MINUTES OF THE
SENATE Committee on Judiciary
Seventy-second Session
March 20, 2003
The Senate Committee on Judiciary was called to order by Chairman Mark E. Amodei, at 8:14 a.m., on Thursday, March 20, 2003, in Room 2149 of the Legislative Building, Carson City, Nevada. Exhibit A is the Agenda. Exhibit B is the Attendance Roster. All exhibits are available and on file at the Research Library of the Legislative Counsel Bureau.
COMMITTEE MEMBERS PRESENT:
Senator Mark E. Amodei, Chairman
Senator Maurice E. Washington, Vice Chairman
Senator Terry Care
Senator Mike McGinness
Senator Dennis Nolan
Senator Dina Titus
Senator Valerie Wiener
STAFF MEMBERS PRESENT:
Nicolas Anthony, Committee Policy Analyst
Bradley Wilkinson, Committee Counsel
Ann Bednarski, Committee Secretary
OTHERS PRESENT:
Renee L. Parker, Chief Deputy Secretary of State, Office of the Secretary of State
Pat Cashill, Lobbyist, Nevada Trial Lawyers Association
Christina Dugan, Lobbyist, Las Vegas Chamber of Commerce
Derek G. Rowley, Lobbyist, Nevada Resident Agents Association/Carson City
Keku Kamalani, Legislative Intern for Senator Dina Titus, University of Nevada, Las Vegas
Kent F. Lauer, Lobbyist, Nevada Press Association
Matthew L. Sharp, Lobbyist, Nevada Trial Lawyers Association
John P. Sande, III, Lobbyist, Pfizer Incorporated
Bill Bradley, Lobbyist, Nevada Trial Lawyers Association
Samuel P. McMullen, Lobbyist, Las Vegas Chamber of Commerce, and Retail Association of Nevada
Mary Lau, Lobbyist, Retail Association of Nevada
Ray Bacon, Lobbyist, Nevada Manufacturers Association
Tom Wood, Lobbyist, Pharmaceutical Research and Manufacturers of America
Garrett Sutton, Attorney
Scott W. Anderson, Deputy Secretary of State for Commercial Recordings, Office of the Secretary of State
Dan Musgrove, Lobbyist, Clark County, and Southern Nevada Regional Planning Coalition
Dino DiCianno, Deputy Executive Director, Department of Taxation
Chairman Amodei invited Senator Alice Constandina (Dina) Titus, Clark County Senatorial District No. 7, to present Senate Bill (S. B.) 124 to the committee.
SENATE BILL 124: Revises statutory liability of stockholders, directors and officers of corporations. (BDR 7-100)
Senator Titus, who sponsored this legislation, said S.B. 124 was originally drafted to remove language inserted during the 2001 Legislative Session. She asked the committee to ignore the bill as introduced and focus on the amendment, Exhibit C, which she said was the new bill.
Senator Titus recalled the financial collapse and scandals relating to several corporations in 2002 and mentioned several companies, including Enron Corporation and Martha Stewart Living Omnimedia. Senator Titus said the scandals, frauds, bankruptcies, and insider trading caused a major crisis in the job market and in the stock market. Senator Titus listed the statistics and staggering figures on the losses to investors. She said Nevada employees lost $22 million according to Ken Lampert of the Public Employees’ Retirement System (PERS).
In response to this financial devastation, Senator Titus said, the U.S. Congress passed into law the Sarbanes-Oxley Act of 2002, known as “the most far‑reaching reforms of American business practices since the time of Franklin Delano Roosevelt.” As a result of the financial collapse of several corporations, executives, auditors, and corporate boards now face greater scrutiny and individual investors are paying greater attention to conflicts of interest dominating corporate America.
Senator Titus said several states had also passed legislation to strengthen corporate oversight, aiming to protect the public and restore faith in the truthfulness of financial reports, the credibility of managers, and basic honesty of the economic system as a whole. She said California enacted the California Corporate Disclosure Act, signed by Governor Joseph Graham (Gray) Davis on September 28, 2002; she explained this amendment, Exhibit C, was based upon this California law.
Senator Titus stated S.B. 124 was “… an attempt to protect investors from the risk of factual misrepresentations and managerial machinations. It requires more thorough reporting and greater public access to the information gathered.” She conducted an overview of the bill pointing out the sections dealing with foreign and domestic corporations that are publicly traded and disclosure requirements. One provision in S.B. 124 was an online database established by Secretary of State Dean Heller’s Office to make information available to the public at no cost.
Renee L. Parker, Chief Deputy Secretary of State, Office of the Secretary of State, stated she had reviewed S.B. 124 with Senator Titus and now had some changes to submit to “make it easier for us to ensure that we can implement this in a timely fashion and capture the appropriate information.” Ms. Parker said her office had contacted the state of California to learn about the impact of its version of S.B. 124. She said the California secretary of State’s office reported a backlog of work and a need to hire several people to handle the required reporting. Ms. Parker asked for consideration that section 1 be amended to require corporations to inform the secretary of State’s office regarding their status with regard to public trading. She said, ”Let’s capture that information and make that provision effective October 1, 2003.” From that date forward, she said, until 2004, the Office of the Secretary of State would have time to create an annual list and a form to be sent to those corporations that are publicly traded.
Ms. Parker said the other provisions in S.B. 124 would become effective on August 1, 2004. She reasoned any positions needed to implement the provisions could be hired in July 2004, stating this was a fiscally prudent way to effect a change and be conscious of budget constraints too. The database would not need to be created until January 2005, Ms. Parker said. Prior to that date, the list of publicly traded corporations would be established.
Senator Care said most of the information required under section 1, subsection 1 paragraph (f) and in section 2 for foreign corporations was already available from sources other than the secretary of State’s office. The exceptions to this, he said, included a 10-year history of fraud convictions of the boards of directors’ membership. He referenced Enron Corporation and WorldCom Incorporated, stating the promotion of those stocks by securities dealers was questionable because they did not reveal to buyers their interests in the companies. He asked if there was anything in Nevada State law that required a Nevada securities dealer to reveal any relationship with a security he was promoting.
