BILL ANALYSIS Business & Industry Committee C.S.H.B. 1425 4-4-95 Committee Report (Substituted) BACKGROUND The bill proposes a comprehensive package of amendments to the Texas Business Corporation Act (the "TBCA"), the Texas Non-Profit Corporation Act (the "TNPCA), the Texas Miscellaneous Corporation Laws Act (the "TMCLA"), the Texas Limited Liability Company Act (the "TLLCA"), the Texas Revised Limited Partnership Act (the "TRLPA") and the Texas Revised Partnership Act (the "TRPA"). The bill was developed by the Corporation Law Committee of the Section of Business Law of the State Bar of Texas. A number of the proposed amendments are technical in nature (i.e., the proposed amendment to Article 4.03 of the TBCA (which contains an incorrect cross reference)), or provide conforming changes to include definitions contained elsewhere in the TBCA. Other proposed amendments address questions not previously addressed in the statutes or reported by Texas cases (e.g., the proposed amendment to Article 2.28, which clarifies the treatment of broker nonvotes and the effect on a vote of shares that do not vote expressly for, against or abstain on a particular matter). In addition, other proposed amendments change existing statutes or add new statutes to adopt concepts found in the Revised Model Business Corporation Act (the "RMBCA"), or in the corporation laws of other states that are viewed desirable in which to incorporate (e.g., the proposed amendment adding Part Thirteen to the TBCA relating to certain business combinations with affiliated shareholders is based on similar statutes in Delaware and New York, that have been found to be beneficial to shareholders). The bill also includes various proposed amendments relating to the introduction of a new corporate transaction known as a conversion, which will permit corporations, limited liability companies and partnerships an additional option in which to effect a change in their organizational form. Finally, the bill contains various conforming and clean-up changes to the TRLPA and TRPA. PURPOSE The bill continues an effort to update and improve Texas business organizations laws. The intent being to provide modern and flexible business statutes which will make Texas a more attractive jurisdiction in which to incorporate or organize and to facilitate economic transactions by Texas entities. RULEMAKING AUTHORITY It is the committee's opinion that this bill grants additional rulemaking authority under the following sections: SECTION 15 Article 3.03(A) allowing the Secretary of State when all fees and taxes have been paid, endorse and file the original and the copy of the articles of incorporation and issue a certificate of incorporation. In conjunction, under SECTION 15, Article 3.03 (C), the Secretary of State shall file the articles of incorporation, issue the certificate of incorporation, affix a copy of the articles, and deliver the certificate of conversion or merger to the proper entities. SECTION 23, Article 5.03, Section I, the Secretary of State, when all fees and taxes have been paid by the entity to the state, shall endorse and file the merger or share exchange and issue certificate of abandonment. SECTION 24, Article 5.04(C), the Secretary of State, when all fees and taxes have been paid by the entity to the state, shall endorse and file plan of merger or exchange and issue a certificate of merger or exchange. SECTION 28, Part Five, Article 5.17 (E), the Secretary of State, when all fees have been paid by the entity to the state, shall endorse and file the plan of conversion and issue a certificate of abandonment. Also under this SECTION, Part Five, Article 5.18 (C), the Secretary of State, when all fees and taxes are paid by the entity to the state, shall endorse and file the articles of conversion and issue a certificate of conversion. Finally under this SECTION, Part Five, Article 5.19, refers to issuance of the certificate of conversion by the Secretary of State as makes the conversion of a converting entity effective. SECTION 30, Article 6.05(A) and 6.05(B) refers to issuance of a certificate of dissolution of a corporation by the Secretary of State. SECTION 32, Article 8.14(A) refers to issuance of a certificate of withdrawal by Secretary of State, in addition the Secretary may mail a copy of any process against a corporation that may be served on that entity with statement of all sums owed to the state. SECTION 33, Article 9.04(A) if the Secretary of State shall fail to approve any document required by this Act, he shall provide written notice within 10 days to the entity applying with the State. SECTION 35, Article 10.01, Article A, authorizes the Secretary of State to collect fees for the use of the State. SECTION 53, Article 3.03(A), the Secretary of State, when all fees are paid by the entity to the state shall endorse and file the articles of organization an issue a certificate of organization. Also under this SECTION, Article 3.03(C), the Secretary of State shall file the articles of organization, and affix a copy of the articles and deliver to the filing entity the certificate of conversion or merger. SECTION 59, Article 9.01, Section A, the Secretary of State is authorized and required to collect fees for the use of the State. SECTION 61, Article 9.03, Section F, refers to the issuance of a certificate of abandonment by the Secretary of State. SECTION 62, Article 10.03, Section B, the Secretary of State, when all the fees and taxes have been paid by the entity to the state, shall certify and endorse the articles of merger, file and index the endorsed articles of merger, and issue a certificate of merger to entity. Section 63, Article 10.09, the Secretary of State, when all fees and taxes have been paid by the entity to the state, shall endorse and file the articles of conversion and issue certificate of conversion to converted entity. Also under this SECTION, Article 