2001 Lane Reports

Welcomed Amendments To Illinois' Business Law

Thursday, November 1, 2001

On June 28, 2001, Governor George Ryan signed Public Act 92-33 ("P.A. 92-33"), which became effective July 1, 2001. This law changed many sections of the Illinois Business Corporation Act of 1983 ("BCA") and the Illinois General Not For Profit Corporation Act of 1986 ("GNFPCA"). For the most part, the changes are very beneficial to both corporations and government regulators. In this article the major changes, as well as some miscellaneous amendments, are discussed.

No Need to Disclose Directors and Officers' Home Addresses

One of the major changes brought about by P.A. 92-33 concerns the privacy of the directors and officers of corporations. P.A. 92-33 amends of the BCA to provide that the initial directors, if named in the Articles of Incorporation, do not need to give their residential addresses, but only their business addresses. Similarly, foreign corporations applying to obtain authorization to transact business in Illinois, no longer need to provide the residential addresses of their directors and officers on the application for authority. Nor, must directors and officers provide their residential addresses on the corporation's annual report. Likewise, parallel amendments to the GNFPCA provide that the directors and officers of not for profit corporations ("NFPs" or individually referred to as "NFP") may now omit their residential addresses on all forms.

Indemnification Provisions

Another significant change resulting from P.A. 92-33 relates to the indemnification of directors, officers, employees and agents of Illinois corporations. In BCA § 8.75 (c) and GNFPCA § 108.75 (c), the words "present or former" were inserted before the words "director, officer or employee," while the word "agent" was deleted from each. However, subsections (a) and (b) of BCA § 8.75 and GNFPCA § 108.75 remained unchanged. Subsections (a) and (b) of each section permit corporations to indemnify their directors, officers, employees or agents for legal expenses incurred on behalf of the corporation or because of the directors', officers', employees' or agents' positions in the corporation. Subsections (a) and (b) do not mandate that a corporation indemnify its directors, officers, employees or agents. However, the former, unamended subsection (c) of BCA § 8.75 and GNFPCA § 108.75 required indemnification if a director, officer, employee or agent successfully defended a suit or claim described in subsections (a) and (b). Thus, the addition of the words "present or former" to subsection (c) indicates the Illinois General Assembly's intention to apply the mandatory indemnification rules of subsection (c) for successfully defended claims to past and current directors, officers and employees. But, the deletion of the word "agent" from subsection (c) reveals that the General Assembly did not want those mandatory indemnification rules extended to mere agents of corporations.

In addition, the phrase "if the person acted in good faith and in a manner he or she reasonably believed to be in, or not opposed to the best interests of the corporation" was added to the end of subsection (c) in each Act. This additional language restricts the mandatory indemnification rules to only situations in which the director, officer or employee that successfully defended a claim and is seeking indemnification proves that his or her action leading to the claim met this "good faith," "best interest" standard.

Subsection (d) of both BCA § 8.75 and GNFPCA § 108.75 specifies who determines whether the present or former director, officer or employee acted in good faith and in a manner which was in the corporation's best interests, or not opposed to its best interests, and whether the present or former director, officer or employee was reasonable in his or her belief. The Illinois General Assembly amended these two subsections too, in P.A. 92-33. A court can still make these determinations, as it could before P.A. 92-33. Additionally, independent legal counsel in a written opinion and the shareholders of the corporation can also still make these decisions. However, now a majority of the directors who were not involved in the litigation, for which the director, officer or employee is seeking indemnification, can make the decisions, even if that number of directors does not constitute a quorum. Further, a committee of directors appointed by a majority of the directors, even if less than a quorum, may determine whether the present or former director, officer or employee in question acted in a way which entitles him or her to indemnification. Thus, the disinterested directors may make the above determinations, even if their number totals less than a quorum.

Sections 8.75(e) of the BCA and 108.75 (e) of the GNFPCA, which allow corporations to pay officers and/or directors' litigation expenses in advance, so long as the officers and/or directors promise to repay the advancement should they later be found to not be entitled to the advancement of such expenses, were also amended to provide that the corporation may also pay, in advance, the litigation expenses of former directors, officers, employees and agents on the terms and conditions the corporation deems appropriate.

All of the above changes regarding indemnification apply to actions commenced on or after July 1, 2001.

Requirement of "NFP" in Name of NFPs

In an attempt to decrease confusion in the names of NFPs, the General Assembly amended the GNFPCA in P.A. 92-33. Before P.A. 92-33 was enacted, the Act provided that NFPs could, but were not required to, use the words "corporation," "company," "incorporated," "limited," or an abbreviation of them in their names. However, the name of the NFP could not indicate or imply that the NFP "is organized for any purpose other than a purpose for which corporations may be organized under [the GNFPCA], or a purpose other than a purpose set forth in its articles of incorporation." See former GNFPCA § 104.05 (a) (2). The General Assembly changed GNFPCA by deleting all of § 104.05 (a) (2), including the above quoted language, and replaced it with the following language regarding the name of NFPs:

[The names] [m]ust end with the letters "NFP" if the corporate name contains any word or phrase which indicates or implies that the corporation is organized for any purpose other than a purpose for which corporations may be organized under this Act or a purpose other than a purpose set forth in the corporation's articles of incorporation;

But, use of the words "corporation," "company," "incorporated," "limited," or an abbreviation of them is still permitted. Thus, GNFPCA § 104.05 (a) (2) changed from prohibiting use of a name which indicates or implies that the NFP is not an NFP, to requiring the inclusion of the letters "NFP" at the end of the corporation's name, if its name would otherwise indicate or imply that it is not an NFP.