Ms. Parker responded currently there was no law in Nevada, but added the Sarbanes-Oxley Act did require those disclosures. She said they were now required in public documents. Regarding fraud convictions, Ms. Parker said she believed it was only a 5-year history. She said Assembly Bill 163 increased penalties for violations and dealt with the issue of providing fraudulent information to the securities division on the State level. Ms. Parker added this legislation contained some of the Sarbanes-Oxley Act components with respect to disclosures.
Senator Care asked how difficult it was for a securities dealer to notify a potential investor about the information available. He clarified his question, asking if the information could be secured through the secretary of State’s office or elsewhere. He said he was referring to inexperienced investors who may not be knowledgeable and deserved information. He said, “After WorldCom and Enron, I don’t think we can continue to do things the way we used to.”
Ms. Parker agreed, stating in her opinion it would not be difficult to require that disclosure. Ms. Parker said the secretary of State’s office provided investor education by placing disclosures on its Web site. She added a part of investor education included getting the word out this information was available to the public. Ms. Parker said some publicly traded companies also fall under exemptions that made disclosures more difficult. The objective of S.B. 124 was to have all information and disclosures available in one place, to make things much easier for the public.
Senator Care said he was bothered by the relationship between promoters of securities or underwriters with the public. He said investors really do not know, so it really is like playing the slot machines. Ms. Parker said one of the most difficult jobs was getting the word out to the investors, especially after the events of September 11, 2001. She said investor education could easily be inserted into the proposed securities act.
Pat Cashill, Lobbyist, Nevada Trial Lawyers Association (NTLA), said the original version of S.B. 124 was not favored by the NTLA, but as amended, the organization supported it. He said the amended bill would favor all Nevadans. Mr. Cashill then addressed Senator Care regarding his concerns about disclosures, stating there was a fiduciary duty a broker or securities salesman had to the customer. He said the brokerage house had a vested interest in the sale and though it was not a statutory duty, it was a common law duty.
Mr. Cashill explained the relationship between broker and buyer was usually one-sided, in that the broker did not have to disclose what his interest was in the potential sale of a security. He said the difficulty would be: ”How, as a matter of public policy, does this body compel the disclosures that you’re asking about?” Mr. Cashill announced a desire to work with Senator Titus and the committee on S.B. 124 and volunteered to assist in drafting legislation to achieve the goals desired.
Christina Dugan, Lobbyist, Las Vegas Chamber of Commerce, voiced support of S.B. 124. She stated increased disclosure from businesses was important to Nevada citizens.
Derek G. Rowley, Lobbyist, Nevada Resident Agents Association/Carson City, spoke in support of S.B. 124, stating it would not harm the Nevada incorporations industry in any way. He expressed an interest in working with Senator Titus and the committee with regard to how the additional fee could be integrated into other upcoming and related legislation.
Senator Wiener verified with Mr. Rowley his support was for the amended version of S.B. 124. He answered affirmatively. Chairman Amodei announced testimony on S.B. 124 was on the amended version and asked if anyone wanted to amend previous testimony. He said the record would reflect the testimony provided was on the amended version of S.B. 124. He asked those who wanted to propose amendments to submit them within one week.
Chairman Amodei then closed the hearing on S.B. 124 and opened the hearing on S.B. 251. He invited Senator Titus to explain this Sunshine in Litigation Act, which she sponsored.
SENATE BILL 251: Enacts provisions governing confidentiality of certain information. (BDR 3-572)
Senator Titus stated S.B. 251 was simply a sunshine in litigation bill, which prohibited the courts from entering orders or judgments with the purpose or effect of concealing public hazards. She said her efforts to place such a statute had been active for over a decade. This time, she said, editorials had been published in Nevada newspapers in support of this bill, Exhibit D.
Senator Titus introduced Keku Kamalani, who provided background information before she explained the provisions of the bill.
Mr. Kamalani, Legislative Intern for Senator Dina Titus, University of Nevada, Las Vegas (UNLV), said secret settlements were legal mechanisms used by corporations to hide information about faulty and hazardous products. He expanded on this theme in written testimony, Exhibit E. Mr. Kamalani also provided a chart listing the 17 states with Sunshine in Litigation statutes, Exhibit F, that included a list of secret settlements by major companies.
Senator Titus verified the committee had a copy of the explanation of S.B. 251 and noted various components of the bill included definitions and what information would be kept confidential. She said she wanted to stress the point that trade secrets would be protected, but revealing hazards to the consumer was the target of this bill. She said, “Passage of this bill will lift the veil of secrecy that keeps critical safety information hidden from the public.”
Senator Titus said the basic question was about the public’s right to know about hazards that could cripple or kill someone, as opposed to the corporate right to keep those hazards secret. She urged the committee to act in the best interest of the people of Nevada and lift the veil of secrecy.
Kent F. Lauer, Lobbyist, Nevada Press Association, came forward in support of S.B. 251. As one example of why the press association supported this bill, Mr. Lauer relayed a story of a young boy who died, trapped between the outer door and a gate in an elevator in Maine. Mr. Lauer said the elevator was installed in 1929 and was equipped with an outer door and an inner folding gate with approximately 8 inches between them. The victim, an 8-year-old, was crushed to death. Mr. Lauer said the parents sued primarily to stop this type of accident from happening again. The condition set up by the parents was if the case was settled, there would be no confidential aspect to it. Money, he said, could not buy their silence.
Research indicated, said Mr. Lauer, these elevators had killed or injured several children and it was not disclosed because of secrecy agreements. The Otis Elevator Company settled this case, but more importantly, agreed to stop hiding behind confidentiality agreements and fix all the dangerous elevators.
Mr. Lauer continued, there were several companies in the tire and asbestos industries that had been sued hundreds of times and settled with secrecy agreements. He said the manufacturers benefited from these secret settlements, but the public was deprived of essential health and safety information that could prevent death, injury, and suffering.
Mr. Lauer referenced a statement by a former justice on the Texas Supreme Court who said, “I think there are lives being lost every week in America due to hazardous products and hazardous activities as a result of secrecy settlements.” Mr. Lauer said there currently was a movement to ban secret settlements and mentioned South Carolina as one state that had passed such legislation. He said Nevada needed to join in the movement.
