GEC C.S.H.B. 1172 75(R) BILL ANALYSIS BUSINESS & INDUSTRY C.S.H.B. 1172 By: Turner, Sylvester 4-23-97 Committee Report (Substituted) BACKGROUND Over the past three years, the Non-Profit Corporation Committee of the Business Law Section of the State Bar of Texas has drafted proposed amendments to the Texas Non-Profit Corporation Act (the "TNPCA"). The proposed amendments were drafted with the assistance of the Office of the Secretary of the State of Texas and incorporate various proposed changes desired by that office to simplify filing requirements and to address commonly asked questions. This bill reflects the combined efforts of the Business Law Section and the Secretary of State's Office on these matters. A number of the proposed amendments are technical in nature (e.g., the proposed amendment to Article 3.02 of the TNPCA which clarifies the required contents of amended articles of incorporation). Other proposed amendments address questions not previously addressed in the statutes or reported by Texas cases, or change existing statutes or add new statutes to adopt concepts found in the Texas Business Corporation Act or in the corporation laws of other states that are viewed desirable in which to incorporate (e.g., the proposed amendments allowing a member of a non-profit corporation which is itself a charitable not-for-profit to receive a dividend from the non-profit corporation.) PURPOSE The proposed amendments represent a continuing effort by the Non-Profit Corporation Committee of the Business Law Section and the Secretary of State's Office to provide Texas with modern and flexible business laws which should 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 does not expressly grant any additional rulemaking authority to a state officer, department, agency or institution. SECTION BY SECTION ANALYSIS Section 1. Article 1.02 is amended by conforming the definition of a "non-profit corporation" to the amendment contained in Section 7 of the bill. Section 2. Article 2.04 of the TNPCA is proposed to be amended to expand the types of entities for which a non-profit corporation may not adopt a deceptively similar name. Section 3. Article 2.04A of the TNPCA is proposed to be amended to allow for the cancellation of a reservation of a corporate name prior to the expiration of the period for which the name is reserved. Section 4. Article 2.10 of the TNPCA is proposed to be amended to give the board of directors flexibility in scheduling annual meetings of members in circumstances where the corporation's by-laws designate a specific date and time for an annual meeting. This provision is a conforming provision to the TBCA. Section 5 Article 2.13B of the TNPCA is proposed to be amended to allow members to elect directors and officers by mail or facsimile transmission, even in the absence of a provision in the by-laws to that effect. This amendment would give member non-profit corporations greater flexibility the governance of the corporation's affairs. This provision is a conforming provision to a similar provision contained in the TBCA. Section 6. Article 2.23 is proposed to be amended by adding thereto a new Subpart C which provides that a corporation has no obligation to retain its books and records for a given fiscal year more than six years after the closing of such fiscal year. The purpose of this amendment is to provide a corporation certainty with respect to the length of time the corporation must make its books and records available to its members Section 7. Article 2.24 is proposed to be amended to allow dividends by a non-profit corporation to a member if the member has obtained an exemption from the Internal Revenue Service classifying the member as an organization described in section 501(c)(3) of the Internal Revenue Code of 1986, or corresponding provisions of any subsequent Federal tax laws (the "Code"). It is common for a Texas non-profit corporation which has obtained an exemption from the Internal Revenue Service classifying the member as an organization described in section 501(c)(3) of the Code, to organize, and be a member of, another Texas non-profit corporation. The newly created organization may carry out its own charitable purposes or may further the charitable purposes of the member. It is likewise common for the member to provide funding for the newly created organization. The newly created organization may thereafter generate income from an endowment and/or from the provision of charitable services, in which case the member may want a return on its investment. Current law forbids the newly created organization from issuing dividends to its member in support of the member's charitable activities. The purpose of this amendment is to provide express conditions under which a non-profit corporation may convey funds in the form of dividends to its member. Any funds paid as a dividend to a member pursuant to this amendment would remain subject to the oversight of the Attorney General of the State of Texas. Section 8. Article 3.02 of the TNPCA is proposed to be amended to make certain clarifying corrections. Section 9. Article 3.05 of the TNPCA is proposed to be amended to provide for additional methods of giving notice of organization meetings to directors named in the articles of incorporation. Section 10. Article 5.06 the TNPCA is proposed to be amended to conform the provisions relating to the effect of mergers to that contained in the TBCA. Section 11. Article 7.01 of the TNPCA is proposed to be amended to extend the period during which a non-profit corporation may be reinstated after dissolution from 12 months to 36 months. Section 12. Article 8.03A of the TNPCA is proposed to be amended to expand the types of entities for which a foreign non-profit corporation may not adopt a deceptively similar name. Section 13. Article 8.15E of the TNPCA is proposed to be amended to make certain typographical and conforming changes relating to types of names. Section 14. Provides that September 1, 1997 will be the effective date. Section 15. Provides an emergency clause. COMPARISON OF ORIGINAL TO SUBSTITUTE 1) The C.S.H.B. 1172 replaces Section 1 of the bill as originally filed with a new Section 1 which amends the definition of "Non-profit Corporation" as presently contained in the Texas Non-Profit Corporation Act. 2) C.S.H.B. 1172 deletes from the original bill, Section 5, 7, 8, 9, and 15, renumbering all sections accordingly. 3) In Section 10 of the original bill for H.B 1172, pg. 10, line 4, the word "three" is replaced with "six" to indicate that a non-profit corporation is not obligated to retain its books and records for greater than a six year period of time.