10.10, refers to the issuance of the certificate of conversion by the Secretary of State. Article 10.11(8), states that a converted entity shall be deemed to appoint the Secretary of State as its agent for service of process. SECTION 73, Article 6132a-1 Vernon's Texas Civil Statutes, Section 2.11(e), the Secretary of State, when all the fees and taxes are paid by the entity to the state, shall certify and endorse the certificate of merger and file and index the endorsed certificate of merger and return the certificate copy similarly endorsed to surviving or new entity that is party to plan. SECTION 74, Article 6132a-1, Vernon's Texas Civil Statutes, Section 2.12, Subsection F, upon filed with the Secretary of State, the certificate of abandonment shall deem the event or transaction as evidenced by certificate abandoned and shall not become effective. SECTION 80, Article 6132a-1, Vernon's Texas Civil Statutes, Section 12.01, under this section the Secretary of State shall collect fees for the use of the state. SECTION 94, Article 6132b-9.02(e), Vernon's Texas Civil Statutes, the Secretary of State, when all fees and taxes have been paid by the entity to the state, shall certify and endorse the certificate of merger and file and index the endorsed certificate, and return the copy, similarly endorsed to surviving and new entity. Also under this SECTION, under Article 6132b-9.02(f), Vernon's Texas Civil Statutes, upon issuance of the certificate of merger by Secretary of State, the merger shall be effective. SECTION 96, Article 6132b-9.01 et seq., Vernon's Texas Civil Statutes, Article IX, Section 9.05(f), the Secretary of State, when all fees and taxes are paid by the entity to the state shall endorse and file the articles of conversion, and issue a certificate of conversion to proper entities. Also under this SECTION, 6132b-9.01 et seq., Vernon's Texas Civil Statutes, Article IX, Section 9.05(g), upon the issuance of the certificate of conversion by the Secretary of State, the conversion shall be effective. SECTION BY SECTION ANALYSIS SECTION 1. Section A, Article 1.02, Texas Business Corporation Act, amends the definitions of "other entity", "share dividend" and "treasury shares", and adds the definitions "associate", "conversion", "converted entity", "converting entity", "disinterested", "independent", and renumber the remaining subsections. (2) Adds the definition of "associate". The term "associate" is based on the definition of that term contained in the Securities Exchange Act of 1934. The term "associate" is used to indicate a relationship with a person: (a) in a domestic or foreign corporation or other entity of which the person is an officer of partner; (b) a trust or other estate in which the person has a substantial beneficial interest; (c) a spouse or relative of the person who has the same home as the person. (8) Adds the definition of "conversion" relating to other changes to the Texas Business Corporation Act set forth in the bill. The term "conversion" is used to indicate: (a) the continuation of a domestic corporation as a foreign corporation or other entity; (b) the continuation of a foreign corporation as a domestic corporation or other entity; (9) Adds the definition of "converted entity" relating to other changes to the Texas Business Corporation Act set forth in the bill. The term "converted entity" is used to indicate any domestic or foreign corporation to which a converting entity has converted or intends to convert. (10) Adds the definition of "converting entity" relating to other changes to the Texas Business Corporation Act set forth in the bill. The term "converting entity" is used to indicate any domestic or foreign corporation or other entity that has converted or intends to converted. (12) Adds the definition "disinterested" relating to other changes to the Texas Business Corporation Act set forth in the bill. The term "disinterested" is used to indicate a director or other person disinterested in a contract, transaction, or other matter for purposes of approval of a contract or transaction. A director or other person is not to be considered involved in conduct that is subject to a claim or challenge or have financial interest in the outcome of a contract or transaction if: (a) the person was nominated or elected as a director; (b) the person receives normal director's fees or similar customary compensation; (c) the person has a direct or indirect equity interest in the corporation; (d) the corporation or its subsidiaries has an interest in the contract or transaction; (e) the person or an associate receives ordinary and reasonable compensation for services rendered; (f) in the case of a review by the person of alleged conduct that is subject to a claim or challenge: (i) the person is named as a defendant in the derivative proceeding; or (ii) the person approved of, voted for, or acquiesced in, as a director, the act being challenged. (15) Adds the definition "independent" relating to other changes to the Texas Business Corporation Act set forth in the bill. The term "independent" is used to indicate a director or other person is independent for purposes of considering the disposition of a claim or challenge when: (a) the director or other person is disinterested; (b) the director or other person is not an associate or member of the immediate family of a party to the contract or transaction; (c) the director or other person, or an associate or member of the immediate family of the director or other persons, does not have a business, financial, or familial relationship with a party to the contract or transaction; (d) the director or other person is not otherwise shown, by a preponderance of the evidence by the person challenging the independence of the director or other person. The director or other person is not considered to have a relationship that could be expected to materially and adversely affect the