“Opponents of this bill,” Mr. Lauer said, “can not possibly overcome the primary reason why this bill should be approved. … the fundamental principal behind the bill, the need to protect the public. … Lives are at stake.” He explained the secrecy documents encouraged settlements and kept court dockets free of these cases. Or, he said, these accidents were called “private matters.” However, he said, lawsuits were filed in public courts where there was a strong presumption of openness. “Courts,” Mr. Lauer concluded, ”should not be used to sacrifice the public’s well-being in favor of private interests.”
Senator Care asked if it was the choice of the press to decided which lawsuits to cover. He asked Mr. Lauer to explain the relationship between the terms of a settlement and the amount of publicity the press afforded it and if the attitude of the press was different if there was no confidentiality agreement. Mr. Lauer responded, there was a lot of interest, and referenced Firestone tires as an example, because it was a public hazard that involved a lot of people.
Mr. Lauer said during his experience as a court reporter he was most interested in hazardous product lawsuits, but often secrecy agreements limited the reporting to an announcement the case was settled. He said he believed S.B. 251 would open the door to much greater publicity.
Matthew L. Sharp, Lobbyist, Nevada Trial Lawyers Association, said the association supported S.B. 251. He said public interest and its right to know was the issue. Mr. Sharp addressed Senator Care regarding the filing of a lawsuit, stating it was public information, but documents were confidential and available only to the plaintiff’s counsel. He said a dangerous product’s information was often filed under a seal. He said the complaint or lawsuit alleges a hazard and it was during discovery that facts were revealed and those were sealed.
Senator Care posed the scenario of a memo written to a chief executive officer that becomes the smoking gun and said that memo would not be included in a settlement agreement. Mr. Sharp said evidence of oppressive, willful conduct was attached to motions and they too were sealed. Mr. Sharp also said defense counsel often requested the return of all discovered evidence. He stated S.B. 251 would preclude the practice of returning evidence and could be used to alert the public of a hazardous product.
Senator Care asked if S.B. 251 was written to allow disclosure of all documents or simply the settlements, excepting the trade secrets provision. Mr. Sharp responded this bill would give the court an affirmative duty to disclose a public hazard. He said in section 9 of S.B. 251, the public hazard became the duty of the court to disclose, but the amount of any settlement remained subject to secrecy because, he explained, the amount of the settlement did not constitute a public hazard.
Chairman Amodei said he thought S.B. 251 concentrated on two issues, entering an order of judgment, a function of the court, and in Section 10, subsection 2, the ability to contest an agreement or contract. He asked Mr. Sharp what he thought this law would do to settlement discussions. Chairman Amodei posed a scenario as if he were a defendant and interested in confidentiality, and stated he would likely contact the counsel of the suing party for a settlement discussion. Chairman Amodei said the plaintiff’s counsel would likely be motivated to settle, and both sides would mutually agree on a motion to dismiss. Chairman Amodei said legislators may be creating a cottage industry and while it could be a very good result for the clients allowing them to skirt certain conditions, he was confident it was not the intention of this legislation.
Mr. Sharp agreed, saying the objective of S.B. 251 was not to create a subcategory of collusion. He said S.B. 251 was not about settlement agreements. Rather, he said, the bill addressed the situation occurring when, in the course of discovery, documents produced on a confidential basis revealed a public hazard and even after settlement, remained confidential. He said this legislation made such documents public. He added the bill, as written, was limited and he suggested an amendment for clarity and avoidance of collusion. He said the intention was not to encourage class action types of settlements.
Chairman Amodei asked how the language of settlement agreements would change with the passage of S.B. 251. Specifically, Chairman Amodei referred to statements within the settlement of “no fault” or “no admission of guilt” or “this is a contested issue.” He asked if a new issue would be created.
Mr. Sharp replied, “Certainly, it could.” But, he said, focusing on section 9 of S.B. 251, he did not interpret it to mean a settlement at arm’s length as an issue. He said statements such as Chairman Amodei cited were not an area of concern, rather in the course of discovery, documents produced was the issue.
Senator Care, referring to section 9, asked if standard language as discussed would become a liability to the court. He asked if a product was discovered to be an arguable public hazard, was it the duty of the court to make a judicial determination the product was unsafe. “What,” he asked, “is the burden on the court?”
Mr. Sharp answered, “I don’t see there being an affirmative duty upon the court, absent the court’s knowledge that there’s a public hazard.” He said if documents showing a public hazard were shown to the court, the court did have an affirmative duty to question the validity of a confidential agreement.
Senator Care said under section 10 of S.B. 251, a consumer advocacy group or the press could investigate discovery on a case already settled and file a motion to examine the documents. Mr. Sharp responded some kind of prima facie evidence would need to be presented to the court to allow such an investigation. He added this possibility was limited to very few of the cases before the court. Mr. Sharp used the Firestone tire problem as an example and stated lawyers knew of the hazard, but were precluded from disclosing it to the public.
Senator Care said this statute did nothing for a demand letter in response to which a company sends a settlement and a lawsuit is never filed. Mr. Sharp agreed, stating this type of settlement was not affected by S.B. 251. He said in this type of case, with the smoking gun in a lawyer’s possession, there was no confidentiality agreement. Mr. Sharp noted Chairman Amodei’s point was good and reiterated the need for an amendment to consider collusion.
Chairman Amodei asked how the language of S.B. 251 compared to language of similar legislation in the 17 other states. Mr. Sharp said he did not know, but agreed to find out.
Senator Wiener asked about the responsibility a lawyer had to his or her client if, in the discovery process, it was determined the client was responsible in some way. Mr. Sharp said the lawyer’s responsibility was to protect the client’s best interest. He said, in Senator Weiner’s context, disputed facts did not change counsel’s responsibility; the objective remained to get the case settled. He added, as an officer of the court, if a hazard was discovered, the lawyer had a responsibility to notify the judge and suggest eliminating the confidentiality. He said the job of the attorney was to advise the client that if he or she was offered an acceptable settlement to take it.
