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.