Jerry Kopel

Once in a while, the phone will ring and it's a wealthy out-of-state friend considering investments in Colorado. "Whatever you do" I respond, "don't invest in any company incorporated in Colorado unless you are the majority stockholder or have some loose money that you can throw away."

That has been my "stock" answer ever since the new Colorado Business Corporation Act went into effect July l, 1994, and my response will be even more emphatic if HB 1285 by Rep. Schauer becomes law in 1996. What few, miserable protections were left minority stockholders in the corporation law in 1994 are chopped off and thrown into the mud by HB 1285.

The philosophy of the new corporation law, which was also sponsored by Rep. Schauer, was made very clear from its original push by the Colorado Bar Association (CBA) business section, through hearings before CBA leaders and in legislative testimony. Paraphrasing the motivation: "It will allow entrepreneurs to gamble on making it with other people's money, and if the business folds, the entrepreneur can walk away unscathed." Of course this leaves minority investors holding the bag.

Let us pretend that the Colorado legislature is governed by Colorado's corporation law and HB 1285 instead of the constitution, statutes and legislative rules, and I'll walk you through some of the problems produced by the corporation law and the Schauer bill:

Suppose Rep. Schauer introduces HB 1234 deregulating the electrical generating industry. The bill is assigned to State Affairs (11 members). When four of the eleven show up at the hearing, that is a quorum instead of the presently required six of eleven. The bill is passed to the committee of the whole by a 3 to 1 vote.

(Reducing a quorum from a majority to one-third is found in HB 1285's revision of 7-108-205.)

Instead of having a second and third reading debate, Rep. Schauer calls 32 other Republican House members on the phone, tells them what the bill is about and obtains their approval. Signed written approvals of the bill are sent to Rep. Schauer by fax. The bill passes to the Senate and then Rep. Schauer notifies the other eight Republicans and 24 Democrats of what has happened.

(Legally operating on the sly is guaranteed in HB 1285's amendment to 7-107-104.)

When the bill reaches the Senate, it has more trouble, because all 16 Democrats and several Republicans don't like the bill. But the Senate sponsor of HB 1234 gets 18 Republicans to agree to then and there change the state constitution and increase the number of Senate members by eight to a total of 43. All additional eight will be Republicans who will vote for the bill. The Schauer bill now passes the Senate by a vote of 22 to 21.

(The 1994 corporation law did away with preserving pre-emptive rights. That term means a stockholder has the option of keeping his or her percentage of ownership if the amount of stock is expanded. The 1994 law says there is no pre-emptive right unless it is stated in the articles of incorporation.)

(And if pre-emptive rights are in the articles of incorporation, CRS 7-110-103 allows the "articles/constitution" to be changed by a majority under the 1994 law instead of a two-thirds vote. A minority stockholder who buys stock believing he or she will have a 46 percent stake (or 16 of 35 Senate votes) in the company may discover, too late, that the stake has been reduced to 37 percent (16 of 43) by his or her not being offered the right to buy additional stock.)

(In fact, under HB 1285, amendments to articles of incorporation under 7-110-103 won't need even a majority of all stock voting in favor, just a "majority" of the majority voting. That could be as little as 25.1 percent of a "possible" 100 percent.)

There are other attempts in HB 1285 to ripoff the minority investor. Here is one example: You invest $50,000 in the Three Stooges Corporation. Directors Larry and Moe take your stock purchase money and "loan" it to Director Curley to start a restaurant. As you might expect, the restaurant goes belly-up with the stooges throwing pies at each other and sticking fingers in each other's eyes. The only asset showing for your investment is a worthless promissory note.

Under present corporation law regarding director conflicts of interest, (CRS 7-108-501) Larry and Moe would have had to inform you at least ten days prior to making the $50,000 loan to Curley, raising some possibility of an investigation into whether the loan could be repaid. It is a small protection, but under Rep. Schauer's HB 1285 that protection is repealed. You only learn what is happening when you walk through the restaurant door and get a pie in your face.

The Colorado legislature got into a lot of trouble in the middle 1980's over a law instigated in 1981 by the CBA business section. That law, SB 419, turned Colorado's security transactions into the nation's garbage pit and the laughing stock of the country's astute investors.

Crooked stock manipulators and their highly paid legal counsel could not have flourished but for the CBA-drafted bill and the legislature's acquiesence. And the CBA business section leadership lobbied heavily and testified interminably against revising the law to stop the thievery.

Finally in 1991, when security regulators in other states were considering ways to ban Colorado securities and the nation's banks would not finance Colorado offerings, we changed our laws to close the loopholes that allowed crooks to operate with impunity.

In the 1990's, the same CBA business section instigated the corporation bill that became law in 1994 and will, in my opinion, eventually burn a number of Colorado corporate minority investors. Again, the legislature acquiesed. After all, lawyers wouldn't do anything to harm our economic situation, right?

With HB 1285, it's the same CBA business section, the same type lobbying, the same motivation of greed, the same stage direction:

"As the play ends, exit right, laughing as the curtain falls."


Jerry Kopel writes a column for the Statesman based on 22 years past experience as a state legislator.

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