Things to Consider When Doing Business in Arizona: Unique Aspects of Arizona Law – From Cumulative Voting to Blue Pencils, Blind Trusts and Guns at Work
September 24, 2015
Arizona is a great place to do business. It boasts an excellent regulatory environment, envious climate, skilled workers, fair tax rates, good transportation facilities, and a growing pool of consumers. In addition, CNBC ranked Arizona among the top fifteen of its “America’s Top States for Business 2014” list, giving it high marks for a growing and independent workforce, good access to capital, and a solid infrastructure.
Companies seeking to do business in Arizona should understand some key differences about Arizona law that might surprise them. Below are some highlights and links to important resources.
Forming a Company:
The Arizona Corporation Commission (ACC) regulates and approves the formations of Arizona’s corporations and limited liability companies. Filings with the ACC can be made by fax, and good standing certificates are generally available online. Information and simple forms are available through the ACC’s website (www.azcc.gov), but those forms do not often contain all the provisions advisable for business owners to consider for their organizational documents.
Partnerships are under the auspices of the Arizona Secretary of State’s office (www.azsos.gov). The Secretary of State’s office requires original signatures, so it does not permit online or fax filings.
For Arizona corporations, note that:
- cumulative voting is mandatory in the election of directors, per the state’s constitution. This cannot be waived by the shareholders.
- actions by consent without a meeting of the directors or the shareholders currently require unanimous consent.
Limited liability companies formed in Arizona do not have the same restrictions.
Company Relocation Assistance:
Businesses seeking to relocate to Arizona may wish to contact the Arizona Commerce Authority (www.azcommerce.com), which spearheads the state’s efforts to attract new business and expand businesses already existing in the state. The Greater Phoenix Economic Council (www.gpec.org) assists with development efforts in the greater Phoenix metropolitan area, while the Tucson Regional Economic Organization (www.treoaz.org) does so in the Tucson region.
Arizona and local entities provide a variety of tax incentives that may be available for companies seeking to relocate to or expand in Arizona. Public incentives, however, must pass muster under the Arizona constitution’s prohibition on public gifts, by demonstrating sufficient public benefits.
Arizona laws on capital formation resemble those of most other states with respect to exemptions from the registration requirements under the securities laws, including having a “Regulation D” exemption known as “Rule 126” of the state’s securities regulations. Arizona recently adopted a “crowdfunding” statute that will exempt those offerings from the registration requirements once effective this summer.
Persons being compensated for assisting in the offer or sale of securities may be required to register as a securities dealer or salesman, and issuers may be subject to those requirements if the securities are not sold in a priavte exempt offering.
In connection with the offer or sale of securities from or within Arizona, each participant in that offering may have joint and several liability for any material misstatements or omissions made. Accordingly, care should be taken to prepare appropriate disclosures and offering materials and to comply with the applicable offering restrictions.
Additional information on Arizona’s securities laws and available exemptions is also available at www.azcc.gov/divisions/securities.
Arizona’s minimum wage is higher than the Federal rate. It is currently $8.05 per hour, which is a favorable to that of many other states, however.
Arizona law prohibits the employment of unauthorized immigrants, and mandates the use of the federal “E-Verify” system. Employers that violate these provisions face stringent penalties imposed by the state, which may include revocation of license(s) to do business and criminal charges, among other sanctions.
Arizona, per its constitution, is a “right to work” state, meaning no worker can be forced to join a union. As a result, Arizona has a low percentage of unionized workers.
Arizona has laws permitting workers to bring weapons to their workplace, with some exceptions, so long as they are locked in a vehicle and out of sight. Employers may designate certain areas where those vehicles must be parked.
Arizona has also authorized, by voter initiative, the use of medical marijuana. The impact of that statute in the workplace continues to evolve.
Non-compete agreements can generally be enforced if they are reasonable in restricting the kind of work, the geographic scope, and the time limits on those restrictions. Because it is a “facts and circumstances” type of test, case law can help determine what may be a reasonable restriction, but the enforceability of those restrictions may be subject to the discretion of a trier of fact.
Of special note, not just for non-compete agreements, but for all Arizona contracts, is what is commonly known as the “Blue Pencil Rule.” That “rule” of judicial interpretation provides that an Arizona court will not rewrite language in a contract that is invalid. Instead, the court will cross out the invalid part (with its proverbial blue pencil) and attempt to construe the remainder of the text. If it can be enforced with that deletion, the provision (and contract) can stand. If not, the provision, and perhaps the whole agreement, may be invalid. Counsel can advise as to potential methods for addressing these issues.
Arizona law permits employers to require that employees notify them of “intolerable working conditions,” and to give the company time to remedy the situation. Failure to comply with those provisions can bar a suit for state law violations.
Finance and Banking Issues:
For commercial loans, parties can agree in writing on the applicable rate of interest.
Arizona is a “community property” state. To bind the marital community to any guaranty and suretyship obligations or with respect to any transaction for the acquisition, disposition, or encumbrance of an interest in real property (other than unpatented mining claims), both spouses must sign that obligation. Otherwise, the guaranty is binding only on the sole and separate property of the spouse signing that document.
Real estate liens are typically documented through a deed of trust, rather than a mortgage. For foreclosure actions under a deed of trust, the borrower has a right to reinstate the loan up until the day preceding the sale, upon payment of the amounts then due, plus accrued costs and expenses as permitted by law. Judicial foreclosure actions do not have the same reinstatement rights, but a significant disadvantage of those actions is the longer time typically required to complete the judicial foreclosure process, and the borrower will have a redemption period following the sale.
Arizona has a “blind trust act,” which applies to deeds or conveyances of an interest in real property by a trustee. That act requires disclosure of the name and address of the beneficiaries for whom a grantor or grantee holds an interest in that property, among other items.
Note the provisions discussed in “Finance and Banking” above with respect to community property issues for their impact on real estate transactions.
Arizona law prohibits “deficiency actions” against borrowers for property up to 2.5 acres that is used for one or two family dwellings, and the property is sold pursuant to a deed of trust. If it is sold pursuant to the judicial foreclosure statutes, a deficiency action is prohibited if the loan was to purchase the property (including a refinance without any “cash out” features).
Real property transactions are typically handled through third-party title and escrow companies. Title insurance is issued by Arizona licensed underwriters in accordance with posted rates.
Arizona law prohibits certain liens, claims or encumbrances recorded against property that are determined to be without a “colorable” basis. Violation of that statute imposes, among other things, no less than treble damages.
Documents to be recorded with the county recorders must exclude certain personally identifiable numbers, like social security numbers, as well as to meet other formatting requirements.
Arizona prohibits the sale of the subdivided property, generally defined as six or more lots, without notice to the Arizona Real Estate Department, issuance of a Public Report and delivery of the Public Report to a prospective purchaser.
Arizona’s laws governing subdivisions is sufficiently comprehensive that it is deemed “substantially equivalent” to the Interstate Land Sales Full Disclosure Act. Arizona also regulates, among other things, condominiums, time shares, cemetery sales, residential landlord/tenant relations and master planned communities.
Any party receiving any commission, fee or compensation for services in the sale of real estate as a “broker” or “finder” (broadly defined) must be licensed in Arizona. The exception for seller-owned property is narrowly construed. There is no reciprocity with other state licensed brokers.
In construction contracts, Arizona law restricts the ability to alter the statutorily mandated payment procedures for contractors and subcontractors, unless required disclosures are made in the contracts and construction plans.
Arizona has a rich Native American history, and relics, historical sites, burial grounds and funerary objects are subject to regulation at all levels of government. Encountering those items can impede development.
Contractors, suppliers, laborers and others, including certain other professionals engaged in construction, have lien rights with super-priority.
Municipalities have the power to encourage development with certain tax reductions and abatements under the Government Property Lease Excise Tax (GPLET) statutes and tax rebates and other inducements provided they can satisfy certain constitutional constraints, including the gift clause noted above. Development can also be aided by the use of community facilities districts.
Commercial leases are subject to termination by the tenant in the event of certain circumstances that would render the premises uninhabitable, unless the lease contains alternative provisions.
Rents or other sums collected under commercial and other leases are subject to a “transaction privilege tax” as referenced below (generally understood as a “rent tax”). There are mechanisms for the landlord to avoid successor liability.
Arizona is a community property state, which can have implications on how assets are titled and treated upon disposition.
Arizona allows holographic wills and codicils meeting certain requirements.
“Do Not Resuscitate” or DNR instructions must be on orange paper and be either wallet or letter-sized to be enforceable.
Arizona state courts have adopted a streamlined disclosure and discovery system that helps expedite the time it takes to conclude a matter. In addition, each of the county court systems has implemented a mandatory, but non-binding arbitration program for matters with amounts in controversy under a specified threshold established for the respective county in which the litigation is filed.
Arizona practices in rendering legal opinions typically follow national trends, although Arizona practitioners frequently add certain additional assumptions, qualifications, and limitations in those opinions to address unique areas of the law. For example, Arizona firms often include an assumption that the documents on which the opinion is being rendered contain the mutual intent of the parties and that there are no verbal statements that modify those documents. This is in light of the Darner Motors v. Universal Underwriter’s case and its progeny. Practitioners from other jurisdictions often inquire as to the need for that qualification. Additional information on typical Arizona practice for legal opinions can be found in the amended report of the State Bar of Arizona’s Business Law Section on Opinions in Business Transactions, at 38 Ariz. Law Journal 47.
Arizona taxes income, property, and sales/use of goods, but does not have a sales (transaction privilege) tax on services. Rates are considered to be fairly favorable to those of many other states, and a plethora of sales tax exemptions exist for many industries, such as health care, mining, and film production. Information on taxes is available through the Arizona Department of Revenue (www.azdor.com).
Note that business asset purchasers may be liable for certain unpaid state taxes of the former business, including unpaid transaction privilege taxes.
Arizona and many municipal jurisdictions impose transaction privilege taxes on the sale of commercial real property within two years of its improvement or substantial renovations for additional improvement. Because those amounts can be significant, owners are encouraged to evaluate those issues in connection with proposed transactions. This tax is often referred to as the “speculative builder’s tax.”
The foregoing are examples of the variety of ways in which Arizona law presents a unique approach to commercial and other areas of the law. Before conducting business in Arizona, a company should seek legal counsel. The attorneys of Jennings, Strouss & Salmon, PLC welcome the opportunity to provide additional guidance to those seeking to do business in our state.
ABOUT THE AUTHORS
Bruce B. May | Read Bio
Richard Lieberman | Read Bio
About Jennings, Strouss & Salmon, P.L.C.
For over 75 years, Jennings Strouss has been dedicated to providing clients with strategic legal guidance to help them seize every opportunity. The firm is well-known for its rich heritage, commitment to community, and long-lasting relationships. We have a deep understanding of business and law. When you work with us, you’ll have a team of legal experts who are dedicated to your vision of success.
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