director' or other person's judgment with respect to the consideration of the disposition of a matter subject to a claim or challenge for the following reasons: (a) the person has been nominated or elected as a director by persons who are interested in the contract or transaction; (b) the person receives normal director's fees or similar compensation; (c) the person has a direct or indirect equity interest in the corporation; (d) the corporation or its subsidiaries has an interest in the contract or transaction; (e) the person or an associate or affiliate of such person receives ordinary and reasonable compensation for services rendered; (f) the person or an associate, other than the corporation and its associates, immediate family member or affiliate of the person has an ongoing business relationship with he corporation. (20) Amends the definition "other entity" to provide a single definition that can be used throughout the Texas Business Corporation Act to refer to entities other than domestic or foreign corporation. Adds limited liability company and real estate investment trust. (21) Amends the definition "share dividend" to clarify that a stock split or reclassification is not a share dividend. (28) Amends the definition "treasury shares" to make clear that shares held by a corporation through a trust or similar arrangement or in a fiduciary capacity will not be considered treasury shares and may be voted. SECTION 2. Sections A, P, R, and T, Article 2.02-1, Texas Business Corporation Act. The amendments to Article 2.02-1A, P and R are conforming in nature and reflect the addition of the term "other entity" in lieu of other enterprise. A typographical error in Article 2.02-T was corrected. SECTION 3. Sections A and B, Article 2.15, Texas Business Corporation Act. Eliminates the requirement that consideration be expressed in dollars. This amendment is intended to provide flexibility to corporations in establishing the consideration for shares following the 1994 amendment to the Texas Constitution removing the restrictions on the types of consideration that may be received for shares. The change also provides that the consideration for shares issued by a new corporation pursuant to a plan of merger or conversion may be contained in the plan of merger or conversion. SECTION 4. Article 2.16, Texas Business Corporation Act. PAYMENT FOR SHARES. Eliminates the reference to restrictions in the Constitution of the State of Texas on valid consideration in light of the repeal of that provision. Section B permits shares of a corporation to be authorized pursuant to a plan of merger or conversion and to confirm that such shares when issued will be fully paid and nonassessable. SECTION 5. Sections A and B, Article 2.21, Texas Business Corporation Act. Provides that affiliates of a shareholder or subscriber will be provided with the same protection as the shareholder or subscriber. SECTION 6. Article 2.28, Texas Business Corporation Act. Provides that once a quorum of shareholders is met at a meeting, any action may be taken at that meeting subject to the receipt of the required vote. Article 2.28B is amended to change the basic vote requirement for approval of matters that are not otherwise provided by statute or in the articles of incorporation of a corporation to a majority of the shares that vote for, against or expressly abstain on the matter. The purpose of this amendment is to clarify the effect of those shares which may be present at a meeting but do not vote for, against or expressly abstain on the matter. In this regard, the amendment clarifies that broker nonvotes, i.e., shares of stock held by a shareholder through his broker or dealer that may not be voted by the broker or dealer on a matter without instructions from the shareholder, will not be counted as a vote for or against the matter. A new Section E is proposed to allow corporations to establish procedures in their bylaws that are consistent with the Texas Business Corporation Act for determining when proxies are valid and the effect of broker nonvotes. SECTION 7. Section B, Article 2.29, Texas Business Corporation Act. Permits a corporation that may hold or control shares of its own stock through a trust or otherwise to vote those shares. SECTION 8. Part Two, Texas Business Corporation Act, adding Article 2.30-1. Relating to shareholder agreements. This amendment, which is based on a similar article in the RMBCA, essentially allows corporations by agreement among all shareholders to modify the discretion and powers of their board of directors, the means for authorizing and making distributions, the terms of election of officers and directors, the use of property of the corporation, the allowance of arbitration provisions and the granting of management authority to shareholders. Currently, such agreements may only be entered into by corporations electing to be "close" corporations under Part Twelve of the Texas Business Corporation Act. The amendment will allow corporations to enter into such agreements without having to elect close corporation status as long as all shareholders at the time of the execution of the agreement so agree. Various procedural and notice provisions are also proposed to be added. Such agreements will not be available to corporations that are publicly traded. The proposed amendment will provide Texas corporations greater flexibility in structuring their internal affairs. SECTION 9. Article 2.31, Texas Business Corporation Act. Adds a reference to the provisions of the Texas Business Corporation Act, that permit a corporation to modify the general rule that a corporation will be managed under the direction of its board of directors. SECTION 10. Section A, Article 2.35-1, Texas Business Corporation Act. Clarifies that contracts between a corporation and its directors and officers or in which its directors and officers have a financial interest will