BILL ANALYSIS S.B. 1617 By: Harris (Brady) May 2, 1995 Committee Report (Unamended) BACKGROUND The Texas Real Estate Investment Trust Act ( TREITA") authorizes a form of business organization, in conformance with federal tax law, designed specifically for use in the acquisition and development of real property. The establishment of a real estate investment trust ("REIT") pursuant to the TREITA has become an important financial device for investor participation in major real estate development. The TREITA, however, is in critical need of updating and standardization to facilitate its use and to make it competitive with other states. Areas of primary concern for modification include the merger and share exchange provisions. The Texas Business Corporation Act ( TBCA") provides an excellent source for concepts and language for the TREITA modifications. By transposing concepts from the developed body of corporation law, the TREITA can obtain the benefit, by analogy, of established judicial interpretations. The use of TBCA concepts (for example, the provision drawn from Section 5.01 of the TBCA permitting multiple surviving entities in a merger) also adds needed flexibility. Language taken from the TBCA has been modified to conform with existing provisions of the TREITA (e.g., the retention of the requirement that filings be made with the county clerk of the county of the principal place of business and the role played by trust managers). Other proposed changes are technical in nature, intended to remove potential ambiguities (e.g., the addition of enumerated rights for dissenting REIT shareholders, which were formerly established by reference to the TBCA). Certain statutory limitations are proposed to be deleted (e.g., the requirement of major capital improvements within 15 years) when the supporting rationale is unclear or no longer applicable. Other minor changes include conforming changes to heading formats and expansion of the numbering system. All modifications have been analyzed and approved by the Corporation Law Committee of the Business Law Section of the State Bar of Texas. PURPOSE The bill provides a comprehensive update of the TREITA using appropriate concepts and provisions from the TBCA while preserving the distinctive characteristics of REITs. The bill establishes a modern, flexible, and competitive statutory basis for forming REITs which will attract additional investment in Texas real property. RULEMAKING AUTHORITY Section 5.20(B). May grant the secretary of state the authority to be an agent of the real estate investment trust on whom any process, notice, or demand may be served. Service of any process, notice, or demand on the secretary of state shall be made by delivering to and leaving with the secretary of state, assistant secretary of state, or any clerk having charge of the corporation department of the office of the secretary of state, duplicate copies of the process, notice, or demand. If any process, notice, or demand is served on the secretary of state under section 5.20, the secretary of state shall immediately forward by registered mail one of the copies of the process, notice, or demand to the real estate investment trust at its registered office. Any service made on the secretary of state shall be returnable in not less than 30 days. Section 5.20(C). May grant the secretary of state the authority to keep a record of all processes, notices, and demands served on the secretary of state. The record must include the time of the service and the action of the secretary of state with regard to the process, notice, or demand. Section 5.20(D). May authorize the secretary of state to collect a fee for the administration of certain real estate investment trust records. SECTION BY SECTION ANALYSIS SECTION 1. The Texas Real Estate Investment Trust Act (Article 6138A, Vernon's Texas Civil Statutes) is amended as follows: ART. 6138A. TEXAS REAL ESTATE INVESTMENT TRUST ACT Section 1.10. SHORT TITLE. States the Act shall be known as the "Texas Real Estate Investment Trust Act." Section 2.10. REAL ESTATE INVESTMENT TRUST DEFINED. Defines "real estate investment trust" as an unincorporated trust formed by one or more managers. Section 3.10. FORMATION OF REAL ESTATE INVESTMENT TRUST. Deletes language requiring major capital improvements within 15 years. The current capital improvement requirement is not required by federal tax law for real estate investment trust qualification, restricts the applicability of the TREITA to particular types of properties, and reduces the flexibility of trust managers to respond appropriately to market conditions. Also requires the receipt of consideration for the issuance of shares having a value of at least $1,000. Provides that the existence of a real estate investment trust begins upon filing of the declaration of trust, requires an organizational meeting, and establishes creation and governance formalities. Section 3.20. DEFENSE OF ULTRA VIRES. Sets forth circumstances under which the defense applies. Excludes certain common law possibly applicable which might cause certain real estate investment trust acts to be unenforceable. Section 