This change does not assist one in determining whether the name used by an NFP indicates or implies that the NFP is something other than an NFP. For example, does the name "XYZ Public Health Clinic" imply either for-profit or not-for-profit status? How about the "Association of Commerce and Industry for Greater Metropolis?"

This practitioner believes the General Assembly had the right idea when it proposed the use of the letters "NFP." However, it did not go far enough. I feel that if the General Assembly wanted to eliminate the confusion over whether a corporation is organized for profit or not for profit, it should have required all NFPs to include the letters "NFP" or the words "not for profit" in their names. That has been done with limited liability companies ("LLCs") and professional corporations ("PCs"). If only NFPs are required to use the letters "NFP" or the words "not for profit," then the public would clearly know which organizations are NFPs and which are not. Nevertheless, under the new GNFPCA § 104.05 (a) (2) conservative organizers will most likely err on the side of caution and include the letters "NFP" at the end of their NFP's name.

Another related change provides that a name used by a corporation must now be distinguishable from the names or assumed names of all other domestic corporations, LLCs, foreign corporations and foreign LLCs, whether for profit or not for profit. Previously, a corporation's name only had to be distinguishable from the names or assumed names of all other domestic and foreign corporations.

Miscellaneous Amendments

P.A. 92-33 made several other miscellaneous alterations to the BCA and GNFPCA. Most of these miscellaneous changes affect the filing requirements for various documents. One such change concerns the certificates the Secretary of State ("SOS") affixes to the true copy of documents filed with the SOS, that the SOS retains. As a result of P.A. 92-33 the SOS is no longer required to attach a certificate to the true copy. Instead, the SOS must only stamp each true copy with the word "filed" and place the filing date on the true copy. The SOS must still affix a certificate to all duplicate copies of documents returned to the filer for recording with the filer's local county recorder's office. Further, the requirement to submit documents in triplicate to the SOS for filing was deleted.

Additionally, for all documents, other than the Articles of Incorporation and documents filed before the board of directors have been determined, only the signature of one of the following persons is necessary:

1) President 4) Assistant Secretary
2) Vice President 5) Treasurer, or
3) Secretary 6) other officer duly authorized by the board of directors

Therefore, it is no longer necessary to have the President or Vice President and the Secretary or Assistant Secretary sign such documents, as was the former rule.

The BCA was also amended to allow a corporation to change its registered office or agent and/or address of its registered agent by indicating such change on its annual report. The GNFPCA was also amended to permit NFPs to do the same.

Furthermore, the BCA and the GNFPCA were amended to add two new grounds for administrative dissolution of an Illinois corporation. Now the SOS may administratively dissolve a corporation, if it fails to pay its fees, franchise taxes, or charges under the BCA or GNFPCA, as the case may be. Additionally, a corporation may be administratively dissolved by the SOS if it makes a material misrepresentation on any application, report, affidavit, or other document filed by the corporation.

Another miscellaneous change affecting foreign corporations seeking authority to transact business or operate as an NFP in Illinois, is that they are no longer required to list the other states in which they are authorized to transact business or operate.

Further, NFPs may now be organized in Illinois for tax-exempt purposes set forth in the Federal Internal Revenue Code. GNFPCA § 103.05 (a) (31) and (32) were added by P.A. 92-33. According to GNFPCA § 103.05 (a) (31), an NFP may be organized for "any purpose permitted to be exempt from taxation under Sections 501 (c) or 501 (d) of the United States Internal Revenue Code." Additionally, GNFPCA § 103.05 (a) (32) provides that organization as an NFP is authorized for "any purpose that would qualify for tax-deductible gifts under Section 170 (c) of the United States Internal Revenue Code." Thus, organizations satisfying these federal standards will clearly be able to organize as an NFP in Illinois.

In addition, the filing fee for an application to use an assumed corporate name was also amended. The fee will now be determined on an annual basis, instead of a monthly basis. See Id. The new schedule for the filing fees is as follows:

If application is submitted in a
year ending in the following digits The filing fee will be

0 or 5 $150
1 or 6 $120
2 or 7 $ 90
3 or 8 $ 60
4 or 9 $ 30

Finally, amendments to BCA § 15.95 allows the SOS to fulfill an expedited service request via electronic means, if the SOS wishes.

The amendments made by P.A. 92-33 ease some of the filing burdens on both the SOS and the filers themselves. The changes to the indemnification provisions clearly indicate the General Assembly's intention that those provisions apply to past officers and directors of corporations as well as current corporate officers and directors. The two new additional grounds the SOS can now use to administratively dissolve corporations should encourage better compliance with the BCA and the GNFPCA. This practitioner welcomes these amendments. However, I feel that confusion may still arise over the names of NFPs, unless all NFPs are required to include the letters "NFP" or words "not for profit" in their names.

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The Lane Report is a publication of The Law Offices of Marc J. Lane, a Professional Corporation. We attempt to highlight and discuss areas of general interest that may result in planning opportunities. Nothing contained in The Lane Report should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein. Copyright, 2003 by The Law Offices of Marc J. Lane, A Professional Corporation. Reproduction, in whole or in part, is forbidden without prior written permission

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