address because the business is done from the client’s home. This may force clients to disclose their home address in the initial filing – a less than ideal situation.
According to my phone conversation with Peter Threlkel, Director of the Corporation Division at the Oregon Secretary of State, the name and address of the individual with direct knowledge of the operations and business activities of the entity will most likely be treated in a similar manner to an Incorporator or an Organizer. In other words, that person’s name will only appear on the image of the filed document and won’t be displayed on the website in the same manner that a Registered Agent, President, Secretary or Manager’s name address is displayed. Unfortunately, the word “initial” was omitted from the bill as it relates to this individual’s information, so it is unclear whether this individual’s information needs to be updated and how such updates would be implemented at the Corporation Division. Mr. Threlkel reports that we may see a change to this legislation in February if the legislature decides to make a change to clarify this issue and that we should wait and see. He further reports that the Secretary of State’s office will be posting a page on their website about the Bill and how it will change the procedures and policies at the Corporation Division. As of the date of submission of this article to the Paragram, such page has not yet been posted.
The Incorporator or Organizer, as the case may be, now must declare above their signature on the Articles of Incorporation or Articles of Organization “under penalty of perjury, that the document does not fraudulently conceal, fraudulently obscure, fraudulently alter or otherwise misrepresent the identity of the person or any of the officers, directors, employees or agents of the corporation on behalf of which the person signs.” This requirement may make our attorneys more hesitant to sign off as Incorporators and Organizers because they rely on what their clients report and often do not have first-hand knowledge of these things.
The Bill also gives the Secretary of State the authority to investigate alleged or potential fraud, and to force an entity to deliver a list of shareholders (for corporations), or LLC members (for LLCs), and to answer interrogatories in connection with such investigation. It also allows the Secretary of State to administratively dissolve an entity that fails to deliver such list of shareholders (for corporations), or LLC members (for LLCs).
The Secretary of State will be permitted to work with the Department of Revenue to administratively dissolve any entity that fails to comply with the state tax laws. It is unclear exactly how this type of action will occur until the Secretary of State and the Department of Revenue complete their task of creating protocols.
The Bill specifically prohibits the formation of an entity for any illegal purpose or with an intent to fraudulently conceal any business activity from another person or a governmental agency. The term “illegal purpose” is not defined in the bill. The legitimate marijuana business sector is growing ever larger since the State of Oregon legalized it. But, marijuana is still illegal federally. Because it is a circuit court that must find that an entity was created for an illegal purpose, it is presumed that only the state laws are applied to the definition of illegal, and it is likely that marijuana businesses will not be subjected to Shell Entity status simply because of their principal business activity, but this remains to be seen.
In conclusion, the Bill may make it easier to prevent fraudulent activity via corporations and LLCs, but it may come at the cost of privacy for the majority of the law-abiding business owners in this state. The procedures and protocols for the sweeping changes that the Bill imposes are still murky and how they will be implemented remains to be seen.
Download the full text of House Bill 2191 at: https://olis.leg.state.or.us/liz/2017R1/Downloads/MeasureDocument/HB2191/Enrolled
April Stricker is a corporate paralegal at Kell, Alterman & Runstein, L.L.P., and she leads the corporate specialty group for the Oregon Paralegal Association.