3.30. CLASSIFICATION OF SHARES. Clarifies that preemptive rights are denied unless specifically provided in the declaration of trust. Moves share certificate provisions to Section 7.20. Section 4.10. OPERATION OF REAL ESTATE INVESTMENT TRUST; TRUST MANAGERS AND OFFICERS. Modifies residency requirements for a majority of trust managers. Provides for the number and election of trust managers. Provides for classification of trust managers as well as staggered elections and, when there are nine or more trust managers, cumulative voting for trust managers. Provides that a declaration of trust may provide for trust manager vacancies to be filled by majority vote of the remaining trust managers. If set forth in the declaration of trust or bylaws, an alternative procedure may be provided. Sets forth investment limitations, including the requirement that 75% of assets be invested in real property, to replace a reference to the Internal Revenue Code (the Code"). This cross reference reduces need for conforming amendments to Code changes. Section 4.20. INTERESTED TRUST MANAGERS AND OFFICERS. Sets forth standards and procedures for approving contracts and transactions involving interested trust managers and officers. Section 4.30. COMMITTEES OF THE TRUST MANAGERS. Provides for the creation of committees of trust managers and sets limits on committee authority. Section 5.10. REGISTERED OFFICE AND REGISTERED AGENT. Provides for a registered office, for consistency with other sections that refer to a registered office (e.g., sections that provide for documents to be placed on file at the trust's registered office). Notice of the registered office is filed with the applicable county clerk. The registered office may be, but need not be, the same as the trust's principal office and place of business. Also requires real estate investment trusts to maintain and file notice with the county clerk of a registered agent, which may be an individual Texas resident, a Texas corporation or real estate investment trust, or a foreign corporation authorized to transact business in Texas. Section 5.20. SERVICE OF PROCESS. Provides for service of process and names the Secretary of State as agent for service of process whenever a registered agent is not maintained in Texas. Section 6.10. GENERAL POWERS OF REAL ESTATE INVESTMENT TRUST. Sets forth the general powers of a real estate investment trust. Grants express powers to engage in activities mandated or authorized by applicable sections of the Code. Section 7.10. SUBSCRIPTION FOR SHARES. Governs the subscription for shares. Section 7.20. CERTIFICATES REPRESENTING SHARES. Sets forth the requirements for share certificates. As the proposed revisions do not contain a grant of preemptive rights similar to the TBCA, but rather provide that preemptive rights may be granted under the declaration of trust, any certificates representing real estate investment trust shares issued with preemptive rights must contain a conspicuous statement to that effect. Section 7.30. CONSIDERATION AND PAYMENT FOR SHARES. Provides that any tangible or intangible benefit to the trust, including services performed, contracts for services to be performed, and other securities of the real estate investment trust, constitute legal consideration for the issuance of shares. Section 7.40. TRANSFER OF SHARES AND OTHER SECURITIES AND RESTRICTIONS ON TRANSFER. Provides for the transfer of shares. Permits transfer restrictions, including a restriction that reasonably maintains a tax advantage (including real estate investment trust status) under the Code. Section 8.10. LIABILITY OF SUBSCRIBERS AND SHAREHOLDERS. Sets forth the liability of subscribers and shareholders. Section 9.10. BYLAWS. Provides for initial bylaws by the trust managers and deletes the alternative provision for adoption of the initial bylaws by shareholders. Shareholders retain a right to amend, repeal, or adopt the trust's bylaws unless the declaration of trust or bylaws adopted by shareholders provide otherwise. Section 9.20. INDEMNIFICATION. Provides for indemnification. Extends indemnification to trust managers and officers who served in certain of the trust's predecessor entities. Reimbursement of indemnified expenses may be authorized by a resolution of the shareholders or trust managers (as well as by provision in the declaration of trust or bylaws). Section 10.10. MEETINGS OF SHAREHOLDERS. Provides for meetings of shareholders. Failure to hold an annual meeting will not work a dissolution. The declaration of trust may adjust the percentage of shareholders needed to call a special meeting (but not higher than 50%). Section 10.20. TRUST MANAGER MEETINGS AND NOTICE OF MEETINGS. Provides for trust manager meetings. Section 10.30. ACTIONS WITHOUT A MEETINGS; TELEPHONE MEETINGS. Provides for actions without a meeting and telephone meetings. Clarifies that the shareholder notice provisions do not apply to action taken by written consent of shareholders. Section 11.10. NOTICE OF SHAREHOLDERS MEETINGS. Provides for notice of shareholder meetings. Section 11.20. REGISTERED HOLDERS OF SHARES, CLOSING OF SHARE TRANSFER