John P. Sande, III, Lobbyist, Pfizer Incorporated, spoke in opposition to S.B. 251, stating the record would reveal Nevada legislators discussed this aspect of the Federal Rules of Civil Procedure in 1992. He said the discussion took place then because some claimed the federal rules really did not protect the public from hazardous products. Mr. Sande said some of the testimony heard today was also heard then. The result then was the Judicial Conference of the United States did a thorough study on public hazards. The results of the study, found in Exhibit G, concluded legislation such as S.B. 251 would delay the resolution of private disputes by burdening the courts. He said Nevada’s Rules of Civil Procedure were similar to the federal rules in that the courts were responsible for making determinations about the confidentiality of information. Mr. Sande said, “Our courts in Nevada can adequately address that on a case‑by-case basis.”
Mr. Sande said S.B. 251 could be abused easily by third parties, including the press, by demanding the names of persons involved in private or protected lawsuits or who had filed a claim against a product.
Senator Titus verified Mr. Sande represented a pharmaceutical company. He affirmed he represented Pfizer Incorporated. Senator Titus noted the list of companies which had caused damage to people contained several pharmaceutical companies. She said she understood why Mr. Sande opposed the bill.
Mr. Sande responded the Federal Drug Administration (FDA) approved drugs and regulated the drug industry before drugs reached the market. He explained, with new drugs that are tested and approved, there were known side effects. He said pharmaceutical companies attempted to get drugs out into the marketplace as quickly as possible and potential problems with a drug were already reported to several agencies. Mr. Sande said:
I think, quite frankly, that in the drug arena the FDA does a pretty good job now. … This [S.B. 251] just opens up the floodgates and basically allows anybody to come in and try to get any information that they want and it will put a big burden on the courts in Nevada.
Senator Titus asked if this was a problem in the 17 states that had this law. She asked if there were any statistics available regarding increases in lawsuits. Mr. Sande said he would get that information adding, from a legal standpoint, defendants would be less likely to want to settle early in the proceedings.
Senator Care referred to Senate Bill No. 411 of the 71st Legislative Session, which he said was passed on after testimony, but was similar to S.B. 251. He asked Mr. Sande how different the two bills were. Mr. Sande responded the bills were very similar.
Senator Care, who reported having experienced a blowout at 70 miles per hour, said the general argument regarding the Firestone tire tragedies is, “If I had known Firestone had done this, I would have never bought my Firestone tires. There is a public policy argument.”
Mr. Sande said it was cases like the Firestone tire case or Enron’s fraudulent practices that prompted the study conducted in 1992. He said failure to disclose important information and confidentiality agreements was discussed and the finding was the courts do a good job. If, he continued, the court saw something it deemed a public hazard, it would be disclosed.
Chairman Amodei said the way S.B. 251, in section 9, was written, it read, “A court shall not knowingly enter an order …” with nothing regarding which side prevails in the litigation. He said if there was a defense verdict, the wording of the bill still contained a disclosure issue. Mr. Sande agreed with Chairman Amodei’s interpretation.
Bill Bradley, Lobbyist, Nevada Trial Lawyers Association, said he wanted to present some facts to Mr. Sande. He said, “When a case goes to trial, then all those documents are entered into evidence at the trial and at that point they all become public.” Chairman Amodei said, “There is no limiting language … the way it is written it says any order or judgment.” He said he did not disagree with Mr. Bradley’s statement, but said, as written, it was a very global statement. Mr. Bradley responded, if there is a judgment for the defendant then the jury had made a decision from which one could infer the product did not create a public hazard, so the burden is taken off the court. Chairman Amodei asked Mr. Bradley if he had language to include in the bill to communicate his point. Mr. Bradley said he believed it was included in the bill, but agreed to find additional language.
Mr. Bradley then said he discerned some confusion in the bill relating to the discovery of documents, a release, and a settlement agreement. He said these were three distinctly different things. Mr. Bradley said the bill did not cover the release and explained it was in the release where the confidentiality agreement was placed. Chairman Amodei asked Mr. Bradley if there was more precise language available to accomplish the objectives of this legislation. Mr. Bradley agreed to find more definitive wording for the bill.
Senator Care said a public hazard was a finding of fact. He asked if the case had not yet gone to the jury, how does the court determine a public hazard. He expanded his question saying, “Who makes that determination, by whom and how?”
Mr. Bradley said in discovery the defense would know there were documents within the litigation about incidents and, at that point, request a confidentiality order. He said often defense lawyers claimed trade secrets were what needed to be protected and relayed to the plaintiff’s attorney another $25,000 would be required to continue to try the case regarding whether it was a trade secret or not.
Then, Mr. Bradley said, defense attorneys offered a settlement agreement to save the additional costs of litigation. He continued, once the agreement was signed, the documents were there but subject to a confidentiality agreement. If litigants continued with trial, he explained, and a settlement was offered, the confidentiality order had a clause that all documents must be returned.
Mr. Bradley said the plaintiff then signed a release that stated the terms and amount of the settlement remained confidential. Finally, he said, came an order to dismiss the case and, when signed, it was dismissed with prejudice.
Additionally, Mr. Bradley said, if there was a motion for punitive damages with a harmful document attached to it, it was often accompanied by a motion to have the court file sealed. Then, he said, nobody could access that document and the next person with a similar experience could not see findings of the similar case to set precedence.
Senator Care said one could infer the jury did not find the product a public hazard and, equally, a settlement could infer there was a public hazard. He said he was still unclear about who made that determination. He asked, “Is it the public at large? Is it the press?” He said he did not think a judge would hold up the case to rule on a public hazard issue. Mr. Bradley said it was the judge making such a ruling that S.B. 251 desired to achieve.
Samuel P. McMullen, Lobbyist, Las Vegas Chamber of Commerce, and Retail Association of Nevada commended Senator Titus for her perseverance and her interest in this legislation. He said there were differences in goals and interests and explained while his clients had compassion for those injured by hazardous products, they did not support S.B. 251.
Mr. McMullen said, from a business point of view, S.B.251 was not beneficial. He said prevention was a better idea. Mr. McMullen said the way this bill was written, contrary to Mr. Sharp’s testimony, S.B. 251 did not affect a small number of cases, rather, he contended, all businesses were impacted. Though he said he had been told slip-and-fall accidents were not the focus of the bill, those injuries happened and lawsuits often ensued. He said he was not promoting public hazards or hazardous products, but in the midst of litigation of private citizens on personal cases, the press or anyone else doing research became privy to personal information. He concluded S.B. 251 was “a huge wrench to the process and, frankly, one that we think works adequately and we’d like to keep it the way it is.”