be valid notwithstanding that interest if (i) the disinterested directors of the corporation after disclosure of the interest approve the transaction, (ii) the shareholders of the corporation after disclosure of the interest approve the transaction or (iii) the transaction is otherwise fair. If any one of these conditions is met, the contract will be considered valid notwithstanding the director or officer has an interest in the transaction. Some uncertainty as to the scope of Article 2.35-1 has existed over the years because case law interpretations of a similar statute in Delaware has held that approval by disinterested directors or by shareholders does not necessarily result in a valid contract. The amendment is intended to eliminate this uncertainty. In addition, Article 2.35-1A of the Texas Business Corporation Act did not previously contain a definition of what constitutes a disinterested director for the statute. To provide greater certainty on this issue, a new definition of "disinterested" is proposed to be added to Article 1.02. See Section 1. Under this definition, a director will be considered "disinterested" if the director is not a party to the contract or transaction or does not otherwise have a material financial interest in the outcome of the contract. SECTION 11. Section B, Article 2.36, Texas Business Corporation Act. Adds the approval of a plan of conversion as an item which a whole board of directors must approve. SECTION 12. Section B, Article 2.38-4, Texas Business Corporation Act. Allows for the determination of surplus in the case of an obligation by a corporation to redeem, exchange, purchase or otherwise acquire its own shares to be either on the date on which the obligation to redeem, exchange, purchase or otherwise acquire is made or on the date the shares are to be redeemed, exchanged, purchased or acquired. This amendment conforms the manner in which the availability of surplus is determined for contractual redemptions, exchanges, purchases or acquisitions of shares to that used for purchases of shares in which a debt obligation is incurred. SECTION 13. Article 3.01, Texas Business Corporation Act. Incorporates the definition of "other entity". SECTION 14. Section A, Article 3.02, Texas Business Corporation Act. Deletes the requirement that the articles of incorporation state that the $1,000 minimum subscription for shares prior to commencing business consists of money, labor done and property received in order to conform the broader forms of consideration that may be received for shares as a result of the recent Constitutional amendment removing the restrictions on the types of legal consideration for shares. Article 3.02A also requires a corporation that is being incorporated through a plan of conversion or a plan of merger to make a statement in its articles of incorporation stating that fact. SECTION 15. Article 3.03, Texas Business Corporation Act. Establishes procedures for incorporating a corporation created by a plan of merger or plan of conversion. SECTION 16. Article 3.04, Texas Business Corporation Act. Provides that a corporation that is incorporated pursuant to a plan of conversion or a plan of merger will be incorporated upon the effectiveness of the conversion. SECTION 17. Article 3.05, Texas Business Corporation Act. Deletes the requirement that the $1,000 in consideration required prior to a corporation being authorized to transact business be in the form of money, labor done or property actually received. The deletion is the result of the elimination of the prior constitutional restriction on the types of consideration that may be received for shares. This change also conforms the restrictions in Article 3.05 to the provisions of Article 2.15 of the Texas Business Corporation Act. SECTION 18. Article 3.06, Texas Business Corporation Act. Eliminates the requirement of an organizational meeting of the board of directors of a corporation that is created pursuant to a plan of conversion or merger if the plan of conversion or merger sets forth the bylaws and initial officers of the corporation. Where a corporation is created by conversion or merger, the actions to be taken at the organizational meeting of the board are capable of being included in the plan of merger or conversion. Therefore, an organizational meeting is not considered necessary. Article 3.06 also clarifies the action required for a close corporation to organize the corporation. SECTION 19. Section A, Article 4.03, Texas Business Corporation Act. Corrects an incorrect cross reference in Article 2.13. SECTION 20. Article 4.14, Texas Business Corporation Act. Adds a conversion as an additional type of transaction that may be effected pursuant to a bankruptcy reorganization. SECTION 21. Section B, Article 5.01, Texas Business Corporation Act. Clarifies that articles of incorporation of a corporation created by a plan of merger are to be attached as an exhibit or attachment to a plan of merger. SECTION 22. Section A, Article 5.02, Texas Business Corporation Act. Adds the restriction previously contained in the definition "other entity" on the ability of "other entities" to participate in share exchanges. SECTION 23. Section I, Article 5.03, Texas Business Corporation Act. Clarifies the procedures for abandoning a plan of merger after shareholder approval. SECTION 24. Article 5.04, Texas Business Corporation Act. Eliminates the requirement that a plan or merger or exchange be filed with the Secretary of State if the corporation certifies that the plan of merger has been executed and approved and that an executed copy of the plan of merger is on file at the principal location of each surviving, acquiring or new corporation or other entity and that a copy of the plan of merger or exchange will be furnished without cost to any shareholder, creditor or obligee of the corporation. This provision is based on a similar provision under