RECORDS, AND RECORD DATE. Provides for the registered holders of shares, closing of transfer records, and record dates. Section 12.10. QUORUM OF AND VOTING BY SHAREHOLDERS. Provides for the quorum of and voting by shareholders. Trust managers must be elected by two thirds of the votes cast, unless otherwise provided in the declaration of trust. If provided in the declaration of trust or bylaws, express abstentions may have the effect of a negative vote on a matter (with certain exceptions). Provides for establishment of procedures for determining the validity of proxies and certain other matters relating to shareholder meetings. Section 13.10. VOTING OF SHARES. Provides for the voting of shares. Cumulative voting is denied unless specifically authorized by the declaration of trust. Permits the voting, in a fiduciary capacity, of shares held or controlled by a real estate investment trust in its fiduciary capacity. Section 13.20. VOTING TRUSTS AND VOTING AGREEMENTS. Permits voting trusts and voting agreements. Section 14.10. DISTRIBUTIONS. Provides for distributions from a real estate investment trust. Section 14.20. SHARE DIVIDENDS. Provides for share dividends. Section 14.30. SPLIT-UP OR DIVISION WITHOUT STATED CAPITAL INCREASE. Provides for a split up or division without stated capital increase. Clarifies that these matters may be approved by trust managers. Section 14.40. DETERMINATION OF NET ASSETS, STATED CAPITAL, AND SURPLUS. Provides for the determination of net assets, stated capital, and surplus. Section 14.50. DATE OF DETERMINATION OF SURPLUS. Provides for the date of determination of surplus. Provides that a distribution involving a contract by a real estate investment trust to acquire its shares is deemed to have been made, at the option of the real estate investment trust, either on the date the contract is made or effective on the date on which the shares to be acquired are acquired. Section 14.60. SURPLUS AND RESERVES. Provides for surpluses and reserves. Because real estate investment trusts may have long term or projected obligations with respect to real property interests, a statutory provision for reserves is particularly applicable. Section 15.10. LIABILITY OF TRUST MANAGER(S). Provides for the liability of trust managers. States that trust managers may rely in good faith on trust officers and employees, lawyers, accountants, other outside experts, and manager committees. Trust managers found liable may be entitled to contribution from other trust managers. Provides a timeframe in which actions against trust managers may be brought. Old Section 16.00. SHARE AS PERSONAL PROPERTY. Deleted. Replaced by Section 7.40(A) which provides that real estate investment trust securities and shares are personal property. Section 17.10. JOINDER OF SHAREHOLDERS NOT REQUIRED. The joinder of shareholders in any sale, mortgage, lease, or other disposition of all or any part of assets of a real estate investment trust shall not be required. Section 18.10. BOOKS AND RECORDS. Each real estate investment trust shall keep complete and correct books of accounts and minutes of the proceedings. Any person who has been a shareholder of record for at least six (6) months immediately preceding his demand, or be a holder of at least five per cent (5%) of all the outstanding shares of a real estate investment trust. Old Section 19.00. TRANSFER OF SHARES. Deleted. Replaced by Section 7.40(A) which provides that real estate investment trust shares and other securities are transferable in accordance with Chapter 8 Investment Securities of the Business & Commerce Code. Section 19.10. TERMINATION AND LIQUIDATION. Provides for dissolution of a real estate investment trust. Requires a vote by at least two thirds of any class or series entitled to vote as a class and by at least two thirds of the outstanding shares otherwise entitled to vote. Section 19.20. ARTICLES OF DISSOLUTION. On the termination and liquidation of the real estate investment trust, an officer shall execute articles of dissolution on behalf of the real estate investment trust and the articles of dissolution shall set forth: the name of the real estate investment trust; names and addresses of its officer and trust managers; all remaining property and assets have been distributed among its shareholders; date of the adoption of the resolution to dissolve the trust; number of shares outstanding and the number of shares entitled to vote on the dissolution; number of shares voted for and against the dissolution. A copy of the articles of dissolution shall be filed with the county clerk of the county of the principal place of business of the real estate investment trust. Once the articles of dissolution have been filed with the county clerk the real estate investment trust shall cease to exist. Old Section 21.00. GREATER VOTING REQUIREMENTS. Deleted. Replaced by Section 12.10. Section 21.10. WAIVER OF NOTICE. Whenever any notice is required to be given to any shareholder of a real estate investment trust, a waiver in writing, signed by the person entitled to such notice shall be equivalent to the giving of such notice. Section 22.10. RIGHT