Senator Washington asked about the definition of “a person” in section 5 of S.B. 251. Bradley Wilkinson, Committee Counsel, said a person was defined for clarity, because a person was not a political subdivision. Mr. McMullen said the definition of “a person” was broadened to include political subdivisions and government entities and gave everyone the potential to intervene in the lawsuit. He said every case would be open for inspection by anyone who chose to request it.
Chairman Amodei asked if anyone from the district judges association was present to offer an opinion on S.B. 251. As none came forward, he said the record would show no district judges were present for any portion of this hearing on S.B. 251.
Mary Lau, Lobbyist, Retail Association of Nevada, voiced opposition to S.B. 251. She announced this position was consistent with the retailers’ desires on all other presentations of this kind of proposed legislation. Ms. Lau reported Mr. McMullen had addressed many of the concerns she had planned to discuss with the committee. She said, philosophically and structurally, they opposed disturbing the balance of the law as it currently existed. Ms. Lau said S.B. 251 was a question of product liability, but also one of loss prevention in retail stores.
Ms. Lau then talked about a Web site called fallingmerchandise.com stating it had links to specific trade publications and was a useful source of business information. She said people of similar interests formed associations to communicate progress or problems within that interest. Ms. Lau said trade associations developed priorities together, for example the trial lawyers association and its priority for the Sunshine in Litigation laws.
Senator Titus interrupted Ms. Lau to clarify, “The trial lawyers did not come to me. This is not their priority. They did not encourage me to do this. I’ve been doing this on my own since 1991. Let’s just be a little more guarded when you throw out those accusations.”
Ms. Lau said her testimony was just that, testimony, and not an accusation. She said she was aware of Senator Titus’ interest in this litigation and meant no disrespect.
Ms. Lau said she could not testify in favor of this bill. She said sometimes the alleged smoking gun was informational in nature. She gave an example of a memo sent to stores advising the managers the floor tile was too slick and had caused a number of slip-and-fall accidents. The memo was a directive to replace the floor. Suddenly, she said, the memo became evidence of neglect. She reiterated, the retailers opposed anything that represented a weakening in the balance that already existed, including S.B. 251.
Ray Bacon, Lobbyist, Nevada Manufacturers Association, said part of his preparation for today’s hearing was a call to the Michigan Manufacturers Association and to Ford Motor Company to learn their policies. He said he anticipated Ford would be mentioned at this hearing. Mr. Bacon reported, “Ford’s policy is that nothing in their policy is confidential, with the exception of the settlement amount.” He said to date, six cases involving the Ford-Firestone situation had gone to court and in each one, Ford Motor Company prevailed. He added, federal officials conducted extensive inspections of the production process and found no defects in Ford’s construction.
Senator Titus said Michigan was a state with a Sunshine in Litigation statute.
Tom Wood, Lobbyist, Pharmaceutical Research and Manufacturers of America (PhRMA), said he did not want to add anything to what Mr. Sande had already said. He noted all information about a pharmaceutical product had to be submitted to the U. S. Food and Drug Administration.
Chairman Amodei closed the hearing on S.B. 251 and opened the hearing on S.B. 298.
SENATE BILL 298: Makes various changes to provisions pertaining to business. (BDR 7-987)
Mr. Rowley said he represented 40 resident agents in the State of Nevada who serve approximately 45,000 entities under statute. He stated his intention was to provide a broad overview of S.B. 298. Accompanying Mr. Rowley was Garrett Sutton, an attorney practicing corporate law and corporate formation and Cort Christie, president of several companies that retain Nevada Corporate Headquarters Incorporated in Las Vegas.
Mr. Rowley described his colleagues and himself as the experts in incorporation in Nevada. He claimed to know the business, the market forces, and the competition better than anyone else in the State. Mr. Rowley said there were grave concerns about the consequences and impact of some proposed legislation being considered. He explained approximately 80 percent of the corporate filings in Nevada came from out of State and described them as “typically remote entities that consisted of a filing and a bank account, and possibly the use of a Nevada mailing address.” Mr. Rowley said the companies represented here were not large Wal-Mart or other companies with large physical presences, rather he expanded, these were companies that, with a simple filing, could transfer into other states that compete with Nevada for their business. He said these small business companies represented about $80 million in State revenue every biennium. Mr. Rowley pointed out these revenues had no costs associated with them because these companies did not use the roads, health care facilities, schools, or other services provided in the State. Therefore, he reasoned, this revenue was in need of protection along with Nevada’s history as a desirable incorporation center in the United States.
Mr. Rowley said some of the proposals subject to legislation would damage the reputation of Nevada as a corporate haven. He said the resident agents had prepared a packet designed to strengthen and continue to expand Nevada’s position as an incorporation center, Exhibit H. He said in the revenue portion of this package, the cost of filing a corporation in Nevada was higher than the cost of filing in competing states. The competing states, he said, included Florida, Colorado, Delaware, Wyoming, and Texas. He added these states brought more corporate filings into their states than their populations would support. Mr. Rowley said Nevada brought in far more corporations than our population supports. He said the average incorporation fee in the aforementioned states was about $70.
The state of Florida, Mr. Rowley said, charged about $70-75 for a corporate filing and $125 for the annual list. He explained the “intelligently lower” entry fee to incorporate in Florida brought in several companies, and once a company was there, the associated fees brought in significant revenue. For Nevada, the proposal lowered the corporate fee to a competitive $75 and raised the annual renewal fee to $125.
Mr. Rowley used an example of a cellular phone company trying to establish a market share in a competitive business. He said these companies either gave the customer a phone or sold one under cost just to enroll people in a plan. Once on the plan, he explained, the company began to generate revenue. He compared this with the State of Nevada’s annual filing fees; mergers, amendments, default penalties all the fees generated revenue. He described the proposal as opposite of what was presented during the last Legislative Session, when fees were raised on the front end. He reported corporate filings in the State of Nevada had flattened out and currently were lower than in 2000. He said the economy was a factor in that change, but also raising filing fees up front also contributed to the loss in the number of corporations coming to Nevada.