Delaware law and is intended to simplify the filing process. Article 5.04C of the Texas Business Corporation Act also addresses a procedural difficulty encountered in connection with the requirement that franchise taxes be paid prior to effectiveness even if not then due. The amendment permits a merger to be effected without the payment of accrued franchise taxes, if the surviving entities are obligated to pay those taxes under the plan of merger. SECTION 25. Section B, Article 5.10, Texas Business Corporation Act. States that a sale of substantially all of the assets of a corporation will not be considered a merger or conversion. SECTION 26. Article 5.11, Texas Business Corporation Act. Conforms the dissenters' rights provisions relating to sales of substantially all assets of a corporation that require shareholder approval to the provisions relating to mergers. Article 5.11 of the Texas Business Corporation Act also adds securities quoted on the national market system of the National Association of Securities Dealers as securities that may be received in a merger without appraisal rights being granted to the holders of similar traded public securities. The amendment results in such securities being treated in the same manner as securities listed on The New York Stock Exchange or American Stock Exchange and makes the Texas Business Corporation Act consistent with others jurisdictions that have added this same exception in light of the general acceptance of the NASDAQ national market system as an efficient market for securities. SECTION 27. Article 5.14, Texas Business Corporation Act. Updates the procedures governing the consideration and disposition of derivative proceedings, including a codification of procedures under which a disinterested and independent group of directors or persons appointed by a court may determine the appropriate action that should be taken with respect to a derivative proceeding. The provisions of the amended Article 5.14 are based on similar provisions contained in the RMBCA and incorporates concepts from the ALI Corporate Governance Project. SECTION 28. Part Five, Texas Business Corporation Act. Adds new Articles 5.17, 5.18, 5.19 and 5.20 that provides for a new form of corporate transaction defined as a conversion. A conversion will be similar to a merger in form but will differ from a merger in that the underlying transaction will not involve any combination or division of the corporation, but rather involve only a change in organizational form with the organization continuing in existence without interruption. Similar statutes are found in Wyoming, Louisiana and Pennsylvania. Delaware also has an analogous statute for domestications. Under the new provisions, a Texas corporation may convert into another corporation or entity if such conversion is permitted or not inconsistent with the laws governing the other corporation or other entity and other corporations and entities may convert into a Texas corporation if the laws governing the entities so permit. The procedures for a conversion, including the vote requirement, rights to dissent and filings, will be substantially the same as those for a merger. Because a conversion represents a mere continuation of an organization in a different organizational form, a conversion may only be effected where the new entity has no other business and may not be used in lieu of a merger between two pre-existing operating entities. However to the extent another jurisdiction does not expressly provide for a conversion, a Texas corporation may convert into such an entity by organizing that entity in connection with the conversion. In this circumstance, the entity could be a pre-existing entity as long as it was organized solely for the conversion. SECTION 29. Section A, Article 6.03(3), Texas Business Corporation Act. Conforms the voting requirement for dissolutions with the voting requirements for mergers and sales of substantially all assets outside of the ordinary course of business. SECTION 30. Sections A and B, Article 6.05, Texas Business Corporation Act. Conforms the voting requirement for the revocation of a dissolution to the voting requirements for mergers and sales of substantially all assets outside of the ordinary course of business. SECTION 31. Section A, Article 6.06, Texas Business Corporation Act. Conform the requirements for Articles of Dissolution to the new vote requirement under Article 6.03. SECTION 32. Sections A and C, Article 8.14, Texas Business Corporation Act. Deletes the requirement that all creditors and claimants be paid prior to a foreign corporation being entitled to withdraw from its qualification to do business in the State of Texas. This amendment does not affect the criteria for when a corporation is required to qualify to do business in the State of Texas or limit the liability of a foreign corporation for obligations in the State. SECTION 33. Section A, Article 9.04, Texas Business Corporation Act. Makes conforming changes utilizing the definitions of a share exchange, conversion and other entity. SECTION 34. Article 9.10, Texas Business Corporation Act. Adds a new Section D to clarify that if action is taken by shareholders by written consent, any notice requirement otherwise mandated under the Texas Business Corporation Act will not apply. SECTION 35. Section A, Article 10.01, Texas Business Corporation Act. Clarifies the filing fee requirements for Articles of Exchange and requires a filing fee of $300.00 for the filing of Articles of Conversion. SECTION 36. Section A, Article 10.03, Texas Business Corporation Act. Adds conversions to the list of "Permitted Acts" for which delayed effectiveness may be permitted under the Texas Business Corporation Act. SECTION 37. Section B, Article 12.13, Texas Business Corporation Act. Allows corporations to elect close corporation status pursuant to a plan of conversion. SECTION 38. Article 12.21, Texas Business Corporation Act. Permits the termination of close corporation status through a conversion. SECTION 39. Part Thirteen is added to the Texas Business Corporation Act, to impose a special voting requirement for the approval of certain business combinations and related party transactions between public corporations and affiliated shareholders unless the transaction or the acquisition of shares by the affiliated shareholder is approved by the board of directors prior to the affiliated shareholder becoming an affiliated shareholder. This statute is based on §203 of the Delaware General Corporation Law and a similar statute contained in New York. Part Thirteen prohibits certain self-dealing types of transactions between shareholders beneficially owning 20% or more of the outstanding stock of a Texas public corporation (such shareholder being defined as an affiliated shareholder) for a period of three years following the shareholder acquiring 20% of the corporation unless two-thirds of the unaffiliated shareholders approve the transaction. The provisions requiring such a vote of shareholders do not apply to any transaction with an affiliated shareholder if the transaction or the purchase of shares by the affiliated shareholder is approved by the board of directors before the affiliated shareholder acquires beneficial ownership of 20% of the shares or if the affiliated shareholder was an affiliated shareholder prior to December 31, 1994, and continued as such through the date of the transaction. Corporations may also opt out of the statute by adopting a by-law or charter amendment prior to December 31, 1995. Part Thirteen also expressly allows directors to consider the long term interest of a corporation and its shareholders when considering actions that affect the interest of their corporations. SECTION 40. Article 2.06, Texas Miscellaneous Corporation Laws Act (Article 1302-2.06, Vernon's Texas Civil Statutes). Eliminates the restrictions on the type of consideration for the incurrence of indebtedness by corporations in light of the changes to the Texas Constitution in 1993. SECTION 41. Article 5.06, Texas Non-Profit Corporation Act (Article 1396-5.06, Vernon's Texas Civil Statutes). Conforms the provisions relating to the effect of mergers to that contained in the Texas Business Corporation Act. SECTION 42. The Texas Non-Profit Corporation Act (Article 1396-1.01 et seq., Vernon's Texas Civil Statutes). Part Five of the TNPCA adds a new Article 5.10 that will permit non-profit corporations to effect mergers with other entities by utilizing the more flexible provisions of the Texas Business Corporation Act. Although non-profit organizations are permitted under Article 5.10 to merge with entities other than non-profit corporations, it does prohibit any merger of a charitable organization into another entity if the charitable corporation would have its charitable status lost or impaired. SECTION 43. Subsection (4), Section A, Article 1.02, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Article 1.02A makes clear that business trusts, governments and their agencies and subdivisions, and other entities, regardless of the jurisdiction of formation are recognized as "persons" for purposes of the TLLCA. SECTION 44. Article 1.02, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Adds definitions found under Articles 10.08 through 10.11 of the TLLCA relating to conversions. SECTION 45. Article 2.09, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Eliminates the potential trap created by the TLLCA by requiring that the regulations must be adopted by the managers or members named in the articles of organization. The default provisions of the TLLCA are designed to be used in "mom and pop" situations. It is felt that a requirement to take a specific action to adopt regulations creates an unnecessary question as to the validity of the regulations if such action is not taken. Thus, the elimination of this provision will leave the parties to adopt regulations through usage and custom and also allow the later adoption of initial regulations by subsequent members or managers if the initial members or managers fail to do so. SECTIONS 46, 47, and 48. Article 2.13, Article 2.15A, Article 2.15B, Article 2.17A, and Article 2.17B, Texas Limited Liability Company. Adds a proviso making clear that the provisions of these Articles of the TLLCA may be varied by the articles of organization or the regulations, thus expanding the flexibility of the TLLCA. SECTION 49. Article 2.19, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Makes various clarifications in voting, organization, and notice matters relating to limited liability companies. SECTION 50. Sections A and B, Article 2.22, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Makes clear that the regulations are not required to be in writing. SECTION 51. Section A, Article 2.23, Texas Limited Liability Company Act. Makes clear that voting by members may be by proxy. SECTION 52. Section A, Article 3.02, Texas Limited Liability Company Act, (Article 1528n, Vernon's Texas Civil Statutes). Requires a limited liability company that is being organized pursuant to a plan of merger or a plan of conversion to make a statement in its articles of organization to that effect. SECTION 53. Article 3.03, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Amends Section A and adds Section C. Establishes procedures for organizing a limited liability company created by a plan of merger or a plan of conversion. SECTION 54. Article 3.04, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Provides that a limited liability company that is organized pursuant to a plan of conversion or a plan of merger will be organized upon the effectiveness of the conversion. SECTION 55. Article 5.08, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Makes a conforming language change. SECTION 56. Section