TO AMEND DECLARATION OF TRUST. Provides generally for the amendment of declaration of trusts. Section 22.20. PROCEDURE TO AMEND DECLARATION OF TRUST. Sets forth procedures for amending declaration of trusts. Section 22.30. CLASS VOTING ON AMENDMENTS. Permits class voting on amendments. Section 22.40. ARTICLES OF AMENDMENT. Establishes use of articles of amendment. Section 22.50. FILING OF ARTICLES OF AMENDMENT. Provides for filing of articles of amendment. This filing, like the other filings required under the TREITA, is made with the applicable county clerk. Section 22.60. EFFECT OF FILING OF ARTICLES OF AMENDMENT. Establishes effect of articles of amendment. Section 22.70. RESTATED DECLARATION OF TRUST. Provides for restated declaration of trust. Section 23.10. MERGER. Replaces and expands merger provisions. Permits mergers between one or more Texas real estate investment trusts and one or more domestic corporations, real estate investment trusts, partnerships, or other entities. Section 23.20. SHARE EXCHANGE OR ACQUISITION. Provides for share exchange or acquisition involving the entities described in Section 23.10. Section 23.30. ACTION ON PLAN OF MERGER OR EXCHANGE. Provides for plan of merger or exchange. Section 23.40. ARTICLES OF MERGER OR EXCHANGE. Provides for articles of merger or exchange. Specifies information to be included. Requires filing with the county clerk. Section 23.50. EFFECTIVE DATE OF MERGER OR SHARE EXCHANGE. Provides for effective date of merger or share exchange. Section 23.60. EFFECT OF MERGER OR SHARE EXCHANGE. Provides for effect of merger or share exchange. Section 24.10. DISPOSITION OF ASSETS AUTHORIZED BY TRUST MANAGERS. Provides for disposition of assets authorized by trust managers. Section 24.20. DISPOSITION OF ASSETS REQUIRING SPECIAL AUTHORIZATION OF SHAREHOLDERS; EFFECT OF DISPOSITION REQUIRING OR NOT REQUIRING AUTHORIZATION; LIABILITY OF ACQUIRING ENTITY. Provides for disposition of assets requiring special authorization of shareholders, effect of disposition requiring or not requiring authorization, and liability of acquiring entity. Section 25.10. RIGHTS OF DISSENTING SHAREHOLDERS IN THE EVENT OF CERTAIN ACTIONS. Establishes rights of dissenting shareholders in certain actions. Clarifies that a shareholder who receives securities and cash, in combination, in connection with a plan of merger or exchange may not have the right to dissent under certain specified circumstances. Section 25.20. Establishes procedure for dissent by shareholders. Section 25.20. PROCEDURE FOR DISSENT BY SHAREHOLDERS AS TO ACTIONS. Any shareholder of any domestic real estate investment trust who has the right to dissent from any of the actions referred to in Section 25.10 of this Act may exercise that right to dissent only to comply with the following: a written objection to the action must be submitted to a vote of shareholders at a meeting; within 20 (twenty) days after receipt of a demand for payment made by the dissenting shareholder, the entity shall deliver or mail to the shareholder a written notice that sets out that the entity accepts the amount claimed in the demand; on payment of the agreed value, the shareholder ceases to have any interest in the shares or in the real estate investment trust. Section 25.30. PROVISIONS AFFECTING REMEDIES OF DISSENTING SHAREHOLDERS. Sets forth remedies for dissenting shareholders. Section 26.10. REORGANIZATION UNDER A FEDERAL STATUTE. Provides for reorganization under federal law. Section 27.10. DELAYED EFFECTIVENESS OF CERTAIN FILINGS. Provides that a real estate investment trust may specify a future effective time for certain filings (or a time based upon the stated events or facts). Enables real estate investment trusts to control the timing of certain events, such as mergers, amendments to declarations of trust, or share transfer restrictions. Section 28.10. CASES NOT PROVIDED FOR. Default provision requiring that any case not provided for in the TREITA be decided under the TBCA and its case law rather than, as currently provided, "the rules of law and equity." SECTION 2. Provides a general effective date of September 1, 1995. SECTION 3. Emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE Sections 3.10, 5.10, 10.30, 19.20, 22.60, 23.10, 23.20, 23.30, 23.40, 23.50, 26.10, and 27.10. These sections are changed at the request of the Secretary of State to move certain required filings for real estate investment trusts from the Secretary of State's office to the offices of affected county clerks. Section 5.20 was changed to authorize the Secretary of State to collect a fee for the administration of certain real estate investment trust records. The committee substitute contains other minor corrective and conforming modifications. SUMMARY OF COMMITTEE ACTION S.B. 1617 was considered by the Committee on Business and Industry in a public hearing on May 2, 1995. No public testimony was considered on the bill. S.B. 1617 was reported favorably, without amendment, with the recommendation that it do pass and be printed, by a record vote of 6 (six) ayes, 0 (zero) nays, 0 (zero) present-not-voting, 3 (three) absent.