Mr. Rowley said the pricing theory to maximize revenues out of the secretary of State’s office could be accomplished by lowering filing fees and raising annual fees, which would generate in excess of $46 million in revenue per biennium for the State. He said using the Florida model as a base, some provisions were added but the tiered structure would remain. This plan was based on a 3 percent growth rate, he said. Chairman Amodei asked if the $50 million was a net revenue in excess of the existing fee structure. Mr. Rowley answered affirmatively.
Senator Care asked Mr. Rowley if he had perused S.B. 382, and then explained S.B. 382 would increase corporate filing fees by 50 percent.
SENATE BILL 382: Makes various changes to provisions governing public financial administration. (BDR 32-721)
Senator Care said the estimate of revenue from the increased fees was $35 million over the biennium. He asked Mr. Rowley what other states did with fees for reinstatements, amendments, and other fees.
Mr. Rowley said the association of resident agents had agents who did business in all 50 states and comparative information was studied and evaluated. To remain competitive, the fees of other states were used to establish Nevada fees for all services. He said S.B. 298 would place Nevada in the high end of the scale for other states. He said in Wyoming there was an annual report that had a low fee of $50 and was then scaled upward according to the total assets located in Wyoming. He added there was a cap of approximately $25,000. Mr. Rowley said the resident agent fees in the state of Florida model were instructive to the association because Florida filed more corporations than any other state. He said Florida’s model was valuable because their fees were similar to those of Nevada.
Senator Washington asked Mr. Rowley to explain the proposed Certificate of Change in section 4 of S.B. 298. Mr. Rowley said the language which appeared in several sections of the bill placed a limitation on what constituted a change. Currently, Mr. Rowley explained, a name change of a corporation or a merger required fees, but the proposed language clarified the changes and eliminated confusion for the consumer. Senator Washington then asked about a decrease in fees found in section 9 and asked about the proposed revenue of $46 million. Mr. Rowley said the estimated revenue of $46 million was based on projections of no change in the number of filings, the status quo. He said if there was a drop in initial filings, a loss would occur and the increases in renewal fees would make up for any loss. If there was an increase in new filings, he said that figure would also rise. Basically, he said, the pricing theory was to raise the fees on mandatory filings and not the elective filings. He explained given a choice of incorporating in Nevada or elsewhere, the initial filing fee was attractive to those in a decision-making position regarding incorporation.
Senator Wiener asked what portion of the proposed $46 million in revenue was expected from limited partnerships with limited liabilities. She asked the reason for the new language, “lawfully designated,” to be included in the provisions. Mr. Rowley said the additional language dealt with the resident agents’ concern with annual lists sent in mass mailings to corporations represented by other resident agents. Sometimes, he explained, the lists filed at the secretary of State’s office were done without a change of resident agent form and the record on file was incorrect. The consumer was less confused and the language was clarified with this addition to the bill.
Senator Wiener asked if the confusion with the lawful resident agent had been occurring for a long time. Mr. Rowley said the marketing device of appearing to be a resident agent was a phenomenon that has only been around for a few years. He added the Office of the Secretary of State would concur with that estimate.
Regarding the revenue generated by limited partnerships with limited liability, Mr. Rowley said none of the revenue from limited partnerships was included in the projected revenue. He said the reason was usually it took a while for a limited partnership to catch on and the Office of the Secretary of State took that into consideration. He said only Colorado, Delaware, Florida, Georgia, Maryland, and Texas offered limited liability and limited partnerships, states which were Nevada’s competition for resident agent services. Mr. Rowley continued, the revenue component of the limited liability and limited partnership filings was, while any existing limited partnership on file with the State could register for the limited liability status, this status change would incur an additional $100 filing fee, and the renewal fee for the limited liability would then be $175 annually, instead of the $125 fee, thereby generating additional revenue for the State.
Senator Wiener asked if other states had added the limited partnership and limited liability features Nevada had proposed. Mr. Rowley said limited liability and limited partnership were new to all the aforementioned states and those states already offering this feature had done so only within the last few years. He said he expected several other states would follow and offer limited liability and limited partnerships. Mr. Rowley said the expectation or projection was in time, general partnerships and limited partnerships, as they are known today, would go the way of the oxcart. He said the limited liability and limited partnership features were the new must have entities to have in this market to stay competitive.
Senator Care said when the 71st Session concluded in 2001, it was well known there were revenue problems in this State. He commended the resident agents for proposing the bill. Senator Care said his fear was some corporations would decide to leave Nevada because of increased annual filing fees. He said he also was curious about limited liability partnerships and what position the Internal Revenue Service held on them.
Mr. Rowley responded raising the fees would predictably have an impact on the corporations paying those increased fees. But, he continued, with the need for revenue in the State, the conditions of the market, and the position of competitive states, the unanimous conclusion of the resident agents association was the State of Nevada could support these fee increases. He said, “We don’t anticipate, on the basis of this type of fee increase, from $85 to $125 annual renewal, that there would be a significant drop-off or it would trigger a mass exodus from the State.” He explained if the fee increase was coupled with a gross receipts type of mechanism, that statement might not be valid. Mr. Rowley said the increase protects the State of Nevada.
Senator Washington asked why the language was deleted from section 30 of S.B. 298, and a subsection was added.
Garrett Sutton, Attorney, announced he was testifying on behalf of the Nevada Resident Agents Association. He explained the issue was with the “charging order,” which he described as monies received by a creditor from a limited liability partnership. He said judicial foreclosure was allowed for in Nevada and a charging order is also allowable. Mr. Sutton said the objective was to have the charging order become the exclusive remedy. He said there were two reasons this change was desired: one was the competitiveness of the area, with companies going to Wyoming from Nevada because the charging order in that state was the only remedy. He said a charging order was regarded as corporate advantage. Additionally, Mr. Sutton said the charging order added to the clarity of S.B. 298. He added, the charging orders protected creditors because it allowed the creditor to receive proceeds from the limited liability company or the limited partnership.