A, Article 6.01, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Eliminates an incorrect reference to "limited company." SECTION 57. Section B, Article 7.13, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Makes clear that the failure of a foreign limited liability company to qualify to do business in this State does not impair the limitation on liability of members. SECTION 58. Section C, Article 8.12, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Makes clear that references to "articles of incorporation" in Article 1302-7.06 of the TMCLA for purposes of the TLLCA mean both articles of organization and regulations. SECTION 59. Section A, Article 9.01, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Establishes a filing fee for the filing of articles of conversion that is equivalent to the fee required for the filing of articles of merger. SECTION 60. Subsection (1), Section A, Article 9.03, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Adds conversions as a type of transaction that may be effected on a delayed basis. SECTION 61. Section F, Article 9.03, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Adds a reference to the term articles of conversion and a certificate of abandonment. SECTION 62. Section B, Article 10.03, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes). Simplifies the procedures for payment of franchise taxes in connection with mergers. SECTION 63. Part Ten, Texas Limited Liability Act (Article 1528n, Vernon's Texas Civil Statutes). Adds new Articles 10.08 through 10.11 that will provide limited liability companies the right to effect conversions in the same manner that corporations may effect conversions pursuant to the proposed amendments to the Texas Business Corporation Act. SECTION 64. Section B, Article 11.01, Texas Limited Liability Company Act (Article 1528n, Vernon's Texas Civil Statutes) is amended by amending Subsection (2) and adding Subsections (3) and (4). Makes clear that members of a professional limited liability company may be "professional individuals" or "professional entities". The definition of a "professional individual" and a "professional entity" is also added. The definition of a "professional entity" is new and makes clear that another professional entity, such as a professional association, may be a member of a professional limited liability company. This change is intended to clarify the ability to create "multi-tier" professional entities. SECTIONS 65, 66, 67, AND 68. Article 11.03, Article 11.04A, Article 11.05A and Article 11.07A of the Texas Limited Liability Company Act (Articles 1528n, Vernon's Texas Civil Statutes). Makes references to "professional individuals" and "professional entities". SECTION 69. Section 2.01, Texas Revised Limited Partnership Act (Article 6132a-1, Vernon's Texas Civil Statutes). Requires a limited partnership that is being formed pursuant to a plan of merger or a plan of conversion to make a statement in its certificate of limited partnership to that effect. Article 2.01 of the TRLPA also provides that a limited partnership that is formed pursuant to a plan of conversion or a plan of merger is be formed upon the effectiveness of the conversion. SECTIONS 70 and 71. Sections 2.03(a), 2.03(c) and 2.04(a), Texas Revised Limited Partnership Act (Articles 6132a-1, Vernon's Texas Civil Statutes). Makes conforming changes to allow for conversions of limited partnerships to other forms of entities or other entities to limited partnerships. SECTION 72. Sections 2.06(a)-(d), Texas Revised Limited Partnership Act (Article 6132a-1, Vernon's Texas Civil Statutes). These sections which relate to reorganization by a bankruptcy court, parallel the provisions in the Texas Business Corporation Act and add language applying this section to conversions. SECTION 73. Sections 2.11(b), (d), (e), (g), and (h), Texas Revised Limited Partnership Act (Article 6132a-1, Vernon's Texas Civil Statutes). These sections which relate to mergers and interest exchanges, parallel the provisions in the Texas Business Corporation Act and make some clarifications regarding partner liability. SECTION 74. Subsections A and F, Section 2.12, Texas Revised Limited Partnership Act (Article 6132a-1, Vernon's Texas Civil Statutes). Adds conversions as a type of transaction that may be effected on a delayed basis. SECTION 75. Article 2, Texas Revised Limited Partnership Act (Article 6132a-1, Vernon's Texas Civil Statutes). Adds a new Section 2.15 provides limited partnerships the right to effect conversions in the same manner that corporations may effect conversions pursuant to the proposed amendments to the Texas Business Corporation Act. SECTION 76. Section 3.03(b), Texas Revised Limited Partnership Act (Article 6132a-1, Vernon's Texas Civil Statutes). Clarifies that acting as a member or manager of a limited liability company or in a similar capacity with another person that is a general partner does not constitute taking part in control of the business of a limited partnership. SECTION 77. Section 6.03, Texas Revised Limited Partnership Act (Article 6132a-1, Vernon's Texas Civil Statutes). Reverses the statutory presumption that a limited partner has a right to withdraw on six months' notice. Partners may still grant a limited partner a right to withdraw in the partnership agreement. The current presumption is contrary to most parties' expectations and can complicate tax planning. SECTIONS 78 and 79. Sections 8.01 and 8.04(a), Texas Revised Limited Partnership Act (Article 6132a-1, Vernon's Texas Civil Statutes). Provides that a limited partnership may continue without dissolution if at least one other general partner remains or is appointed. The current version of the Texas Revised Limited Partnership Act requires a limited partnership to dissolve whenever a general partner ceases to be a general partner, but allows reconstitution in certain cases in which at least one other general partner remains or is appointed. SECTION 80. Section 12.01 Texas Revised Limited Partnership Act (Article 6132a-1, Vernon's Texas Civil Statutes). Establishes the filing fee for the filing of a certificate of conversion for a limited partnership to be the same as the fee for the filing of a certificate of merger. SECTION 81. Section 1.01(4), Texas Revised Partnership Act (Article 6132b-1.01, Vernon's Texas Civil Statutes). Conforms language in the Texas Revised Limited Partnership Act to parallel provisions in the national Uniform Partnership Act (1994). SECTION 82. Section 1.03(b), Texas Revised Partnership Act (Article 6132b-1.03, Vernon's Texas Civil Statutes). Adds language making explicit that restrictions on liability due to a partnership's being a registered limited liability partnership are permitted, as has been implicit by allowing registered limited liability partnerships. SECTION 83. Section 1.05(a), Texas Revised Partnership Act (Article 6132b-1.05, Vernon's Texas Civil Statutes). States the determination whether a partnership has been formed and are governed by the same law that would govern the partnership's internal affairs and the liability of partners. SECTION 84. Section 2.02, Texas Revised Partnership Act (Article 6132b-2.02, Vernon's Texas Civil Statutes) is amended by adding Subsection (d). Provides that a partnership formed pursuant to a plan of conversion or merger will begin existence as a partnership upon the effectiveness of the merger or conversion. SECTIONS 85 and 86. Sections 3.02(a), 3.02(b), and 3.04, Texas Revised Partnership Act (Article 6132b-3.02, 3.04, Vernon's Texas Civil Statutes). These sections conform language in the Texas Revised Partnership Act to parallel provisions in the national Uniform Partnership Act (1994). SECTIONS 87 and 88. Adds Sections 3.05(f) and amends 3.08(a)(1) and adds 3.08(a)(4), Texas Revised Partnership Act (Article 6132b-3.05, Vernon's Texas Civil Statutes). These sections make explicit that the specific limitation on liability provided partners in registered limited liability partnerships in certain cases overrides more general provisions of TRPA creating liability for partners and requiring them to share losses. This has been implicit under existing law. SECTIONS 89, 90, 91, 92, and 93. Amends Sections 4.01(b) and (c), 4.06(b), 6.02(b), 8.06(a), and 9.01(b), Texas Revised Partnership Act (Articles 6132b-4.01, 4.06, 6.02, 8.06, 9.01, Vernon's Texas Civil Statutes). These sections conform language in the Texas Revised Partnership Act to parallel provisions in the national Uniform Partnership Act (1994). SECTIONS 94 and 95. Amends Sections 9.02 and 9.03(a), Texas Revised Partnership Act (Article 6132b-9.02, 9.03). Relating to mergers and interest exchanges, the language of these sections are conformed to parallel provisions in the Texas Business Corporation Act. SECTION 96. Article IX, Texas Revised Partnership Act (Article 6132b-9.01 et seq. Vernon's Texas Civil Statutes). Adds Sections 9.05 and 9.06 that allow general partnerships to effect conversions in the same manner that corporations may effect conversions pursuant to the changes to the Texas Business Corporation Act. See Section 31. SECTIONS 97 and 98. Amends Sections 171.252 and 171.255(a) and (c), Tax Code, to specify corporation director and officer liability for state taxes in charter forfeiture situations. SECTION 99. Section 8.03, Texas Revised Limited Partnership Act (Article 6132a-1, Vernon's Texas Civil Statutes). This section repeals Section 8.03 of the Texas Revised Limited Partnership Act relating to dissolution and reconstruction of limited partnerships in light of the changes provided in Sections 77, 78 and 79. SECTION 100. Specifies that the effective date is September 1, 1995 and this Act will not effect any action or proceeding commenced before the effective date. Because Section 77 could affect the expectations of partners in existing limited partnerships, however, it will apply only to limited partnerships formed on or after the date the statute takes effect. SECTION 101. Emergency Clause. COMPARISON OF ORIGINAL TO SUBSTITUTE The differences between H.B. 1425 as introduced and the committee substitute are the following: SECTION 5, Subsection A, the committee substitute returns to existing law proposed modifications concerning corporate formalities compliance by removing the strike throughs on the terms "contractual". SECTION 32, in the introduced version is deleted in the committee substitute at the request of the State Comptroller. As a result of this deletion, the SECTIONS were renumbered in the committee substitute. SECTION 97 and 98 were added to the substitute at the request of the State Comptroller, requesting modifications clarifying certain capabilities in the collection of state taxes. The committee substitutes contains other minor, nonsubstantive corrective and conforming modifications. SUMMARY OF COMMITTEE ACTION The Business and Industry Committee considered H.B. 1425 in a public hearing on March 7, 1995. Testifying in favor of H.B. 1425 were Alan Bromberg, representing Texas Business Law Foundation and Curtis Huff, representing Texas Business Law Foundation. H.B. 1425 was left pending before the committee. H.B. 1425 was reconsidered in a public hearing on April 4, 1995. The committee considered a complete committee substitute for H.B. 1425. One (1) amendment was offered to the substitute. Amendment #1 was adopted without objection. The substitute, as amended, was adopted without objection. The chair directed the staff to incorporate the amendment into the substitute. Testifying for H.B. 1425, as substituted was John Kuhl, representing Texas Business Law Foundation. H.B. 1425, as substituted, was reported favorably with the recommendation that it do pass and be printed, by a record vote of 7 (seven) ayes, 0 (zero) nays, 0 (zero) present-not-voting, 2 (two) absent.