Senator Washington asked which states have the exclusive charging order. Mr. Sutton said Alaska, Arizona, Oklahoma, and Wyoming. Senator Washington then asked about foreign companies filing in Nevada, specifically, what would entice a foreign company to file for incorporation in Nevada and what the anticipated revenue was from foreign entities.
Mr. Rowley responded the requirements were defined in section 51 of S.B. 298 for foreign entities opening limited partnerships in Nevada.
Senator Care asked Mr. Sutton about section 48, the alter ego element of S.B. 298. He said the language was included in the legislation passed last session and asked if there was a reason to keep it in the bill. Mr. Rowley said the language remained intentionally because when the limited liability statutes of other states were studied, an existing standard with regard to alter ego status of any partner was discovered. Mr. Sutton explained the language indemnified what formerly was the general partner of a limited partnership who had unlimited liability. He continued, there needed to be some defined standard regarding at what point a partner could be held responsible and the alter ego doctrine was applicable and therefore, intentionally included in the bill.
Mr. Sutton added the alter ego doctrine was case law and the way Nevada courts would handle limited liability cases. Senator Care said he believed it to be a matter of law as opposed to the finding of fact. He agreed with Mr. Sutton that the statute already existed.
Ms. Parker said Mr. Anderson was prepared to discuss the Office of the Secretary of State concerns regarding S.B. 298. She said there were some technical changes that would affect the department’s operation. Ms. Parker said S.B. 298 would have a fiscal impact in that the office would need to hire additional staff for customer service. She noted her office had hired six new employees when the fee increases of S.B. No. 577 of the 71st Legislative Session went into effect, and still a lot of overtime was logged with staff at capacity. Ms. Parker explained fee increases also brought increased phone inquiries, more correspondence, additional processing, and generally more activity. Ms. Parker added to remain competitive, the quality of service from the Office of the Secretary of State had to be maintained. Ms. Parker said the changes and suggestions from the Office of the Secretary of State had been discussed with Mr. Rowley.
Ms. Parker said Mr. Anderson had prepared a list of the top ten filing states that also contained new filings, amendments, and renewals fees, Exhibit I. She said a lot of people relied on the database maintained by the secretary of State, stating the resident agents were designated in that system and if a corporation’s name changed and the certificate was not updated in the system, it would create issues of service problems. She said she preferred resident agents to file certificate with the secretary of State, but many had numerous listings and as the fee was currently $30 per entity, the fees could be substantial. However, the new system coming on-line at the end of 2003 had a global change feature that would automatically change all entities for one fee.
Senator Washington asked how soon the changes would be available on-line. Ms. Parker said the changes should be completed by December 2003. Senator McGinness asked if the estimated figure for revenue the secretary of State calculated matched the figure provided by Mr. Rowley. Ms. Parker said their figure was $43 million in estimated revenue at the end of the biennium, assuming no changes.
Scott W. Anderson, Deputy Secretary of State for Commercial Recordings, Office of the Secretary of State, said a number of the provisions he would be discussing, Exhibit J, affected different sections of S.B. 298. He explained there were similar provisions within the different types of entities filed. First, he addressed the additional wording, “lawfully designated agent,” in section 5. He said it was necessary because without it, a review of each entity would be required.
Chairman Amodei said, as he understood it, that language became necessary because competing resident agents were sending out forms with inaccurate information. He asked if there was a system to cross-check the information provided with the filings at the commercial filing department. Mr. Anderson said there was no system to cross-check and Chairman Amodei suggested some system be produced to avoid filing “fugitive forms.”
Mr. Anderson next discussed default and reinstatement procedures. He said there were approximately 4200 reinstatements annually. He said additional scrutiny, scanning, and processing were required when a corporation was reinstated. He said there was no objection to these additional processes, but more staff would be required to handle it. Mr. Anderson said he wanted to note that filing a resident agent acceptance does not change the resident agent of record; that change occurred when the entity filed a change of agent form.
Mr. Anderson then explained a new procedure for filing a resignation for an officer of a corporation. He said currently there was no fee for resigning. The officer would merely send a letter stating that he or she wished to resign. Now there was a charge of $75 to remove oneself from affiliation with an entity. Mr. Anderson said he believed it to be “publicly prudent” to charge the same fee to allow resignation from limited partnerships, and general partners of limited partnerships and general partners of limited liability partnerships. These policies, he said, were found in section 13, subsection 8, of S.B. 298.
Mr. Anderson continued, section 17 of S.B. 298 was a major change in policy for the secretary of State’s office. He said the bill would change the static filing fee, currently for corporations or other for-profit entities, of $85 per year and $15 for non-profit organizations, to a fee based upon the listed amount of capitalization. Under the new system, he said the annual fee would be printed on the form when mailed out. Mr. Anderson said the Department of Information Technology would be integral to implementing changes.
Mr. Anderson said, with regard to the provisions of section 14, the Office of the Secretary of State would work with resident agents to adjust the language and amend the information included in the registration list. The registration of resident agents was desirable, Mr. Anderson said, and if the resident agents needed to amend information anytime during the year they could do so for a fee. He announced the Office of the Secretary of State wanted to expand the process of registering agents and in order to do so, the office needed the regulatory authority as to the content, maintenance, presentation, and distribution of the list.
Mr. Anderson explained “corporations sole” or entities formed for religious purposes and other nonprofit corporations, as per sections 23 and 24 of S.B. 298, would be required to file an annual list of officers and a new fee would be required to file the list, and also for any delinquency in filing the list. Ms. Parker pointed out in the bill, as currently drafted, the amount of the reinstatement fee was $50 in section 23 and $100 in section 24. Mr. Anderson said the reinstatement fee should be $100. He added corporations sole tended to have long names and announced the need to create a process to identify them in the lists.
Mr. Anderson said sections 43 through 60 of S.B. 298 dealt with the requirements and provisions for the formation of a limited-liability limited partnership (LLLP). He explained, “The secretary of State has always been supportive of new entities that allow us to maintain our competitive edge or even be on the leading edge.” Therefore, with the addition of limited-liability limited partnership, many changes were needed in the Office of the Secretary of State including new forms, additional training for staff, and manual and computer processes would need to be modified, he said. Mr. Anderson continued, the current systems would also need programming changes. In section 56, Mr. Anderson said including the name of the organizer of the LLLP represented an addition to the filing.
Ms. Parker talked next about sections 73 through 75 of S.B. 298 stating there might be a need to increase other fees for business filings. She said there were some discrepancies between the service of process fees, depending on the particular filing. She explained some were $10 and some were $100, but there was no resistance from the secretary of State’s office to making all the service of process fees uniform.
Ms. Parker stated in subsection 4 of section 75 of S.B. 298 the maximum fee was increased to $35,000. The fee, she said, was based on the increase in stock and capitalization of a corporation.
Section 80 of S.B. 298 addressed negotiable instruments returned for insufficient funds. Ms. Parker said there were many problems with resident agents who filed multiple entities and paid with one check. She said when the check bounced, fee processors in the accounting departments had to reverse each entity separately. This process was very time-consuming, Ms. Parker said, and the $10 fee did not cover labor costs. Therefore, she explained the minimum fee was increased to a fee of $25 for one entity with a maximum fee of the direct cost to the Office of the Secretary of State. Ms. Parker said the greatest concern was with subsection 3, which addressed the portion of the fees the Office of the Secretary of State received for services. She said Special Services funded 58 full-time equivalent positions and, she said, if filings remained static and no fee increases were implemented, the fund would be bankrupt by the end of 2004, but with the fee increases the fund would remain solvent indefinitely.
Regarding the registration of lawfully designated resident agents, Ms. Parker said there were 205,000 annual list forms processed and currently there was no system in place to cross-check the resident agent except for a box on the form to check if the resident agent had changed. She said with the new system, the reliability of the lawfully designated resident agent should become more accurate.
Dan Musgrove, Lobbyist, Clark County, and Southern Nevada Regional Planning Coalition (SNRPC), said there was ambiguity in section 82 of S.B. 298. The concern and problems, he said, dealt with the issuing of business licenses because some people in Clark County thought the issuance of a business license in Clark County was, in fact, a business license for the State of Nevada and assumed there was no requirement to contact the other local jurisdictions. He suggested “registration” as the name-change and to include, as an addition, the need to have a business license in the place where business was to be conducted. He said the business license form was too ambiguous and confusing.
Chairman Amodei asked Mr. Musgrove to contact the district attorney’s office and request they submit proposed language to clarify this point and send it to Mr. Wilkinson for consideration.
Mr. Sharp voiced opposition to section 30 and sections 43-50 of S.B. 298 in regard to limited-liability limited partnerships. He said section 30 dealt with the rights of a judgment creditor. He described judgment creditors as those who had a meritorious suit and a judgment in their favor. He said, “Anytime those people’s rights are limited, it better be done with extreme care.” Mr. Sharp continued, stating he did not hear a compelling reason to limit the rights of a judgment creditor.
With regard to sections 43 through 50, Mr. Sharp said he was concerned about the essential elimination of laws on partnerships. He said when a person forms a business, he had the privilege of selecting the type of entity he wanted and in partnerships, there were benefits and a responsibility to be accountable for the liabilities of the partnership. Mr. Sharp said he read the bill as offering the benefits of partnership, but not the accountability. He referenced the discussion on S.B. 124 and said, “Much of the shenanigans that were going on with Enron were dealt through phony partnerships.” He asked how the provisions of S.B. 298 affected entities such as banks that actively assist executives in setting up phony partnerships.
Senator Care commented to Mr. Sharp he was describing “white collar crime” but added the secretary of State was not involved in finding fraud. Senator Care said a limited liability partnership would be filed as a corporation. He said Senator Titus’ S.B. 124 was “right on” when white-collar crime started robbing people, especially retirees. Senator Care said there should be more time spent dealing with heavy-handed, white-collar criminals. He said corporations and partnerships would be created and there was no one out there to determine if they were the real thing. He said, “Certainly, the secretary of State could not do it.”
Mr. Sharp said he agreed with Senator Care’s comments about protecting people who were defrauded and, at the same time, wished to preserve legitimate businesses. He said he was concerned about limited liability companies and S.B. 298 made it more difficult for a defrauded person to be compensated by the white-collar criminal. Mr. Sharp mentioned the savings and loan crisis and Enron and stated:
Ultimately, the people with the money left over after everything’s been destroyed are the banks, the lawyers, the accountants who set these things up and allowed these things to function knowing that they were defrauding people. The more levels you have to keep the ultimate parties responsible, the more difficult it is for the people who have been harmed to seek compensation.
Chairman Amodei said Assemblyman Christianson had planned to testify but could not attend. He sent a letter that was entered into the record, Exhibit K.
Dino DiCianno, Deputy Executive Director, Department of Taxation, said the department did not have any position on S.B. 298. But, he offered an amendment to section 82 to repeal Nevada Revised Statutes (NRS) 364.160, which he said was confusing to sole proprietors. This amendment, Mr. DiCianno said, would increase the level of section 82 to approximately 60,000 accounts and would generate additional revenue to the General Fund.
Mr. Rowley said there was one additional amendment to section 43 of S.B. 298 in subsection 1, paragraph (f). He said the brief statement of professional service rendered by the limited partnership needed to be deleted. Senator Care asked if something would replace that paragraph. Mr. Rowley said, “Nothing.” He explained this statement came from other statutes pertaining to professional partnerships and this entity was designed for general business use and was not necessary.
Chairman Amodei closed the hearing on Senate Bill 298. He announced there was one Bill Draft Request (BDR) from the Nevada Supreme Court.
BILL DRAFT REQUEST 3-611: Makes various changes to provisions concerning certain protective orders. (Later introduced as Senate Bill 398.)
SENATOR CARE MOVED TO INTRODUCE BDR 3-611.
SENATOR WASHINGTON SECONDED THE MOTION.
THE MOTION CARRIED UNANIMOUSLY.
*****
Chairman Amodei adjourned the meeting at 10:55 a.m.
RESPECTFULLY SUBMITTED:
Ann Bednarski,
Committee Secretary
APPROVED BY:
Senator Mark E. Amodei, Chairman
DATE: