BILL ANALYSIS
H.B. 1156
By: Giddings
Business & Industry
Committee Report (Unamended)
BACKGROUND
The Business Organizations Code (the "Code") is a joint project of the
Business Law Section of the State Bar of Texas and the Office of the Texas
Secretary of State. The Texas Legislative Council also has assisted in
the drafting of the Code. The Code has been under development since 1995.
The Code was introduced as H.B. 2681 in the 1999 Texas Legislature and as
H.B. 327 in the 2001 Texas Legislature. Both bills were passed by the
House Business & Industry Committee but were never set on the House
Calendar in either session by the House Calendars Committee. With some
inter-session changes, this bill is essentially the same as H.B. 2681 and
327. The Code was also the subject of an Interim Report of a subcommittee
of the House Business & Industry Committee.
Section 323.007, Government Code requires the systematic revision and
reorganization of Texas statutes into codes. A new code revising and
reorganizing Texas statutes governing for-profit and non-profit,
private-sector entities has not yet been enacted. The codification
process involves reclassifying and rearranging the statutes in a more
logical order, emphasizing a numbering system and format that will
accommodate future expansion of the law, eliminating repealed, invalid,
duplicative and other ineffective provisions, and improving the
draftsmanship of the law if practicable. These efforts are carried out to
make the statutes more accessible, understandable and useable.
The Code differs from the normal, non-substantive codification by the
Legislative Council because, when compared to existing law, substantive
changes have been made in the Code. Several of the code projects in the
past (for example, the Election Code, the Tax Code, the Penal Code, the
Education Code and the Transportation Code) have contained substantive
revisions and were prepared to a great extent by parties other than the
Legislative Council. This same process has been followed in the drafting
of the Code. While for the most part the Code represents a nonsubstantive
codification of existing statutes, substantive improvements have been made
to effect the additional goals of modernizing, simplifying and
standardizing provisions, procedures and filings. These goals are
consistent with the objectives of a standard codification project where no
substantive changes are made.
Unless otherwise noted, the provisions of this Code are nonsubstantive
revisions of comparable provisions found in the Texas Business Corporation
Act ("TBCA"), Texas Non-Profit Corporation Act ("TNPCA"), Texas
Miscellaneous Corporation Laws Act ("TMCLA"), Texas Limited Liability
Company Act ("TLLCA"), Texas Revised Limited Partnership Act ("TRLPA"),
Texas Real Estate Investment Trust Act ("TREITA"), Texas Uniform
Unincorporated Nonprofit Associations Act ("TUUNAA"), Texas Professional
Corporation Act ("TPCA"), Texas Professional Associations Act ("TPAA"),
the Texas Revised Partnership Act ("TRPA"), the Cooperative Associations
Act ("CAA") and other existing provisions of Texas statutes governing
domestic entities.
The proposed effective date of the Code is January 1, 2006 to allow for
ample time to educate and inform all interested persons and to allow an
additional legislative session to meet and consider any further changes to
the Code before it becomes effective. The new Code generally would not
apply to an existing entity prior to January 1, 2010, unless the entity
expressly elects to adopt the Code as its governing statute.
Codification of the organizational statutes of Texas governing
private-sector entities is one of the last steps in the overall
codification of Texas statutes. The Code will provide Texas with a
modern and flexible statute governing for-profit and non-profit,
privatesector entities.
STRUCTURE OF CODE
The Code creates an integrated statute, as opposed to a standalone
statute, in which common provisions applicable to most forms of entities
governed by the Code are placed in a single title with provisions specific
to entity type being placed in separate titles. Title 1 of the Code
contains the common provisions. The title headings below reveal the basic
structure of the Code:
Title 1. General Provisions
Title 2. Corporations
Title 3. Limited Liability Companies
Title 4. Partnerships
Title 5. Real Estate Investment Trusts
Title 6. Associations
Title 7. Professional Entities
Title 8. Miscellaneous and Transition Provisions
PURPOSE
As proposed, H.B. 1156 would create the Business Organizations Code for
the State of Texas. Although some substantive changes would be made to
modernize, simplify and standardize the law, this Code would be generally
a nonsubstantive recodification of statutes.
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: Section 1 adopts the new Texas Business Organizations Code as
follows:
A detailed table of contents is contained in the bill and lists each
title, chapter, subchapter and section of the Code.
TITLE 1. GENERAL PROVISIONS
CHAPTER 1. DEFINITIONS AND OTHER PROVISIONS
Subchapter A. Definitions and Purpose
Subchapter A contains definitions used in the Code and provisions
relating to the purposes of the Code, synonymous terms in other statutes,
dollars as monetary units and short titles for portions of the Code.
Section 1.001 summarizes the purposes of the codification effected by the
Code.
Section 1.002 contains the definitions for many of the terms used in the
Code. This section introduces new terminology not found in existing
statutes primarily for the purpose of the provisions of Title 1. Because
Title 1 applies to all entities, common terms used for all entities must
be formulated.
The new term "organization" is intended to refer in the broadest sense to
any kind of entity or organization regardless of jurisdiction of formation
or purpose. One subset of an "organization" is an "entity," which is
defined to be either a "domestic entity" or a "foreign entity." A
"domestic entity" means an organization formed under or the internal
affairs of which are governed by the Code. A "foreign entity" means an
organization the governing documents of which are adopted under a
jurisdiction of formation other than Texas. "Organizations" formed under
other Texas law besides the Code, for example banks and insurance
companies, are neither domestic entities, or foreign entities.
The universe of "domestic entities" is further divided into "filing
entities" and "nonfiling entities." A "filing entity" includes a domestic
corporation, limited partnership, limited liability company, professional
association, professional corporation, cooperative, or real estate
investment trust. These entities require a filing with the Secretary of
State or a county clerk's office as a condition to formation. A
"nonfiling entity" includes a domestic general partnership and nonprofit
association. These domestic entities do not require formal filings as a
condition to formation.
The universe of entities is further divided into "for-profit entities"
and "nonprofit entities." A "nonprofit entity" is an entity that is
organized solely for one or more of the nonprofit or charitable purposes
specified in Section 2.002 and includes a nonprofit corporation and
nonprofit association.
Each entity has either "owners" or "members" which in turn have
"ownership interests" or "membership interests," respectively, in the
entity. For-profit corporations, real estate investment trusts and
partnerships have "owners," while nonprofit corporations and
unincorporated nonprofit associations have "members." Limited liability
companies, cooperative associations and professional associations have
both "members" and "owners," and these terms are used interchangeably for
these kinds of entities.
A "filing entity" is formed by filing a "certificate of formation," which
replaces the existing articles of incorporation, articles of organization,
certificate of limited partnership or similar document. A "foreign filing
entity" is a foreign entity that is required to register under the Code to
transact business in Texas. The certificate of formation and the other
documents or agreements adopted by the entity to govern the formation or
internal affairs of the entity constitute the "governing documents" of the
domestic entity. Similarly, for a foreign entity, the instruments,
documents and agreements that govern its formation or internal affairs
constitute its "governing documents." The person or group of persons who
are entitled to manage and direct the affairs of an entity under the Code
and the governing documents of the entity is referred to as the "governing
authority." This term refers to the board of directors of a corporation,
the trust managers of a real estate investment trust, the general partners
of a partnership, the managers of a limited liability company that is
managed by managers or the members of a limited liability company that is
managed by its members. A "governing person" is a person who serves on
the governing authority of an entity. A "managerial official" is an
officer or a governing person.
A "filing instrument" is a document or instrument that is required or
permitted to be filed under the Code with the Secretary of State. The
term "fundamental business transaction" means a merger, interest exchange,
conversion or sale of all or substantially all of an entity's assets. The
term "interest exchange" is similar to the term "share exchange" as used
in the TBCA but applies to exchanges of membership or ownership interests
in all domestic entities.
The term "jurisdiction of formation" refers to the jurisdiction in which
a filing entity's certificate of formation is filed. In the case of
nonfiling entities, "jurisdiction of formation" means the jurisdiction
chosen in the entity's governing documents to govern its internal affairs
if the jurisdiction bears a reasonable relation to the owners or members
or to the nonfiling entity's affairs under contract law principles or
otherwise the jurisdiction in which the entity has its chief executive
office.
The Code adopts the definition of "affiliate" from the Federal Securities
Act of 1933, as amended.
The Code also introduces terms to facilitate electronic filing. The Code
defines "signature" to mean any symbol executed or adopted by a person
with present intention to authenticate a writing and includes a digital
signature, electronic signature or a facsimile of such. The terms
"writing" or "written" are expanded to encompass textual information
stored in an electronic or other medium that is retrievable in a
perceivable form, and includes electronic data and transmissions and
reproductions of writings. These terms do not include sound or video
recordings.
The terms "certificate of ownership" and "certificated ownership
interest" are introduced to make generally applicable to domestic entities
the certificated share provisions found in TBCA. The Code also adds a new
phrase "uncertificated ownership interest" to mean those ownership
interests in domestic entities that are not represented by an instrument
and are transferred either by amendment of the governing documents or by
registration on books maintained for that purpose. The use of the terms
"certificated" or "uncertificated" in connection with particular types of
ownership interests throughout the Code should have similar meanings.
The term "fundamental business transaction" is new and means a merger,
interest exchange, conversion, or sale of all or substantially all of an
entity's assets. Not all domestic entities provide to its owners the
rights of dissent and appraisal in connection with a fundamental business
transaction. An entity that provides to its owners such rights is
referred to as a "domestic entity subject to dissenter's rights." Those
entities that provide rights of dissent and appraisal are identified in
Subchapter H, Chapter 10.
The Code contains a separate title governing professional associations,
professional corporations and professional limited liability companies.
These entities are referred to as "professional entities."
Chapter 1 contains additional definitions which can be found in one or
more existing Texas statutes.
Section 1.003 supplies the definition of the term "disinterested person."
Section 1.004 supplies the definition of the term "independent person."
Section 1.005 defines the term "conspicuous" when used in connection with
required information.
Section 1.006 states that certain phrases and terms in other Texas
statutes or codes will be synonymous with certain terms and phrases used
in this Code.
Section 1.007 clarifies that a writing has been signed by a person when
the writing includes the person's signature. A transmission or
reproduction of the writing signed by a person is considered signed by
that person for purposes of this Code. This section and the definitions
in Section 1.002 of "signature" and "writings" are intended to facilitate
the use of electronic filings and to comply with the federal Electronic
Signatures in Global and National Commerce Act.
Section 1.008 establishes names by which various portions of the Code may
be cited.
Section 1.009 provides that a value or amount required by the Code to be
stated in monetary terms must be stated in U.S. dollars unless the context
requires otherwise. Currency that is not specified is considered to be in
U.S. dollars.
Subchapter B. Code Construction
Subchapter B contains provisions regarding the construction of the Code.
Section 1.051 specifies that the Code Construction Act (Chapter 311,
Government Code) applies to the construction of the Code.
Section 1.052 clarifies that references in other laws to a statute
revised by this Code is considered to be a reference to the part of this
Code that revises that statute.
Section 1.053 states that the Code applies to foreign and interstate
affairs only to the extent permitted by the United States Constitution.
Section 1.054 reserves to the legislature the power to prescribe
regulations, provisions and limitations binding on any entity subject to
the Code.
Subchapter C. Determination of Applicable Law
Section 1.101 states that Texas law governs the formation and internal
affairs of an entity formed by the filing of a certificate of formation in
accordance with Chapter 4.
Section 1.102 provides that if the entity is formed through the filing of
a certificate of formation with a foreign governmental authority, the law
of the state or the jurisdiction in which that foreign governmental
authority is located governs the formation and internal affairs of the
entity.
Section 1.103 provides that if an entity is formed without the filing of
a certificate of formation, the law governing the entity's formation and
internal affairs is the law of the entity's jurisdiction of formation.
Section 1.104 provides that law governing the entity, as determined under
Sections 1.101-1.103, applies to the liability of an owner, member or
managerial official for an obligation of the entity.
Section 1.105 provides the definition of the phrase "internal affairs of
an entity."
Section 1.106 provides that all foreign and domestic entities are subject
to Title 1 of the Code to the extent provided by Title 1. Each title,
other than Title 1, applies to a different type of entity to the extent
provided by that title. If a provision of Title 1 conflicts with the
provision of another title, the provision of the other title supersedes
Title 1.
CHAPTER 2. PURPOSES AND POWER OF DOMESTIC ENTITY
Subchapter A. Purposes of Domestic Entity
Subchapter A contains provisions relating to the purposes of domestic
entities formed under the Code.
Section 2.001 provides that a domestic entity has any lawful purpose
unless otherwise provided by the code.
Section 2.002 specifies the purposes that may be included in the
certificate of formation for a domestic nonprofit entity. The TLLCA is
silent as to whether a limited liability company can be formed for a
nonprofit purpose. While the Code does not explicitly permit a limited
liability company to be a nonprofit entity, the provisions of the Code do
not prevent that result.
Section 2.003 prohibits a domestic entity from engaging in a business or
activity that is unlawful, that may not be engaged in by that entity under
state law or that may not be engaged in without first obtaining a license
and a license cannot be lawfully be granted to the entity. A domestic
entity also may not operate as a bank, trust company, savings association,
insurance company, railroad company, cemetery organization or abstract or
title company. This Section clarifies that limited liability companies
and partnerships may not engage in a business or activity that is unlawful
or prohibited by law, that requires a license that cannot be granted to
such entities, or that is included in a list of specified types of
businesses, such as banking and insurance, that are regulated under other
statutes. These limitations were only implied in existing law for these
types of entities.
Section 2.004 specifies that except as provided in Title 7, a
professional entity may only engage in one type of professional service,
unless otherwise expressly authorized under state law, and services
ancillary to that type of professional service. Section 2.004 allows a
professional entity to provide more than one professional service as its
purpose if permitted by the Texas law regulating the professional
services. This change clarifies existing ambiguities in Texas law.
Existing Texas statutes governing professional entities have been
interpreted in an unduly rigid manner. The necessity for a single
professional service limitation should be the subject of the special
regulatory law governing the profession and not the organizational law.
Section 2.005 specifies that the domestic entity's governing documents
may limit the entity's purposes. Section 2.005 states what is implicit in
existing Texas law governing all entities, namely that the governing
documents of the entity may limit its purposes. This statement was not
explicit in some existing Texas statutes.
Section 2.006 permits for-profit corporations to be formed for certain
purposes in addition to those permitted by this chapter.
Section 2.007 prohibits for-profit corporations from engaging in certain
activities.
Section 2.008 prevents corporations formed to operate a nonprofit
institution from forming as a for-profit corporation under Chapter 21.
Section 2.009 permits a nonprofit corporation to have a purpose to
organize laborers, workers, or wage earners.
Section 2.010 enumerates entities with certain purposes that may not
organized or registered to conduct its affairs in Texas as a nonprofit
corporation. Those purposes include the operation of group hospital
service, rural credit unions, agricultural and livestock pools, mutual
loan corporations, cooperative credit associations, farmers' cooperative
societies, cooperative marketing corporations, rural electric cooperative
corporations, telephone cooperative corporations, fraternal organizations
under the lodge system, and water supply or sewer corporations.
Section 2.011 sets out a broad description of the type of activities in
which a cooperative association may be incorporated to engage. However,
it states that a cooperative association may not serve as a health
maintenance organization, furnish medical or health care, or employ or
contract with a health care provider in a manner prohibited by the statute
under which the provider is licensed. It also prohibits a cooperative
association from engaging in health maintenance organizations or prepaid
legal service corporations.
Subchapter B. Powers of Domestic Entity
Subchapter B contains provisions relating to the powers of a domestic
entity.
Section 2.101 provides that a domestic entity has the same powers as an
individual and lists what the powers of a domestic entity include.
Section 2.101 is derived primarily from similar provisions in the TBCA and
TNPCA. The concept of broad powers is implicit in existing Texas law for
all domestic entities. This Section clarifies the law with respect to
corporations so it is clear that they have the same powers as an
individual except as otherwise provided by the Code. In addition, the
enumeration of powers has been extended to partnerships and cooperatives,
even though similar provisions are not explicit in the statutes currently
governing those entities.
The concept of perpetual existence of a corporation was a relatively new
concept in 1955 when the TBCA was adopted. However, that concept is now
ingrained in corporate law. Accordingly, a provision in TBCA Art. 2.02.A
authorizing corporations to have perpetual existence is no longer
necessary and has been omitted.
Section 2.102 specifies that certain domestic nonprofit entities or
institutions may invest their funds in property for the use and benefit,
at the discretion of and in trust for an affiliated convention, conference
or association.
Section 2.103 authorizes a domestic entity to create indebtedness. In
the absence of fraud, the judgment of the governing authority as to the
value of the consideration received for the indebtedness is conclusive.
The common law of corporations placed limits on the power of a corporation
to incur debts or make guarantees. This common law concept has become
antiquated in modern times as corporations have been accepted as separate
entities with full legal capacity in all respects. Existing law in TMCLA
Article 1302-2.06 provides explicit powers to incur indebtedness and make
guarantees. Implicit in the existing Texas law for other domestic
entities, including particularly partnerships, is the power to incur
indebtedness and make guarantees. The explicit powers to incur
indebtedness and make guarantees found in Sections 2.103 and 2.104 also
apply to partnerships.
Section 2.104 authorizes a domestic entity to guaranty another person's
contract, security or other obligation. The guaranty must be on behalf of
an affiliate of the entity or reasonably be expected directly or
indirectly to benefit the entity. The governing authority's decision is
conclusive except in certain circumstances.
Section 2.105 grants certain powers conferred in the Natural Resources
Code to corporations, partnerships or limited liability companies engaged
in certain pipeline businesses.
Section 2.106 authorizes the nonprofit corporation described by
particular sections of the Internal Revenue Code, in limited
circumstances, to serve as trustees of a trust of which the corporation is
a beneficiary, or benefiting another similar organization. It also grants
immunity from suit for a claim that the nonprofit corporation is engaging
in the trust business in a manner requiring a state charter.
Section 2.107 specifies that the certificate of formation of each
nonprofit corporation which is a private foundation is deemed to contain
certain language regarding distributions, self-dealing, excess business
holdings and investments in accordance with the Internal Revenue Code
unless the certificate is amendment to exclude the language.
Section 2.108 provides that a professional association shall have the
same powers, privileges, duties, restrictions, and liabilities as a
for-profit corporation.
Section 2.109 provides that a professional corporation shall have the
same powers, privileges, duties, restrictions, and liabilities as a
for-profit corporation.
Section 2.110 states that a cooperative association may exercise the same
powers and privileges as a nonprofit corporation and specifically
describes certain powers of a cooperative association.
Section 2.111 limits certain organizational expenses of a cooperative
association.
Section 2.112 provides that a domestic entity need not state the powers
provided by Subchapter A in its governing documents.
Section 2.113 provides that a domestic entity and its managerial
officials may not exercise a power in a manner inconsistent with a
limitation on its purposes. No action in violation of this state's
antitrust laws is authorized.
Section 2.114 specifies that a debt certificate issued by a domestic
entity may contain facsimile seals and signatures and signatures of former
officers. The provisions of Section 2.114, which were derived from TMCLA
Article 1302-2.05, have been expanded to apply to certificated bonds,
debentures and other evidences of indebtedness of partnerships. By
authorizing facsimile signatures from former officers to be enforceable on
such certificates, this provision permits transfer agents to continue to
use preprinted certificate forms despite a change in officers.
CHAPTER 3. FORMATION AND GOVERNANCE
Subchapter A. Formation, Existence, and Certificate of Formation
Subchapter A contains general provisions relating to formation, existence
and certificates of formation for domestic entities. Subchapter A
provides that domestic entities are formed through the filing of a
certificate of formation, which differs from existing law where domestic
entities filed organizational documents by different names, such as
"articles of incorporation," "certificate of limited partnership" and
"articles of organization," for example. Chapter 3 also does not carry
forward the "substantial compliance" concept of TRLPA Sections 2.01(b) and
2.02(e) because of the simplified forms permitted by this Code.
Section 3.001 provides that a filing entity must file a certificate of
formation in accordance with Chapter 4. Upon filing, its existence
commences. The filing officer's acknowledgment of the filing is evidence
of the entity's formation and existence. This Section differs from
certain of the source laws by requiring an acknowledgment of filing by the
filing officer rather than issuance of a certificate by the filing
officer. There is no change in this connection with respect to real
estate investment trusts and partnerships. For limited partnerships, this
Section also changes existing law by providing that the acknowledgment of
filing by the Secretary of State is conclusive evidence of formation and
deletes the concept of "substantial compliance" for formation of a limited
partnership and amendments to its certificate of limited partnership.
Section 3.002 refers to the title governing a nonfiling entity for its
formation and existence.
Section 3.003 provides that a domestic entity exists perpetually unless
otherwise provided in its governing documents or unless terminated in
accordance with this code or the Tax Code. Existing law requires the
articles of incorporation of a corporation, the certificate of
organization of a limited liability company or other formation instruments
for other entities to state the period of duration of the entity. As a
corollary, the certificate of formation under the Code only needs to state
the period of duration if the entity is not formed to exist perpetually.
Section 3.004 specifies the requirements for an organizer of a filing
entity and the general requirement that an organizer sign the certificate
of formation. The general partners of a domestic limited partnership and
the trust managers of a domestic real estate investment trust must sign
the certificates of formation of those entities. This Section differs
from existing law by requiring the organizer to have the legal ability to
contract rather than simply being 18 years of age. The legal ability to
contract is more relevant than the age of an individual.
Section 3.005 specifies what must be stated in a certificate of formation
and what additional provisions may be contained in a certificate of
formation. This Section establishes a standardized basic form of
certificate of formation for all domestic filing entities.
Section 3.006 requires the certificate of formation of a domestic filing
entity formed under a plan of conversion or merger to be filed with the
certificate of conversion or merger. The formation of this entity is
effective on the effectiveness of the conversion or merger.
Section 3.007 sets forth information that must be included in a
certificate of formation of a for-profit corporation (in addition to the
information required for all filing entities pursuant to Section 3.005).
Subsection (a) of Section 3.007 relates to all forprofit corporations,
subsection (b) relates to for-profit corporations authorized to issue more
than one class of shares, and subsection (c) relates to for-profit
corporations electing to have preemptive rights under Subchapter E of
Chapter 21 or cumulative voting. The requirement under existing law that
a for-profit corporation's articles of incorporation and real estate
investment trust's declaration of trust contain a statement that the
corporation or trust will not commence business until it has received for
the issuance of shares consideration of the value of at least $1,000 has
been eliminated since the $1,000 requirement has been eliminated. A
$1,000 minimum capitalization has become outmoded and provides little
comfort as to adequate capitalization. Section 3.007 reflects the change
in presumption regarding silence in a certificate of formation on
statutory preemptive rights and cumulative voting of shares. A for-profit
corporation formed after the effective date of the Code will not have
statutory preemptive rights or cumulative voting of shares unless it
elects to do so by including appropriate provisions in its certificate of
formation.
Section 3.008 sets forth information that must be and may be contained in
a certificate of formation of a close corporation governed by Subchapter O
of Chapter 21. A shareholders' agreement or provisions permitted in a
shareholders' agreement may be added to a certificate of formation of a
close corporation.
Section 3.009 sets forth the information, in addition to that specified
in Section 3.005, which must be contained in a certificate of formation of
a nonprofit corporation. This information includes information about
membership and vesting management of the affairs of the corporation in the
members; the number, names and addresses of the initial directors; and
applicable statements regarding distribution of assets.
Section 3.010 states the information required to be included in the
limited liability company's certificate of formation in addition to the
information required by Section 3.005. As a substantive change from
existing law, under Section 3.005 the certificate of formation is now
required to state the type of entity and need not state the duration of
the entity if it is perpetual.
Section 3.011(a) provides that to form a limited partnership, the
partners must enter into a partnership agreement and file a certificate of
formation. Subsection (b) specifies that the partnership agreement may be
included in the plan of merger or conversion. Subsection (c) provides
that a certificate of formation for a limited partnership must also
include the address of the principal office in the United States where
records are to be kept or made available under Section 153.551. Section
3.011(d) provides that a certificate of formation is constructive notice
of the fact that the partnership is a limited partnership and of the other
facts required to be included in the certificate.
Section 3.012 sets forth the additional statements that must be contained
in the certificate of formation of a real estate investment trust.
Section 3.013 sets out the additional statements that must be contained
in the certificate of formation of a cooperative association.
Section 3.014 sets forth the supplemental information that is required to
be included in a certificate of formation of a professional entity; that
is, the type of professional service to be provided and whether the entity
is a professional association, corporation, or limited liability company.
Section 3.015 sets forth the supplemental provisions for the certificate
of formation of a professional association, including provisions regarding
winding up and continuation. It also permits other provisions to be added
to the certificate of formation. Sections 3.014 and 3.015 simplify and
clarify the form of certificate of formation for a professional
association.
Subchapter B. Amendments and Restatements of Certificate of Formation
Subchapter B contains provisions relating to amendments and restatements
of the certificate of formation.
Section 3.051 authorizes a filing entity to amend its certificate of
formation and states what provisions may be contained in an amended
certificate of formation.
Section 3.052 refers to the title of this code that applies to the entity
for the procedures to adopt an amendment to the certificate of formation.
A filing entity must file under Chapter 4 a certificate of amendment or a
restated certificate of formation to amend its certificate of formation.
Section 3.053 specifies what statements must be contained in a
certificate of amendment. A certificate of amendment need not specify the
date or method of adoption by the owners, as required by the TLLCA, TBCA,
TNPCA and other existing law. As to limited partnerships, the
requirements for the certificate of amendment are greater than presently
required, but the new requirements are procedural in nature. This change
simplifies the filing instrument without any significant detriment.
Section 3.054 states that certain supplemental information must be
furnished in a certificate of amendment for for-profit corporations if the
amendment provides (i) for an exchange, reclassification, or cancellation
of issued shares and (ii) for a change in the amount of a corporation's
stated capital. It also provides for the execution and filing of a
certificate of amendment.
Section 3.055 specifies the additional statements that must be contained
in a certificate of amendment for a real estate investment trust and
whether an officer or the trust managers may sign the certificate of
amendment on behalf of the real estate investment trust. Other required
statements are specified in Section 3.053. It also provides for the
execution of the certificate of amendment.
Section 3.056 provides that the amendment takes effect on the filing of
the certificate of amendment under Chapter 4. Existing causes of action,
pending suits and existing rights of nonowners are not affected by an
amendment or a name change. There are no provisions similar to
subsections (b) and (c) in TRLPA, but may be implied.
Section 3.057 authorizes a filing entity to restate its certificate of
formation. The provisions permitting restatements of certificates of
formation have no parallel in the TRLPA. The ability of the general
partners to effect a restatement of the certificate of limited partnership
and all previous amendments is implicit in TRLPA.
Section 3.058 refers to the title of this code that applies to the entity
for the procedure to adopt a restated certificate of formation. The
filing entity must file a restated certificate of formation in the manner
required by Chapter 4 to restate its certificate of formation.
Section 3.059 specifies what must be contained and what may be omitted
from a restated certificate of formation. A restated certificate of
formation that makes new amendments to the certificate of formation must
identify each amended provision and must state that the amendment has been
approved in the manner required by this code and the governing documents
of the entity.
Section 3.060 specifies that a restated certificate of formation of a
for-profit corporation may update director information and who may sign
the restated certificate of formation.
Section 3.061 requires that any restated certificate of formation for a
church with management of the church vested in the membership include that
information regardless of whether it was required to be included in
original certificate of formation. The section also requires a nonprofit
corporation to update the number, names and addresses of its directors
when filing a restated certificate of formation.
Section 3.062 permits a restated certificate of formation of a restated
certificate of formation of a real estate investment trust to update trust
manager information.
Section 3.063 provides that a restated certificate of formation takes
effect on filing under Chapter 4 and supersedes the original certificate
of formation and each prior amendment or restatement.
Subchapter C. Governing Persons and Officers
Subchapter C contains certain provisions relating to governing persons
and officers of a domestic entity.
Section 3.101 provides a general rule that the governing authority of a
domestic entity manages and directs the entity's business and affairs.
This rule is subject to the governing documents and the title of the Code
governing the entity.
Section 3.102 authorizes governing persons to rely on certain information
and data in discharging their duties or exercising a power. The right of
contribution is provided from other governing persons that are liable on
the same claim. Sections 3.102 and 3.105 permit governing persons and
officers to rely on information, opinions, reports and statements
concerning the entity or another person prepared or presented by certain
persons. These provisions are taken from the TBCA and TREITA but are new
with respect to partnerships and limited liability companies. Under the
Code, partnerships and limited liability companies may revise these rules
by agreement in their governing documents.
Section 3.103 authorizes the election or appointment of officers and
specifies the duties of an officer. A person may hold two or more offices
unless prohibited. The provisions of Section 3.103 are new to
partnerships and limited liability companies. Nevertheless, under existing
law, partnerships and limited liability companies may adopt similar
provisions by agreement in their regulations or limited partnership
agreements. The Code permits limited liability companies and partnerships
to revise these provisions by their governing documents.
Section 3.104 provides that an officer may be removed for or without
cause by the governing authority or as provided by the governing
documents. Election or appointment of an officer creates no contractual
rights. In a substantive change, Section 3.104 permits the removal of
officers with or without cause. It does not carry forward the provision
found in Article 2.43 of the TBCA that permitted a board of directors to
remove an officer only if "the best interests of the corporation will be
served" by such removal.
Section 3.105 authorizes officers to rely on certain information and data
in discharging their duties or exercising a power. This Section makes
clear what is only implicit in the TREITA, TRLPA, TLLCA and TRPA.
Subchapter D. Recordkeeping of Filing Entities
Subchapter D contains certain provisions relating to the recordkeeping
required by filing entities.
Section 3.151 requires a filing entity to keep books and records of
accounts, minutes of meetings, and records of the names and mailing
addresses of its owners or members. Certain records need not be
maintained by a limited partnership or limited liability company unless
its governing documents require them to be maintained.
Section 3.152 gives a governing person the right to examine the filing
entity's books and records for a purpose reasonably related to the
governing person's service. A court may require a filing entity to open
its books and records for inspection and may award a governing person
attorneys' fees and other proper relief. This section is based on similar
provisions of the TBCA and TREITA. Insofar as a limited liability company
may be managed by a manager, this section has no parallel in existing
limited liability company laws but could be provided for in the
regulations of the limited liability company. This Section also
clarifies that directors of nonprofit corporations and cooperative
associations have the right to inspect the books and records of the filing
entity. Section 3.152 does not apply to limited partnerships.
Section 3.153 provides that an owner or member may examine the entity's
books and records to the extent provided in the governing documents and
the title of this code governing the entity.
Subchapter E. Certificates Representing Ownership Interest
Subchapter E contains provisions relating to certificated or
uncertificated ownership interests in certain domestic entities.
Subchapter E is based on similar provisions in the TBCA and TREITA. TRLPA
and TLLCA contain less detailed provisions that authorize limited
liability companies and limited partnerships to issue certificates
representing their ownership interests.
Section 3.201 provides that ownership interests in a domestic entity may
be certificated or uncertificated. In the absence of any contrary
provision in the governing documents or a resolution by the governing
authority, the ownership interests of a for-profit corporation,
professional corporation or real estate investment trust are certificated.
Ownership interests in other types of entities are uncertificated unless
this code or the governing documents specify otherwise. Existing law is
not clear on whether ownership interests in professional associations are
by default certificated or uncertificated, but this Section clarifies that
uncertificated ownership interests are the default rule for professional
associations. Subsection (d) provides that Sections 3.202 through 3.205
do not apply to partnerships or limited liability companies except to the
extent specified in their governing documents. Subsection (e) specifies
that the governing documents of limited liability companies and
partnerships may provide that ownership interests may be evidenced by
certificates and may adopt the provisions of Subchapter E, which is a
clarification of existing law.
Section 3.202 authorizes facsimile seals on certificates representing
ownership interests and states what information must be stated on the
front of the certificate. Restrictions on transfer must be stated on the
front or back of the certificate. The certificate must also set forth or
refer to any special rights of ownership interests of any class or series.
Section 3.203 specifies that the signature of a managerial official on a
certificate may be a facsimile. The certificated ownership interest may
also contain a signature of a former managerial official.
Section 3.204 requires a domestic entity to deliver a certificate
representing an ownership interest to which an owner is entitled.
Section 3.205 requires a domestic entity to provide a specified written
notice to an owner of an uncertificated ownership interest that the entity
issues or transfers. Exceptions to this rule are provided in subsection
(c). Subsection (b) provides that owners of uncertificated ownership
interests have the same rights and obligations as certificated ownership
interests except as otherwise provided by law.
CHAPTER 4. FILINGS
Subchapter A. General Provisions
Subchapter A contains general provisions relating to filings made with
the secretary of state under the provisions of the code.
Section 4.001 requires that a filing instrument be signed by a person
authorized by the code to act on behalf of the entity, but does not
require the production of evidence of such authorization. This section
standardizes filing procedures for all domestic filing entities and
limited liability partnerships.
Section 4.002 addresses actions taken by the secretary of state upon
acceptance and filing of a filing instrument. In lieu of certificates, as
required by the TBCA, TREITA, TNPCA, TLLCA, TPCA, TPAA and CAA, the filing
officer merely issues an acknowledgment of filing in the case of each
instrument filed with it. Most current laws also require the filing of
two copies of each instrument. Under the Code, only one copy is filed,
and the filing officer does not return a file-stamped copy, unlike current
law. These changes are included in order to permit electronic filings but
also give effect to the provisions of TMCLA Art. 7.08.
Section 4.003 permits the filing of a photostatic, facsimile, electronic
or similar reproduction of an original filing instrument or original
signature on a filing instrument. Permits electronic filing and electronic
acknowledgment of a filing. This Section and Section 4.001 retain the
permissibility of electronic filings and signatures for all domestic
filing entities and limited liability partnerships. Similarly, this
Section and Section 4.002 retain the permissibility of electronic
acknowledgments and communications by the Secretary of State.
Section 4.004 directs an entity to promptly file each filing instrument
required to be filed. This provision clarifies existing law for nonprofit
corporations, cooperative associations, limited partnerships and limited
liability partnerships. The fee for filing a reinstatement is
standardized with the fee payable for reinstatement of a corporation
forfeited under the Tax Code. The fee for filing of a certificate of
exchange is reduced.
Section 4.005 provides that a certificate issued by the secretary of
state or a certified copy of a filing instrument accepted for filing by
the secretary of state may be recorded by a court, public office, or
official body and accepted by such as prima facie evidence of the facts
stated within the certificate or instrument.
Section 4.006 permits the secretary of state to adopt forms for a filing
instrument or report required to be filed with the secretary of state, but
makes use of such forms permissive.
Section 4.007 imposes civil liability on a person, managerial official,
or entity that signed or authorized the filing of a filed filing
instrument which contains a false statement or the omission of a material
fact. Presently, a person harmed by the filing of a false filing
instrument has no statutory right to recover damages for a loss caused by
the filing of the false instrument or by the person's reliance on the
false instrument, except under TRLPA. Existing law makes the signing of a
false document a Class A misdemeanor. However, because prosecution is
seldom brought for a violation of present provisions, more effective means
of deterring such actions are needed. Section 4.007 is modeled on TRLPA
Section 2.08 but omits certain provisions of the TRPA specific to general
partners. The omitted provisions condition liability on whether the
general partner had sufficient time to amend or cancel the certificate or
to file a petition for its amendment or cancellation before the false
statement was reasonably relied on and permits a general partner to avoid
liability if such instrument is filed within 30 days after the date that
the general partner first had or should have had knowledge that a
statement in the certificate was false.
Section 4.008 provides that the signing of a filing instrument which
contains a false statement or the omission of a material fact with the
intent of filing the filing instrument with the secretary of state is a
Class A misdemeanor unless the person's intent is to defraud or harm
another. In the latter case, the offense is a state jail felony. Existing
law simply classifies the offense as a Class A misdemeanor, which is not a
felony.
Section 4.009 requires all filing instruments relating to domestic real
estate investment trusts to be filed with the county clerk of the county
of the principal place of business in Texas of the domestic real estate
investment trust.
Subchapter B. When Filings Take Effect
Subchapter B contains general provisions relating to when a filed filing
instrument becomes effective.
Section 4.051 provides that a filing instrument takes effect upon filing
with the secretary of state. This rule differs from the provisions of the
TBCA, TNPCA, TPAA, TPCA, CAA and TLLCA which specify that most filings are
effective when the Secretary of State issues a certificate.
Section 4.052 permits a filing instrument to become effective at a
specified time and date subsequent to the date of filing by the secretary
of state or upon the occurrence of a future event or fact.
Section 4.053 sets forth the information required to be set forth in a
filing instrument which is to take effect at a time subsequent to its
filing by the secretary of state and time limitations.
Section 4.054 sets forth when a filed filing instrument that is to become
effective upon the occurrence of a future event or act becomes effective.
Section 4.055 requires that a subsequent statement be filed with the
secretary of state within 90 days of filing a filing instrument that is to
take effect upon the occurrence of a future event or fact.
Section 4.056 explains the effect of a failure to file the statement
required by Section 4.055.
Section 4.057 permits a filed filing instrument to be abandoned prior to
its effectiveness upon filing a certificate of abandonment with the
secretary of state. This section sets forth procedure, information
required for the certificate, and effect of filing. Existing law permits
abandonment of filed filing instruments by limited liability companies and
limited partnerships, but not by corporations, real estate investment
trusts, professional associations, cooperative associations and limited
liability partnerships. Under the TBCA, such a right is granted only in
certain circumstances, including, for example, Articles 5.03.L (mergers),
5.17.E (conversions) and 6.05.A (dissolutions). Subsection (e) codifies 1
T.A.C. Section 79.82 in part. Subsection (e) requires, as a prerequisite
to filing the certificate of abandonment, that an entity that is a party
to the abandonment change its name in the manner required by the code
should the name of the entity, in the interim prior to filing the
certificate of abandonment, become the same as or deceptively similar to
the name of another existing entity.
Section 4.058 lists the filing instruments the effectiveness of which
cannot be delayed. Former law listed the filing instruments the
effectiveness of which could be delayed.
Section 4.059 describes the information to be included in an
acknowledgment of filing by the secretary of state when affirming the
filing of a filing instrument that has a specific delayed effective date
or the effectiveness of which is conditioned upon the occurrence of a
future event or act.
Subchapter C. Correction and Amendment
Subchapter C contains general provisions relating to the amendment and
correction of filing instruments filed with the secretary of state under
the provisions of the code.
Section 4.101 permits a filed filing instrument to be corrected by filing
a certificate of correction with the secretary of state. TRPA does not
contain a similar authority for limited liability partnerships.
Section 4.102 codifies 1 T.A.C. Section 79.24(1) which describes the
limitations on correction of filings. A certificate of correction may not
revoke or void a filed filing instrument.
Section 4.103 describes the information required in a certificate of
correction to be filed with the secretary of state.
Section 4.104 requires that the certificate of correction be filed with
the secretary of state.
Section 4.105 provides that the filed filing instrument is considered to
have been corrected on the date the filing instrument was originally
filed, except as to a party that is adversely affected by the correction,
in which case, the filing instrument is considered corrected as of the
date of filing of the certificate of correction.
Section 4.106 permits a filing entity to amend or supplement a filing
instrument the entity has filed, to the extent permitted by the title
relating to such entity.
Subchapter D. Filings Fees
Subchapter D contains a schedule of fees the secretary of state is
authorized to collect for filings made pursuant to the code. In general,
the changes effected by Subchapter D relating to filing fees result in a
standardization of fees for filing instruments that share a commonality of
procedure, and also standardize the fee for formation of certain domestic
entities that are not subject to franchise taxes under Chapter 171 of the
Tax Code.
Section 4.151 authorizes the secretary of state to collect various fees
for specific instruments filed by filing entities. Generally, the section
results in a standardization of fees for filing instruments that are
common and applicable to all entities. The fees are comparable to fees
presently authorized under the TBCA for comparable filing instruments.
The section also authorizes a fee of $50 for the pre-clearance of any
document. Under existing law, only the TRLPA authorizes the fee for
pre-clearance of limited partnership documents; however, the secretary of
state provides pre-clearance of a document to be filed on behalf of any
entity. Additionally, the secretary of state is authorized to collect the
fee established for the filing of the certificate of formation for a
filing entity created by the terms of a merger or conversion, in addition
to collecting the fee established for the filing of the merger or
conversion. Existing law does not authorize the collection of a fee
relative to the formation of the entity by merger or conversion. Section
4.151 reduces the fee for a certificate of correction for a limited
partnership.
Section 4.152 authorizes the secretary of state to collect various fees
for instruments filed by a for-profit corporation. Fees established are
generally the same as the fees established under the TBCA for comparable
documents. The section reduces the fee for filing of a certificate of
exchange. It also standardizes the fee for filing a reinstatement with
the fee payable for reinstatement of a corporation forfeited under the Tax
Code.
Section 4.153 authorizes the secretary of state to collect various fees
for instruments filed by a nonprofit corporation. Fees established are
generally the same as the fees established under the TNPCA for comparable
documents.
Section 4.154 authorizes the secretary of state to collect the fee
specified for an instrument filed by a limited liability company. Fees
established increase the fees presently authorized under the TLLCA.
Section 4.154 authorizes the collection of a fee established under Section
4.152 for a comparable document filed by a business corporation. The fee
provisions of the TLLCA, as enacted in 1987, were drafted to mirror the
TBCA fee provisions for comparable documents. However, a separate
amendment of the TBCA fee provisions in 1987 established a difference in
fees between limited liability companies and corporations which was not
originally intended. Section 4.154 standardizes and makes uniform the
fees for comparable filing instruments by limited liability companies.
Section 4.155 authorizes the secretary of state to collect various fees
for instruments filed by a limited partnership. The filing fee for an
amendment to the certificate of formation of a limited partnership is
reduced from $200 to $150 to make the fee conform to the fee established
for an amendment filed by a business corporation.
Section 4.156 authorizes the secretary of state to collect various fees
for instruments filed by a professional association. The fee for a
certificate of formation for a professional association was increased to
be comparable to the formation fee for a limited partnership. A
professional association, as well as a limited partnership, is not subject
to franchise tax under the Tax Code. By increasing the $200 formation
filing fee to $750, the professional association formation fee is made
comparable to the fee established for formation of a limited partnership.
Section 4.157 authorizes the secretary of state to collect the fees
established under Section 4.152 for similar instruments filed by
professional corporations.
Section 4.158 authorizes the secretary of state to collect the fees
specified for an instrument filed by a general partnership.
Section 4.159 authorizes the secretary of state to collect the fees
specified for an instrument filed by a nonprofit association. These fees
were previously charged by the Secretary of State under its rules and are
not specified in TUUNAA.
Section 4.160 authorizes the secretary of state to collect the fees
established under Section 4.151 or 4.152 filed by a foreign filing entity.
CHAPTER 5. NAMES OF ENTITIES;
REGISTERED AGENTS AND REGISTERED OFFICES
Subchapter A. General Provisions
Subchapter A contains general provisions relating to the chapter.
Section 5.001 provides that the filing of a certificate of formation,
application for registration, or an application for reservation or
registration of a name by a filing entity or foreign filing entity does
not authorize the use of a name in violation of the rights of another to
the name and requires the secretary of state to provide a notice to this
effect upon the formation or registration of a filing entity or foreign
filing entity and upon the registration or reservation of an entity name.
Subchapter B. General Provisions Relating to Names of Entities
Subchapter B contains general provisions relating to restrictions and
requirements for names of entities under the provisions of the code.
Sections 5.054, 5.055, 5.056, 5.057, 5.058, and 5.059 set forth the words
or phrases indicative of status as a particular type or form of entity and
require that the name of an entity contain a word or phrase or an
abbreviation of such word or phrase indicative of such entity type. These
provisions permit greater flexibility of acceptable abbreviations.
Existing law generally sets forth the acceptable abbreviations of the
words and phrases with particularity.
Section 5.051 provides that a domestic entity or a foreign entity having
authority to do business in this state may transact business under an
assumed name. The assumed name of the entity need not meet the
requirements of the subchapter. Notice regarding the legal identification
of the entity and its organizational form is sufficiently provided for by
the filing of the assumed name certificate under Chapter 36, Business &
Commerce Code.
Section 5.052 prohibits a filing entity or foreign filing entity from
having a name that contains any word or phrase that indicates that it is
formed for a purpose it is not authorized by law to pursue.
Section 5.053 prohibits a filing entity or foreign filing entity from
having a name that is the same as or deceptively similar to the name of
another existing filing entity or foreign filing entity registered to
transact business, or a name registered or reserved by a filing entity or
foreign filing entity. A similar name may be used if consent is granted
by an existing entity having a similar name.
Section 5.054 sets forth the words indicative of incorporated status and
requires that a specified word or its abbreviation be contained in the
name of a for-profit corporation, foreign corporation and professional
corporation. Existing law sets forth the abbreviations of such words with
particularity. Section 5.054(a)(1) includes the word "limited" as one
that is among the "approved" list of words that a domestic corporation's
name must contain. The TBCA and the TPAA do not include this word as an
option.
Section 5.055 sets forth the words indicative of status as a limited
partnership and requires that a specified word or words or its
abbreviation be contained in the name of a limited partnership or foreign
limited partnership. Existing law sets forth the abbreviations of such
words with particularity. The Section also sets forth certain
restrictions relating to the name of a limited liability limited
partnership. This Section omits an outmoded prohibition in existing law
on the name of a limited partnership including the name of a limited
partner.
Section 5.056 sets forth the phrases indicative of status as a limited
liability company and requires that the name of a limited liability
company or foreign limited liability company contain a phrase or its
abbreviation to indicate its status as a limited liability company.
Existing law sets forth the abbreviations of such phrases with
particularity.
Section 5.057 requires that the name of a cooperative association contain
the word cooperative or an abbreviation of the word.
Section 5.058 sets forth the words and phrases indicative of status as a
professional association and requires that the name of the entity contain
a word or phrase or its abbreviation to indicate its status as a
professional association. Existing law sets forth the abbreviations of
such words/phrases with particularity.
Section 5.059 sets forth the phrase indicative of status as a
professional limited liability company and requires that the name of the
entity contain the phrase or its abbreviation to indicate its status as a
professional limited liability company. Also retained are grandfathering
provisions for limited liability companies formed before September 1,
1993. Existing law sets forth the abbreviation of such phrase with
particularity.
Section 5.060 prohibits the name of a professional entity from
conflicting with a law or rule of professional ethics governing a person
providing the professional service through the entity.
Section 5.061 prohibits a filing entity or foreign filing entity from
having a name that contains the word "lotto" or "lottery." The provision
is derived from the TBCA and is made applicable to all filing entities.
The current prohibition relates to use of the term "lottery." The section
includes the term "lotto" within the prohibition to take into account the
"lotto" game instituted since the time of the constitutional amendment
authorizing the state lottery in November 1991.
Section 5.062 prohibits a filing entity from having a name that could
reasonably be understood to imply that the organization is created by or
for the benefit of war veterans or their families and that contains any of
the specified restricted words or abbreviations of such words unless
written approval or permission for the use of the name is obtained from a
Congressionally recognized veterans organization having a name containing
the same words or abbreviations. If no Congressionally recognized
organization exists, permission must be obtained from the State Commander
of the organizations listed within the section. The section is derived
for a similar provision in the TMCLA. Current law strictly prohibits
usage of the restricted terms without regard to the context in which such
terms are used. The section requires preapproval only when a name
comprised of one or more of the restricted terms would reasonably imply
that the organization is created by or for the benefit of war veterans or
their families.
Section 5.063 sets forth the words and phrases indicative of status as a
limited liability partnership and requires that the name of the entity
contain a word or phrase or its abbreviation to indicate its status as a
limited liability partnership. Existing law refers to these kinds of
entities as "registered limited liability partnerships" and sets forth the
abbreviations of such words/phrase with particularity. The word
"registered" is unnecessary, and its removal follows the trend in the laws
of other states. This section also clarifies that a limited liability
partnership is not subject to the rules on deceptively similar entity
names in Section 5.053.
Subchapter C. Reservation of Names
Subchapter C contains provisions relating to the reservation of an entity
name.
Section 5.101 permits the reservation of an entity name and sets forth
the requirements for the application for reservation of name. This
section varies from Section 1.04(a) of TRLPA which limits the persons that
may reserve a name of a limited partnership to certain classes of persons.
Section 5.102 prohibits the reservation of an entity name that is the
same as or deceptively similar to the name of an existing filing entity
or registered foreign filing entity, or a name reserved or registered to a
filing entity or foreign filing entity. A similar name may be reserved
with the written consent of the person or entity having the similar name.
Section 5.103 authorizes the secretary of state to reserve a name that is
eligible for reservation.
Section 5.104 provides that the name reservation is effective until the
121st day after the date of filing with the secretary of state or until
the date the applicant files a written notice of withdrawal with the
secretary of state, whichever date is earlier.
Section 5.105 allows a person to renew a name reservation for successive
120-day periods if the person makes a new application for reservation of
the name within 30 days of the expiration of an effective reservation.
Current statutory provisions do not allow for the "renewal" of the
reservation and require a person to await the termination of the
reservation's duration before making an application to reserve the name
for an additional 120-day period.
Section 5.106 permits the transfer of a reservation of name by filing
with the secretary of state a notice of transfer and sets forth the
requirements of the notice of transfer.
Subchapter D. Registration of Names
Subchapter D contains provisions relating to the registration of an
entity name.
Section 5.151 permits a bank, trust company, savings association, or
insurance company, or a foreign filing entity not registered to do
business under the code to register its name under the subchapter.
Section 5.152 describes the information required to be set forth in an
application for registration of name by an organization described by
Section 5.151. Existing law generally requires that a foreign filing
entity not authorized to transact business in Texas must furnish a
certificate evidencing its good standing under the laws of its
jurisdiction of formation in connection with the registration by such
entity of a name in Texas. Section 5.152 eliminates this requirement
(however, the foreign filing entity must include a statement in its
application to register a name that such entity validly exists and is
doing business).
Section 5.153 prohibits the registration of a name that is the same as or
deceptively similar to the name of an existing filing entity or registered
foreign filing entity, or a name reserved or registered to a filing entity
or foreign filing entity. A similar name may be registered with the
written consent of the person or entity having the similar name. A bank,
trust company, savings association, or insurance company may register its
name even if its name is the same as or deceptively similar to an existing
name if it has been in continuous existence from a date that precedes the
date the conflicting name was filed with the secretary of state.
Section 5.154 provides that the name registration is effective until the
first anniversary of the date on which the application was accepted for
filing or until the date the entity files a written notice of withdrawal
with the secretary of state, whichever date is earlier.
Section 5.155 allows a person to renew the person's registration of its
name for successive one-year periods if an application to renew the
registration of the name is made within 90 days prior to the expiration of
an effective registration.
Subchapter E. Registered Agents and Registered Offices
Subchapter E contains general provisions relating to the registered
agent and registered office maintained by filing entities and foreign
filing entities.
Section 5.201 requires each filing entity and foreign filing entity to
designate and maintain a registered agent and registered office address in
this state. The section defines a registered agent, and sets forth the
requirements of a registered agent and requirements of a registered
office. The requirements of a registered agent for a business
corporation, limited partnership, and limited liability company vary under
current law. Section 5.201 makes these requirements uniform. and
applicable to all filing entities and foreign filing entities. Paragraphs
(1) and (3) of Subsection (c) codify 1 T.A.C. Section 79.28, in part, and
make explicit that the registered office address must include a street
address where process may be personally served on the entity's registered
agent and that such location not be solely the location of a business
providing the entity with mailbox service or telephone answering service.
Unlike TBCA Art. 2.09 or TRLPA Section 1.06, Section 5.201 permits any
entity, not just a corporation, to serve as a registered agent for a
corporation or limited partnership, which is already the case for limited
liability companies under TLLCA.
Section 5.202 permits an entity to change its registered office,
registered agent, or both, by filing a statement with the secretary of
state. The section sets forth the information required to be set forth in
the statement and the effect of its filing with the secretary of state.
Section 5.203 permits a registered agent of a filing entity or foreign
filing entity to change its address or name, or both, by filing a
statement with the secretary of state. The provision sets forth the
information required to be set forth in the statement, the effect of its
filing with the secretary of state, and permits a statement that relates
to more than one entity. Current law provides no means for allowing a
registered agent to update information relating to the registered agent's
name when an amendment to the agent's organizational document effects a
name change. Section 5.203 permits the information to be updated by the
registered agent rather than the filing entity represented by the
registered agent. Section 5.203 permits a registered agent to make a
single filing relating to more than one entity.
Section 5.204 permits a registered agent to resign by giving notice to
the represented entity and the secretary of state. The section sets forth
where notice to the entity should be sent; the time within which such
notice should be provided to the secretary of state; the information to be
provided in the notice to the secretary of state; the time when such
resignation becomes effective, and the action taken by the secretary of
state.
Subchapter F. Service of Process
Subchapter F contains general provisions relating to service of process
on domestic and foreign entities.
Section 5.251 authorizes the secretary of state to act as an agent of a
filing entity or foreign filing entity for purposes of effecting service
of process, notice or demand on an entity under circumstances where the
entity fails to appoint or maintain a registered agent in this state.
Section 5.252 outlines the procedure for effecting service on the
secretary of state pursuant to Section 5.251. Section 5.252(a)(2) allows
the Secretary of State to collect a fee for maintenance of a record of
service of process and the forwarding thereof.
Section 5.253 specifies the action to be taken by the secretary of state
upon receipt of service of process in compliance with Section 5.252.
Section 5.253 requires that process forwarded by the secretary of state be
by certified mail, return receipt requested. The secretary of state is
required to forward a copy of such process to the most recent address of
such entity on file with the secretary of state. This procedure differs
from that set forth in Section 1.08(b) of TRLPA, which requires the
secretary of state to forward a copy of the process so received to the
address of the general partner as it appears on file with the secretary of
state.
Section 5.254 requires the secretary of state to maintain a record of
each process, notice, or demand served on the secretary under the
provisions of the subchapter and sets forth the information to be
recorded.
Section 5.255 sets forth persons within a domestic or foreign entity who
shall be considered as agents for the purpose of service of process,
notice or demand as a matter of law.
Section 5.256 provides that the provisions of the chapter do not limit or
affect the right to effect service of process, notice, or demand upon a
domestic or foreign entity in any other manner provided by other law.
Section 5.257 specifies how service of process, notice or demand may be
served by a political subdivision on a corporation whose certificate of
formation has been forfeited under the Tax Code or terminated under
Chapter 11 or where registration has been revoked under Chapter 9.
Existing law did not explicitly apply to foreign nonprofit corporations,
while Section 5.257 is explicit in such application.
CHAPTER 6: MEETINGS AND VOTING
Subchapter A. Meetings
Subchapter A contains general provisions relating to meetings of owners,
members, governing persons and committees of entities governed by the
code.
Section 6.001 permits the location of meetings of a domestic entity to be
set by the entity's governing documents, the agreement of all persons
entitled to notice of the meeting, or the person calling the meeting, and
establishes the entity's registered or principal office as the default
location. Section 6.001 is derived from the TBCA which permitted the
locations of meetings to be set by an entity's governing documents or to
be held at the entity's registered or principal office if the governing
documents were silent. The Code, however, varies from existing law by also
allowing all the persons entitled to notice of the meeting to set the
location of the meeting.
Section 6.002 permits meetings to occur by conference telephone or other
communications equipment if everyone participating can communicate with
each other. This section expands former law by permitting meetings by
suitable electronic communications systems, including video conferencing
technology and the Internet, so long as persons voting by remote
communications are sufficiently identified through reasonable measures.
Section 6.003 provides that anyone participating in a meeting is
considered to be present unless that person is participating for the
purpose of objecting to the meeting because it was not lawfully called or
convened.
Subchapter B. Notice of Meetings
Subchapter B contains general provisions relating to notice of meetings
of owners, members, governing persons and committees.
Section 6.051 permits each entity to choose in its governing documents
the method of providing notice of meetings. A notice must contain the
date, time and location of the meeting. If mailed, notice is deemed to be
delivered when deposited in the United States mail. If sent by fax or
electronic message, notice occurs when the transmission is successful.
Existing law does not authorize entities to send notice by facsimile or
electronic message. Additionally, the similar provisions found in the
TLLCA enable regular meetings to be held with or without notice.
Section 6.052 permits any person entitled to notice to waive notice in
writing or by participating in the meeting. Existing law does not
explicitly state that participation by shareholders in the meeting of
shareholders would constitute waiver of notice of that meeting.
Section 6.053 enables a filing entity to have a valid meeting without
giving notice to an owner or member if certain previous notices or
distributions mailed to that person's address on the filing entity's books
have been returned or if the person is deemed to be a "lost
securityholder." A person to whom notice is excused may have this
requirement reinstated by sending a written request to the entity that
includes the person's current address. For purposes of certificates or
other documents filed with the secretary of state, the filing entity may
state that notice was given to each person entitled to notice even if
notices to certain persons are excused under this section. The Code
differs from existing law by expanding the provisions in the section from
corporations to all filing entities other than limited partnerships and
adds SEC rules permitting a filing entity not to provide notice to a "lost
securityholder."
Subchapter C. Record Dates
Subchapter C contains general provisions relating to record dates.
Section 6.101 provides that an entity's governing documents may fix the
record date or provide a method by which the record date may be fixed to
determine who is entitled to notice of a meeting, to receive a
distribution, and to receive notice for any other purpose that requires
consent. The governing authority may close the ownership or membership
transfer records for no more than 60 days to determine the owners or
members for this purpose. The governing authority must fix the record
date within 60 days of the date the action is taken. If no date is set,
the date that the notice is mailed or that the governing authority
declares the distribution will be the record date. These rules are also
applicable to any adjournment of a meeting except when the determination
has been made through the closing of the ownership or membership transfer
records and the stated period of closing has expired. Consistent with the
TBCA and TREITA, this Section omits the 90-day time limits on adjournments
of meetings for domestic entities covered by the Section, including
nonprofit corporations and cooperative associations.
Section 6.102 permits the governing authority to fix a record date to
determine when owners or members are entitled to consent to an action
without a meeting. If no record date has been fixed and no prior action
of the governing authority is required, it will be the first date that the
written consent identifying the action taken is delivered to the entity.
If no record date has been fixed by the governing authority and prior
action of the governing authority is required, the record date will be the
date the governing authority adopts a resolution taking the prior action.
Section 6.103 provides that distributions held in suspense by a domestic
entity are payable to the owner or member as of the record date determined
for that distribution.
Subchapter D. Voting of Ownership Interests
Subchapter D contains general provisions relating to the voting of
ownership interests.
Section 6.151 states that subject to other provisions of the Code, a
voting of interests is governed by an entity's governing documents.
Section 6.152 prevents ownership interests owned by the issuer of the
interests from being voted at any meeting and from counting toward the
total number of outstanding interests.
Section 6.153 permits ownership interests in one entity owned by another
entity to be voted by the person authorized in the owning entity's
governing documents. If the governing documents are silent, the governing
authority of the owning entity may determine how the interests are voted.
Section 6.154 permits ownership interests held by an administrator,
executor, guardian, or conservator to be voted by that person if the
ownership interests form a part of the estate being administered by that
person without transferring the interest into the person's name. Ownership
interests in the name of the trust may be voted by the trustee. This
Section permits more flexibility in the names in which a trustee may hold
record title to ownership interests.
Section 6.155 states that ownership interests in the name of a receiver
may be voted by the receiver. Ownership interests held by a receiver may
be voted by the receiver without the transfer of interests into the
receiver's name if authority to do so is contained in a court order.
Section 6.156 states that pledged ownership interests are to be voted by
the person in whose name the interests are held.
Subchapter E. Action by Written Consent
Subchapter E contains general provisions allowing the taking of action by
written consent.
Section 6.201 permits actions taken at any meeting of the owners or
members of an entity, or the governing authority or committee thereof to
be taken by unanimous written consent. A unanimous written consent has
the same effect as a unanimous vote at a meeting and may be stated as
having that effect in instruments filed with the secretary of state.
Section 6.202 enables the owners or members of a filing entity to take
action by written consent signed by the minimum number of owners or
members that would be necessary to take that action at a meeting if
authorized by the certificate of formation. All the signatures must be
gathered within 60 days of the date that the first signature was obtained.
The signed written consent must be delivered to the entity. Prompt notice
of the action must be given to those owners or members who did not consent
in writing to the action. The strict delivery requirements set forth in
Sections 6.202 and 6.203 are new for limited liability companies with
respect to member consents when less than unanimous consent is obtained.
Section 6.203 prescribes the manner of delivery and address of each
written consent given pursuant to Section 6.202. This section is derived
from the TBCA and differs from existing law by eliminating the strict
requirements for delivery of consents by owners or members to the filing
entity when the entity is soliciting the consent. Presumably, in that
situation, the filing entity is aware when a consent is signed. Section
6.202 and this section do not apply to non-filing entities. Non-filing
entities like general partnerships and nonprofit associations tend to act
with less formality in the governing of their affairs.
Section 6.204 eliminates the need to give notice if action is taken by
written consent.
Subchapter F. Voting Trusts; Voting Agreements
Section 6.251 permits owners to enter into written voting trust
agreements. The interests subject to the agreement must be transferred to
a trustee, and a counterpart of the agreement must be provided to the
entity to be examined by any holder of an interest in the voting trust.
The provisions of this section are new for limited liability companies.
Section 6.252 enables owners to enter into written voting agreements. A
counterpart of the agreement must be given to the entity and subject to
the right of examination by any owner. The agreement will be enforceable
against the parties to the agreement and their successors if the ownership
certificates subject to the agreement reference the agreement or if notice
is sent to the subsequent holders. Without this information, the
agreement is ineffective against a transferee for value who does not have
actual knowledge of the agreement at the time of the transfer. However,
the agreement is enforceable against any person who is not a transferee
for value once that person acquires actual knowledge of the agreement.
The provisions of this section are new for limited liability companies.
Subchapter G. Applicability of Chapter to Partnerships
Section 6.301 provides that Chapter 6 does not apply to partnerships but
goes beyond existing law by explicitly permitting partnerships by
agreement to choose the rules of Chapter 6 to govern their affairs. The
formal rules of Chapter 6 should not apply to partnerships, which tend to
be governed through less formal decision-making procedures.
Section 6.302 provides that Subchapters C and D do not apply to limited
liability companies except to the extent its governing documents specify.
CHAPTER 7. LIABILITY
Section 7.001 permits a domestic entity, other than a partnership or
limited liability company, or certain other non-code organizations to
adopt provisions in its governing documents that generally exonerate or
further limit liability of a governing person for monetary damages to the
entity, or its owners or members, for the governing person's acts or
omissions in that capacity. The entity may not eliminate or limit such
liability to the extent the person (1) has breached a duty of loyalty, (2)
has taken action or omitted to act not in good faith in such a way that it
breached some other duty owed to the entity or involved intentional
misconduct or knowing violation of the law, (3) has received an improper
benefit, or (4) is otherwise made liable by statute. For a partnership or
limited liability company, subsection (d) clarifies that the duties,
including fiduciary ones, of its managerial officials, owners or other
persons may be limited or restricted to the extent permitted in Chapters
152 and 153 and Section 101.401, which corresponds with existing law.
CHAPTER 8 . INDEMNIFICATION AND INSURANCE
Chapter 8 provides for indemnification and insurance of governing persons
in situations where conflict of interest may be present. The chapter uses
new terminology of the Code but, except as noted below, is a
nonsubstantive revision of present provisions. Provisions of this kind are
necessary to assure that individuals are willing to serve as governing
persons in enterprises where they are subject to risk of liability.
Provisions corresponding to Chapter 8 are presently applicable to
for-profit corporations by TBCA Art. 2.02-1, nonprofit corporations by
TNPCA Art. 2.22A, real estate investment trusts by TREITA Section 9.10,
limited partnerships by TRLPA Sections 11.01-11.21, and to certain other
types of entities by reference to the TBCA or TNPCA. Conforming to
existing law, Section 8.002 makes Chapter 8 inapplicable to general
partnerships and limited liability companies; however, this Section
clarifies that the governing documents of a limited liability company or
general partnership may adopt the provisions of Chapter 8 or may contain
enforceable provisions regarding indemnification.
Subchapter A. General Provisions
Subchapter A contains definitions relating to indemnification of and
insurance for the benefit of certain persons in an enterprise and
identifies enterprises which are subject to Chapter 8.
Section 8.001 defines terms which are used in determining the persons
(particularly respondents in a proceeding) entitled to indemnification or
insurance, the capacities in which they may receive it, the enterprises
that may provide it, and the context in which it may be provided.
Section 8.002 states that Chapter 8 does not apply to general
partnerships and limited liability companies. The governing documents of
these enterprises may adopt provisions of Chapter 8 or may contain
enforceable indemnification, advancement, insurance or other arrangements.
Section 8.003 confirms that the certificate of formation may restrict the
indemnification rights. The same rule applies to a partnership agreement
of a limited partnership.
Section 8.004 specifies that an indemnification provision is valid only
to the extent it is consistent with Chapter 8.
Subchapter B. Mandatory and Court-Ordered Indemnification
Subchapter B contains provisions for mandatory and court-ordered
indemnification.
Section 8.051 requires an enterprise to indemnify an existing or former
governing person for expenses incurred in a proceeding in which the person
is a respondent because of that status if the person is wholly successful
in defense of the proceeding.
Section 8.052 allows a court to order indemnification of an existing or
former governing person or delegate, on that person's application, if the
court determines that the person is fairly and reasonably entitled to
indemnification. Indemnification is allowed whether or not the person met
the standard of Section 8.101 but is limited to reasonable expenses (and
does not include judgments or settlements) if the person is found liable
to the enterprise or because the person improperly received a personal
benefit.
Subchapter C. Permissive Indemnification and Advancement of Expenses
Subchapter C contains provisions for permissive indemnification and
advancement of expenses by an enterprise.
Section 8.101 states the standard for indemnification and how the
standard can be satisfied in certain circumstances. Subsection (a) sets
the basic standard for indemnification of an existing or former governing
person or delegate. These determinations and the determination to pay
indemnification must be made in accordance with Section 8.103. Subsection
(b) states that action reasonably believed by the person to be in the
interest of the participants and beneficiaries of an employee benefit plan
is not opposed to the best interests of the enterprise. Subsection (c)
states that action by a delegate to another enterprise is not opposed to
the interests of the first enterprise. Subsection (d) states that a person
does not fail to meet the basic standard of Section 8.101(a) solely
because the proceeding in which the person was involved was terminated by
a judgment, order, settlement, conviction or nolo contendere plea.
Section 8.102 governs the general scope of permissive indemnification.
Subsection (a) specifies the kinds of liabilities or obligations for which
an existing or former governing person or delegate may generally be
indemnified. Subsection (b) limits or bars indemnification of a person
who is found liable to the enterprise or is found liable because of
improperly receiving a personal benefit. Subsection (c) prescribes when a
person is considered to have been found liable.
Section 8.103 governs the manner for determining permissive
indemnification. Subsection (a) prescribes several alternative means of
determining that the basic standard of Section 8.101(a) has been met. In
Section 8.103(a)(2), a determination that the standard for indemnification
in Section 8.101(a) has been met may be made by a committee of one
disinterested governing person if a quorum of disinterested governing
persons cannot be obtained. TBCA Art. 2.01-1F(2) requires two directors
for a committee; TRLPA Section 11.06 and TNPCA have no such provision.
Section 8.103(a)(5) (permitting indemnification of governing persons by
unanimous vote of the owners or members) has no explicit source in the
TBCA, TREITA, TRLPA or TNPCA but is implicit in the general principle that
all the owners of an enterprise may make any disposition of its assets.
Subsection (b) requires that if special legal counsel determines that a
person meets the basic standard of Section 8.101(a), the counsel shall
also determine whether the expenses (other than a judgment) are
reasonable. Subsection (c) gives effect to a provision requiring
indemnification of a person who meets the basic standard of Section
8.101(a)(1) contained in the governing documents, in a resolution of the
owners, members or governing persons or in an agreement.
Section 8.104 governs advancement or reimbursement of expenses before a
final disposition of a proceeding. Subsection (a) permits advancement or
reimbursement of reasonable expenses of an existing or former governing
person or delegate who is or is threatened to be made a respondent in a
proceeding. The advancement or reimbursement may be made without the
determinations required under the basic standard of Section 8.101(a) after
a written affirmation and undertaking is received by the person.
Subsection (b) gives effect to a provision requiring advancement of
expenses contained in the governing documents, in a resolution of the
owners, members or governing persons or in an agreement. Subsection (c)
states that the written repayment undertaking required by Subsection
(a)(2) must be an unlimited general obligation of the person giving it but
need not be secured and may be accepted without regard to the person's
ability to repay.
Section 8.105 governs permissive indemnification and advancement to
persons other than governing persons. Subsection (a) allows an enterprise
to indemnify and advance expenses to a person who is not a governing
person, including an officer, employee, agent or delegate. The
indemnification or advance is permitted to the extent permitted by other
law notwithstanding any other provision of Chapter 8 except Section 8.003
and 8.004. Section 8.105(a)(3) (permitting indemnification of and
advancement to non-governing persons by unanimous vote of the owners or
members) has no explicit source in TBCA, TREITA, TNPCA or TRLPA but is
implicit in the general principle that the owners or members of an
enterprise may make any disposition of its assets for the benefit of a
person who is not a governing person. Subsection (b) requires an
enterprise to indemnify and advance expenses to an officer to the same
extent it is required to indemnify and advance expenses to a governing
person. Subsection (c) allows a person who is not a governing person to
seek indemnification or advancement of expenses to the same extent as a
governing person.
Subchapter D. Liability Insurance; Reporting Requirements
Subchapter D provides for liability insurance and related arrangements
and reporting requirements.
Section 8.151 authorizes insurance and related arrangements for
indemnification. This Section clarifies that permitted "self-insurance"
includes implementation by indemnity contract. Subsection (a) allows an
enterprise to obtain and maintain insurance or another arrangement to
indemnify or hold harmless an existing or former governing person,
delegate, officer, employee or agent against any liability asserted
against and incurred by the person in that capacity or arising out of the
person's status in that capacity. Subsection (b) allows the insurance or
other arrangement to insure against liability described in subsection (a)
whether or not the enterprise otherwise would have power to indemnify
against that liability. Subsection (c) requires approval by owners or
members for insurance or another arrangement that involves self-insurance
or an agreement to indemnify with the enterprise or with a person not
regularly engaged in the insurance business if the insurance or
arrangement provides for payment of a liability outside the enterprise's
power to indemnify. Subsection (d) permits an enterprise, in addition to
insurance or other arrangement, to create a trust fund, self-insure,
contract to indemnify, grant security or establish a letter of credit,
guaranty or surety arrangement for the benefit of a person to be
indemnified. Subsection (e) allows insurance or other arrangement to be
obtained and maintained within the enterprise or with any insurer or with
any other person considered appropriate by the governing authority,
regardless whether the enterprise owns an interest in the insurer or other
person. Subsection (f) makes conclusive the governing authority's
decision as to insurance or other arrangement and protects governing
persons from liability for approving it even though they may be
beneficiaries of it. But the subsection does not apply in case of actual
fraud.
Section 8.152 requires that an enterprise report an indemnification or
advance paid to its governing persons. The report must be in writing and
made with or before the notice or waiver of the next meeting of the
enterprise and before the next submission of a consent to action without a
meeting, and in no case later than a year after the indemnification or
advance. Section 11.19 of TRLPA requires that any indemnification of or
advance of expenses to a general partner is to be reported promptly in
writing to the limited partners and, in any event, not later than six
months after the date the indemnification occurs.
CHAPTER 9. FOREIGN ENTITIES
Chapter 9 standardizes the requirements and procedures for registration
of foreign entities to transact business in Texas. The provisions utilize
the new terminology of the Code, and, except as noted below, are
nonsubstantive revisions of present procedures.
Subchapter A. Registration
Section 9.001 requires a foreign entity that affords limited liability to
owners or members under the law of its jurisdiction of formation to file
an application for registration with the secretary of state to transact
business in Texas. Current statutory provisions require the registration
of foreign corporations, limited partnerships, limited liability
companies, and limited liability partnerships transacting business in
Texas. Existing law permits the registration of other types of entities
that afford limited liability by broadly defining a foreign limited
liability company to include those entities even though the entities are
not considered limited liability companies in the jurisdiction of
formation. These entities include foreign business trusts, foreign real
estate investment trusts, foreign cooperatives, and foreign public or
private limited companies or other entities. Foreign real estate
investment trusts will register with the Secretary of State under the Code
and not in the county where they might conduct business in Texas, unlike
the formation of a domestic real estate investment trust. TREITA has no
provision regarding registration of foreign real estate investment trusts.
Section 9.002 provides that a foreign entity not described by Section
9.001 may transact business in this state without registration with the
secretary of state under this Code, but does not relieve the foreign
entity from the duty to comply with applicable registration requirements
under other law. Further, this section provides that foreign entities,
such as banks, insurance companies, savings institutions and other
regulated entities, are not required to register under this Code if other
state law authorizes the entity to transact business in this state.
Foreign unincorporated nonprofit associations also need not register under
this Chapter.
Section 9.003 provides for permissive registration of foreign entities
that are regulated entities, if otherwise not prohibited by other Texas
law.
Section 9.004 outlines the requirements for the registration application
that is standard for all entities. Currently, the requirements for
registering or qualifying a foreign limited partnership, corporation, and
limited liability company to transact business in this state vary under
the different acts. Section 9.004 standardizes the procedures for foreign
registration. Existing law requires corporations and limited liability
companies to submit a certificate from the jurisdiction of formation
evidencing the existence of the entity. This section substitutes an
affirmative statement made at the time of application for the certificate.
Section 9.004 also requires a foreign corporation and limited liability
company to state the beginning date of business in Texas in its
application to register, which is a change from the TBCA, TNPCA and TLLCA.
Section 9.005 requires a foreign corporation's application to register to
do business in Texas contain certain information concerning its authorized
shares, issued shares, and stated capital. There is no longer any
requirement that such a corporation state that it has received at least
$1,000 of consideration for its shares, as is required by Article
8.05.A(11) of the TBCA.
Section 9.006 requires a nonprofit corporation to include statements, in
addition to those required by Section 9.004, in its application for
registration as a foreign corporation regarding the names and addresses of
its directors and officers and a statement of whether or not the
corporation has members.
Section 9.007 sets out supplementary information that must be included in
the application for registration of a limited liability partnership in
addition to the information required under Section 9.004.
Section 9.008 directs that the registration takes effect when the
application is filed and remains in effect until terminated, withdrawn or
revoked. The acknowledgment issued by the Secretary of State is evidence
of the authority of the foreign entity to transact business in this state.
Section 9.009 permits a foreign entity to change information in its
original application by filing an amendment. An amendment to the
application for registration is required when the entity changes its name
or its stated purpose. An amendment to reflect the change of name or
purpose must be filed within 90 days following the change. Existing law
does not specify a time frame for filing the amendment.
Section 9.010 suspends the registration of a foreign entity that has
changed its name to a name that would not be available for its use in
Texas. The registration is suspended until the entity files an amendment
to its registration to change its name to a name that is available to it
under the laws of this state. This provision is consistent with the
provision in the TBCA but is made applicable to all foreign filing
entities by this section.
Section 9.011 contains the procedures for withdrawing the entity's
registration, or recording the termination of its existence in its
jurisdiction of formation. Additionally, the section provides for the
entity to consent to service of process by serving the secretary of state
following withdrawal. Section 9.011 simplifies the form of and
standardizes procedures for filing a certificate of withdrawal for all
foreign filing entities. Subsection (e) codifies 1 T.A.C. Section 79.26
and permits an entity to amend its certificate of withdrawal to evidence a
change to the address to which the secretary of state may mail a copy of
any process against the foreign filing entity. Section 9.011 changes the
requirements for the application for withdrawal for a foreign nonprofit
corporation to conform to the requirements for a for-profit corporation.
Consistent with the withdrawal for a for-profit corporation, the
application for withdrawal does not require a statement that there is no
suit pending or threatened against the corporation in this state.
Subchapter B. Failure to Register
Subchapter B specifies the effects and penalties if a foreign filing
entity fails to register under Chapter 9 when required to do so.
Section 9.051 allows the attorney general to apply to a court to enjoin a
foreign entity from transacting business in this state if the entity is
required to register and has not done so. Further, the section provides
that a foreign entity may not maintain legal action in this state that
arises out of the transaction of business in this state unless the entity
is registered as required. Additionally, the section specifies that the
validity of any contract or act of the entity is not affected by the
failure to register and that the entity is not prevented from defending a
legal action in this state. The section also specifies that an owner,
member or managerial official of the entity is not liable by contract or
under other provisions of law for failure of the entity to register.
Section 9.052 imposes civil penalties for failure to register. Those
penalties include all fees and taxes imposed by law on the entity had the
entity registered when first required and any applicable penalties and
interest as well as any penalties and interest imposed by law for failure
to pay those fees and taxes. This includes the late filing fee which the
secretary of state is authorized to collect under Section 9.054. Sections
9.052 through 9.054 provide new or revised civil penalties or late filing
fees imposed upon failure of a foreign filing entity to register when
required. Venue for an action to collect the penalty is also specified.
Section 9.053 sets venue in Travis County for suits brought under Section
9.051 to enjoin an entity from transacting business in this state and
Section 9.052 to collect civil penalties.
Section 9.054 authorizes the secretary of state to collect late filing
fees when an entity has transacted business in this state for more than 90
days without a certificate of authority. The late filing fee is equal to
the registration fee for the entity for each year of delinquency. The
TBCA and the TLLCA provide for the attorney general to seek judicial
imposition of a fee of not less than $100 nor more than $5,000 for each
month the entity transacted business in Texas without a certificate of
authority. The TRLPA provides for the secretary of state to collect a
late filing fee similar to that provided in Section 9.054. This Code
provision is modeled after the TRLPA and provides for the assessment of an
administrative penalty by the secretary of state since there is no history
of the judicial assessment of the penalties under the TBCA or the TLLCA.
Section 9.055 specifies that a foreign entity must comply with
requirements under other laws; including, for example, the requirement to
file assumed names, register as a limited liability partnership, or comply
with applicable securities registrations.
Subchapter C. Revocation of Registration by Secretary of State
Subchapter C contains provisions relating to revocation and reinstatement
of the registration of a foreign filing entity. These provisions are
generally consistent with those located in the TBCA, TNPCA and TLLCA but
are made applicable to limited partnerships.
Section 9.101 permits the secretary of state to revoke the registration
of a foreign entity under specified circumstances after notice and an
opportunity to correct the entity's failure. References to revocation
because of failure to pay franchise taxes were removed since the tax
deposit requirement was repealed and forfeitures for failure to pay
franchise taxes are governed by the Texas Tax Code.
Section 9.102 requires the secretary of state to file and mail to the
foreign filing entity a copy of a certificate of revocation in order to
revoke a foreign entity's registration. The contents and effectiveness of
the certificate of revocation are also specified.
Section 9.103 authorizes the secretary of state to reinstate the
registration of an entity that has been revoked when the entity has
corrected the circumstances that led to the revocation or when the
secretary of state has determined that the circumstances did not exist at
the time of revocation. Existing law does not authorize the secretary to
reinstate when it was determined after the fact that the basis for
revocation was in error. Existing law restricts reinstatement to specified
time periods. The Code provision no longer limits the time period during
which an entity may reinstate its registration, and provides that the
registration of an entity that reinstates within three years of revocation
is considered to have been registered at all times during the period of
revocation except that reinstatement has no effect on any personal
liability issue during the revocation period.
Section 9.104 sets forth the requirements for reinstatement of the
registration of a foreign filing entity, which must be completed within
three years after the revocation took effect. A certificate of
reinstatement must be filed. The contents of the certificate of
reinstatement are specified. No reinstatement under this Section is
permitted if the revocation occurs as a result of a court order or a tax
forfeiture. Section 9.104 adopts the Secretary of State's form for a
certificate of reinstatement and, when applicable, requires the
Comptroller's letter of eligibility to accompany a certificate of
reinstatement of registration of a foreign filing entity.
Section 9.105 prohibits the secretary of state from accepting a
certificate of reinstatement for filing unless the foreign filing entity
amends its registration to change its name or obtains consent for use of
its name if such name is the same as, deceptively similar or similar to
the name of a filing entity or foreign filing entity as provided by or
reserved or registered under the Code.
Section 9.106 specifies that a foreign filing entity must follow the Tax
Code procedures in order to reinstate its registration after revocation
under the Tax Code.
Subchapter D. Judicial Revocation of Registration
Subchapter D contains provisions regarding revocation of a foreign filing
entity's registration by court action. These provisions are generally
consistent with those located in the TBCA, TNPCA and TLLCA but are also
made applicable to limited partnerships.
Section 9.151 authorizes a court to revoke the registration of foreign
filing entities under specified circumstances.
Section 9.152 requires the secretary of state to notify the attorney
general and a foreign filing entity when the secretary of state determines
that cause exists for the judicial revocation of the foreign filing
entity's registration under Section 9.151.
Section 9.153 authorizes the attorney general to bring suit to revoke the
registration of a foreign filing entity if the entity does not cure the
problems for which revocation was sought within 30 days of the
notification under Section 9.152(b).
Section 9.154 permits the action to be abated if, prior to the rendition
of the judgment, the entity cures the problems and pays the costs of the
action.
Section 9.155 directs the court to enter a judgment if it finds that
proper grounds exist under Section 9.151(a) for revocation.
Section 9.156 permits a foreign filing entity to make an application for
stay of judgment to allow the entity the opportunity to cure the problems
when the entity obtains a finding that the problems for which the entity
was found guilty were not willful or the result of a failure to take
reasonable precautions. The court is authorized to stay an entry of
judgment for no longer than 60 days after the date the court's findings
are made pursuant to Section 9.155, to dismiss the action if the problems
are cured and the costs of the action paid, and to enter a final judgment
if the problems are not cured within the time prescribed.
Section 9.157 permits a foreign filing entity an opportunity to cure
after affirmation of findings by an appellate court if the foreign filing
entity did not make an application pursuant to Section 9.156.
Section 9.158 establishes jurisdiction and venue for a suit for
involuntary revocation of the registration of a foreign filing entity.
Section 9.159 provides for service of citation in a suit for the
involuntary revocation of the registration of a foreign filing entity.
Citation would issue as be served as provided by law.
Section 9.160 authorizes citation by publication when service is returned
not found and sets forth procedures for such service.
Section 9.161 requires the clerk of a court to file a certified copy of a
judicial decree with the secretary of state when a court has entered a
decree revoking a foreign entity's registration to transact business. No
fee is charged for such filing.
Subchapter E. Business, Rights and Obligations
Section 9.201 limits the business or activity that a foreign corporation
may transact in this state to those purposes permitted under Chapter 2 for
a domestic entity unless other law authorizes the entity to conduct
additional purposes.
Section 9.202 explains that a foreign entity enjoys the same, but no
greater, rights and privileges than a corresponding domestic entity.
Sections 9.202 and 9.203 differ from existing law by clarifying that a
foreign general partnership is subject to the same rights, powers, duties
and restrictions as a domestic general partnership.
Section 9.203 provides that the owners, members, and managerial officials
of a foreign entity are subject to the same duties, restrictions,
penalties and liabilities imposed on those persons of a corresponding
domestic entity.
Section 9.204 allows a foreign filing entity to exercise its ownership or
membership rights in a domestic entity even though not registered to
transact business in this state. Section 9.204 clarifies an ambiguity
found in TREITA Section 13.10(F) and TBCA Art. 2.29E. The new language
clarifies that a foreign filing entity has a right to vote shares that it
owns in domestic real estate investment trusts or corporations and to
manage or control as a shareholder such entities. However, the language
leaves to other sections, primarily Section 9.251, whether these
activities rise to the level of transacting business in this state. TBCA
Art. 2.29E and TREITA Section 13.10(F) are not clear in this respect.
Besides clarifying ambiguities found in TREITA and the TBCA, this Section
extends these provisions to apply to nonprofit corporations, cooperative
associations and limited liability companies.
Subchapter F. Determination of Transacting Business in this State
Section 9.251 lists those activities that do not constitute transaction
of business in this state.
Section 9.252 specifies that the list of activities in Section 9.251 is
not meant to be an exclusive list of those activities that do not
constitute transacting business.
Subchapter G. Miscellaneous Provisions
Section 9.301 makes the Code provisions regarding foreign registration,
including filing procedures, applicable to entities granted authority to
transact business under a special statute if the statute specifically
provides or to supplement any special statute to the extent not
inconsistent with the provisions of the statute.
CHAPTER 10. MERGERS, INTEREST EXCHANGES AND CONVERSIONS
Chapter 10 contains general provisions relating to mergers, interest
exchanges and conversions involving domestic entities. Except as noted
below, the provisions contained in Chapter 10 are generally
non-substantive revisions of the merger provisions found in the TBCA,
TNPCA, TLLCA, TRLPA and TRPA.
Subchapter A. Mergers
The use of a single chapter in Title 1 of the Code for the merger,
interest exchange and conversion provisions harmonizes the laws applicable
to all entities and clarifies the interrelationship between the various
statutes governing these activities.
Since revisions effected in the 1997 Texas Legislature, the provisions of
the TRPA, TLLCA, TRLPA, TREITA and TBCA have been comparable in most
respects. The principal modifications made to existing law by Chapter 10
involve the extension of these more flexible procedures for effecting
mergers, interest exchanges and conversion applicable to nonprofit
corporations. The provisions of the TNPCA are based on past provisions of
the TBCA but have not been updated. Chapter 10 updates the provisions
governing fundamental business transactions for nonprofit corporations to
parallel the modernized for-profit corporate provisions. Accordingly,
nonprofit corporations will be subject to provisions that permit
conversions and interest exchanges, that eliminate the concept of
"consolidation" by including it within the concept of "merger" and that
specify that member approval is not necessary where the nonprofit
corporation is not a "party to the merger." Important restrictions on
mergers of nonprofit corporations with or conversions into for-profit
entities are retained, added or clarified. Although the placement of
these provisions in Title 1 may represent a substantive change from
existing law for nonprofit corporations, this conforming change was
considered a necessary part of the codification process.
Section 10.001 sets forth the general procedure to be followed for a
domestic entity to effect a merger. The procedures are substantially the
same as under current law. Because different entities will have different
types of governing bodies and owners or members, Subsections (a) and (b)
require the domestic entity to comply with the approval requirements
specific to that type of entity that are set forth in the applicable
Title. Subsection (c) cross-references to the notice requirement in
Section 10.355.
Sections 10.002, 10.003 and 10.004 set forth the general requirements
for a plan of merger based on existing statutes. Section 10.002 specifies
the required provisions for a plan of merger. Section 10.002(b) clarifies
existing law on the requirements for a plan of merger where a new entity
is created by the plan of merger. Section 10.002 clarifies that a plan of
merger must contain a description of the organizational form of each
organization that is a party to the merger or is created by the plan of
merger. In addition, it eliminates the need to attach to the plan of
merger the governing documents of certain non-Code organizations that
survive or are created by the merger. This Section also clarifies that
interest exchange provisions can be included in a plan of merger.
Section 10.002(a)(7) and (8) eliminate the need to attach the governing
documents of each foreign organization that survives a merger unless the
organization is not formed in the United States and is not required to
file its certificate of formation or similar document with the applicable
governmental authority under which the organization is organized.
Existing law requires the governing documents of each surviving entity
that is party to a merger to be attached to the plan of merger. This
change conforms Texas law to Delaware law governing corporate mergers.
Sections 10.002 and 10.052 clarify, consistent with provisions of the
TBCA, that a plan of merger or exchange may treat differently the owners
of ownership interests in the same class or series.
Section 10.003 specifies the supplemental contents of a plan of merger if
there is more than one organization that survives or is to be created by
the plan of merger. Section 10.003 makes a minor modification to the
provisions of the TBCA relating to payment of funds to dissenters in
mergers where there are more than one surviving entity. This Section
requires all surviving entities to be responsible for the payment of
amounts under the Code to any dissenting owner who perfects that owner's
rights of dissent and appraisal. The TBCA allows the obligation to be
allocated to only one entity. As a matter of policy, it would be more
equitable for all surviving entities to be responsible for the payment
with one entity being designated as the entity primarily responsible.
Section 10.004 provides what additional terms may be included in a plan
of merger.
Section 10.005 expands the existing provisions of the TBCA allowing for
the creation of holding companies without shareholder approval under
certain circumstances to other entities, other than partnerships, subject
to the same protections applicable to forprofit corporations. This
expansion is intended to modernize the merger provisions applicable to
non-corporate entities and provide greater operational flexibility to
those entities.
Section 10.006 sets forth the Code requirements for effecting
"short-form" mergers where one entity owns more than 90% of the voting
ownership interest in another entity. These provisions are based on the
provisions of the TBCA and TLLCA but have been harmonized with the regular
merger provisions and expanded to allow other entities to utilize this
approach for completing a merger with a 90% or more owned subsidiary.
However, the section does not apply if the subsidiary organization is a
partnership.
Section 10.007 specifies when a merger takes effect.
Section 10.008 provides for the effects of a merger. If the surviving
organization of a merger is not a domestic entity, the surviving
organization is deemed to have appointed the secretary of state as agent
for service of process and agreed to promptly pay to dissenting owners or
members of each domestic entity that is a party to the merger the amount
to which they are entitled under the Code's provisions governing the
rights of dissenting owners or members.
Section 10.009 contains special provisions relating to partnership
mergers. A partner cannot be made personally liable as a result of a
merger without the partner's consent. Provisions specify when a partner
is deemed to be an incoming or withdrawing partner as a result of the
merger. The partnership agreement must permit the merger, and the
partners must approve the plan of merger in accordance with the
partnership agreement.
For public policy reasons, Section 10.010 continues certain important
merger restrictions on nonprofit corporations found in existing law. As
provided in Section 10.010, a nonprofit corporation may not merge into
another entity if the domestic nonprofit corporation would, because of the
merger, lose or impair its charitable status. Mergers with for-profit or
non-Code organizations are permitted so long as any domestic nonprofit
corporations continue as the surviving entities. The authority to merge
also includes the authority to merge with a foreign nonprofit entity even
if the foreign nonprofit entity is the survivor as presently permitted
under the TNPCA. When a foreign nonprofit entity survives, the entity is
deemed to have appointed the secretary of state its agent for service of
process related to the transaction.
Subchapter B. Exchanges of Interests
Sections 10.051 through 10.055 conform and codify the provisions of the
Code applicable to interest exchanges. These provisions will extend to
all domestic entities and provide greater flexibility to domestic entities
in structuring combination transactions.
Section 10.051 authorizes one or more domestic entities or non-Code
organizations to adopt a plan of exchange. It also specifies the
requirements for effecting an interest exchange pursuant to a plan of
exchange.
Section 10.052 specifies the required contents of a plan of exchange.
Existing law does not specify the contents of a plan of exchange for
partnerships or limited liability companies.
Section 10.053 provides that a plan of exchange may include other
provisions relating to the interest exchange.
Section 10.054 specifies when an interest exchange takes effect.
Section 10.055 specifies the effects of an interest exchange.
Section 10.056 specifies how a partnership approves an interest exchange
and that the partnership agreement must authorize the interest exchange.
Subchapter C. Conversions
In 1997, the TBCA, the TLLCA, the TRLPA and the TREITA were amended to
create a new transaction referred to as a "conversion." A conversion is
nothing more than a statutory mechanism to allow an entity to convert from
one form to another without having to go through the artificial process of
merging into an entity created solely to effect the conversion. Sections
10.101 through 10.108 codify these provisions and make them applicable to
all entities. Sections 10.101 through 10.108 omit the specific conversion
provision applicable to conversion of a general partnership to a limited
partnership, and visa versa, as unnecessary and redundant in view of the
broad conversion provisions applicable to domestic entities generally and
in order to standardize conversion provisions applicable to the various
entities.
Section 10.101 sets forth the requirements for effecting a plan of
conversion by a domestic entity.
Section 10.102 sets forth the requirements for a non-Code organization
converting into a domestic entity.
Section 10.103 specifies the required contents of a plan of conversion.
Section 10.104 provides that a plan of conversion may include other
provisions relating to the conversion that are not inconsistent with law.
Section 10.105 specifies when a conversion takes effect.
Section 10.106 sets forth the effects of a conversion.
Section 10.107 provides that a conversion must be authorized in the
partnership agreement of a partnership and how a partnership approves an
interest exchange.
Section 10.108 continues the public policy of not permitting a domestic
nonprofit corporation to convert into a for-profit entity.
Subchapter D. Certificate of Merger, Exchange, or Conversion
Sections 10.151 through 10.156 set forth the general requirements for
certificates of merger, exchange and conversion. The information required
to be contained in a certificate has been simplified and made consistent
for all transactions. The Code has eliminated a previous requirement that
a plan of merger, exchange or conversion be attached to the filing on the
basis that this requirement has led to excessive paperwork at the
Secretary of State's office for minimal benefit. In lieu of the current
requirement to file a plan of merger, exchange or conversion, the Code
has adopted the Delaware approach of requiring the filing entity to
undertake to provide a copy of the plan to certain designated interested
parties. The Code has also set forth procedures that are to be applicable
where a party to a merger is not a "filing entity."
Existing law contains provisions that require articles of merger,
exchange or conversion to specify the number of outstanding shares
outstanding, the number of shares entitled to vote, including the number
of shares entitled to vote only as a class, and the number of shares that
voted for and against the transaction. Other states, including in
particular Delaware, do not require such detail. The Code substitutes for
these provisions statements to the effect that the certificate of merger,
exchange or conversion has been approved in the manner required by the
Code. Filing procedures are consequently simplified.
The Code eliminates the unnecessary paperwork of filing multiple copies
of the certificate of merger or exchange required by existing law based on
the number of surviving, new or acquiring organizations that are parties
to the plan of merger or exchange. The Secretary of State advises that
these extra copies are simply thrown away. The Code only requires one
certificate of merger or certificate of exchange to be filed.
Section 10.151(a) specifies when a certificate of exchange or certificate
of merger must be filed for an interest exchange or merger to become
effective. Subsection (b) sets forth the requirements for the contents of
the certificate of merger or exchange. Subsection (c) states that a
certificate of merger may also constitute a certificate of exchange.
Section 10.152 sets forth the required supplemental contents for a
certificate of merger with respect to a short-form merger effected under
Section 10.006.
Section 10.153 specifies how a certificate of merger or exchange must be
filed and with which filing officer. In addition, the certificate of
formation of each newly formed filing entity in connection with a merger
must also be filed with the certificate of merger.
Section 10.153 requires filing of a certificate of exchange after a plan
of exchange is approved if interests in a filing entity are acquired.
This provision differs from TRLPA, TLLCA and TRPA.
Section 10.154(a) specifies when a certificate of conversion must be
filed for the conversion to become effective. Subsection (b) specifies
the contents of the certificate of conversion.
Section 10.155 specifies the procedures for filing the certificate of
conversion and with which filing officer it must be filed. The
certificate of formation of any filing entity that is the converted entity
must also be filed with the certificate of conversion.
Section 10.156 specifies that the filing officer may not accept a
certificate of merger, exchange or conversion for filing if it does not
conform to law or if the required franchise taxes have not been paid or
one or more of the surviving, new or acquiring organizations or the
converted entity is not liable for the payment of the required franchise
taxes.
Subchapter E. Abandonment of Merger, Exchange or Conversion
Sections 10.201 through 10.203 codify the procedures for abandoning a
plan of merger, exchange or conversion. The current procedures have
generally been retained and modified to make them clearer and simpler. In
a change from existing law, Section 10.202 allows abandonment of mergers
for nonprofit corporations and cooperative associations after filing of
the certificate of merger and before effectiveness of the merger. Section
10.201 clarifies for limited liability companies and limited partnerships
that a merger, exchange or conversion can be abandoned after approval and
before filing of the certificate of merger, exchange or conversion, which
was only implied in existing law. Sections 10.201 and 10.202 provide
explicit provisions for abandonment of mergers, exchanges and conversions
for general partnerships, which were only implied in TRPA.
Section 10.201 permits abandonment of the plan of merger, interest
exchange or conversion before it takes effect.
Section 10.202 specifies how a merger, interest exchange or conversion
may be abandoned after the certificate of merger, exchange or conversion
has been filed before its effectiveness.
Subchapter F. Property Transfers and Dispositions
Sections 10.251 through 10.254 contain provisions regarding the power of
domestic entities to transfer, sell and lease their property. These
provisions are based generally on similar provisions contained in the
TBCA. The Code clarifies and sets forth a general rule that, except as
may be provided elsewhere in the Code or in the governing documents of an
entity, transfers of property do not require owner or member approval.
Current requirements for approval by owners or members of sales of all or
substantially all the assets of an entity have been retained, where
applicable, in the separate titles governing the types of entities. For
partnerships and limited liability companies, the provisions of Sections
10.251 through 10.253 differ from existing law by being more explicit and
detailed with respect to the rules regarding transfers of property.
Section 10.251 provides the general authority for a domestic entity to
transfer and convey its property, including real property. The domestic
entity may also pledge or mortgage an interest in its property.
Section 10.252 specifies that as a general rule the approval of the
owners or members of the entity is not required to sell, lease, convey,
pledge or mortgage an interest in its property.
Section 10.253 provides that a deed may be signed and acknowledged by an
officer, authorized attorney-in-fact or other authorized person of the
entity or, in the case of a partnership or limited liability company, a
governing person of the entity.
Section 10.254 clarifies for all entities, based on explicit provisions
in the TBCA and TREITA, that a disposition of assets will not constitute a
merger or conversion such that the acquiring entity would be liable for
the obligations of the transferring entity under the "de facto merger"
doctrine. This rule is not clear in existing law for nonprofit
corporations, cooperative associations, partnerships and limited liability
companies.
Subchapter G. Bankruptcy Reorganization
Sections 10.301 through 10.306 codify and conform existing law regarding
the effect of a federal bankruptcy reorganization proceeding on certain
actions that would otherwise require owner or manager approval. These
provisions expand to all domestic entities existing law found in the TBCA,
the TNPCA and the TREITA. This change is relatively nonsubstantive
because federal bankruptcy reorganization law supersedes state law.
Section 10.301 permits a trustee or the officers of a domestic entity
being reorganized to take certain actions with respect to the domestic
entity subject to bankruptcy proceedings without approval of the domestic
entity's governing authority, owners or members.
Section 10.302 permits a trustee or other designated officer of a
domestic entity being reorganized under federal statute to sign on behalf
of the reorganizing domestic entity various instruments.
Section 10.303 specifies how a domestic entity that is being reorganized
under a plan of reorganization under a federal statute effects a merger or
interest exchange.
Section 10.304 eliminates any right of dissent and appraisal for an owner
or member of a domestic entity subject to dissenters' rights except as
provided by the plan of reorganization for the domestic entity.
Section 10.305 specifies that this subchapter does not apply after the
entry of a final decree in a reorganization case under federal statute.
Section 10.306 provides that this chapter does not preclude other changes
in a domestic entity or its ownership or membership interests or
securities by a plan of reorganization ordered by a court under federal
statute.
Subchapter H. Rights of Dissenting Owners
Sections 10.351 through 10.368 primarily codifies existing provisions
under the TBCA relating to the procedures to be followed where an owner
has a right of dissent and appraisal with respect to a particular act,
which the Code defines as "fundamental business transactions." The Code
has combined and simplified a number of different statutes that were
contained in the TBCA that governed the right of dissent with the
objective of providing a clearer procedure to be followed when an owner
has a right to dissent to a fundamental business transaction. The Code
does not expand these provisions to any new type of entities but permits
partnerships and limited liability companies to adopt these provisions in
their governing documents. These provisions with respect to real estate
investment trusts are updated to parallel modernized corporate provisions.
The Code maintains the existing provisions under the TBCA which provide
that the right of dissent and appraisal is the exclusive remedy of an
owner who is seeking monetary damages for the action. This limitation is
set forth in (i) Section 10.356(e), which states that an owner who does
not perfect that owners right of dissent may not bring suit to recover the
value of that owner's ownership interest and (ii) Section 10.368, which
provides that absent fraud in the transaction, the right of dissent and
appraisal is the "exclusive remedy" for recovery of the value of an
ownership interest in an organization or of money damages to the owner
relating to the action.
Section 10.351 provides for when this subchapter applies.
Section 10.352 provides definitions for use in this subchapter. The Code
adds in Section 10.352 a definition of a "responsible organization," which
is the organization that is to be primarily responsible for the payment of
the fair value of the ownership interest of a dissenting owner.
Section 10.353 specifies the form and validity of notices required by
this Subchapter.
Section 10.354 provides the general rule for when an owner will have a
right of dissent and appraisal. A more flexible definition is added of
what is a national securities exchange and national automated quotation
system for purposes of determining whether there is a public market for
the securities that are subject to the transaction.
Section 10.355 through 10.361 represents a codification of the current
notification procedures contained in the TBCA that must be followed by a
domestic entity and dissenting owner. The current statutes are overly
complex and inconsistent for different types of transactions. The Code
has simplified and conformed the procedures to be followed by eliminating
unnecessary notice requirements and clarifying others.
Section 10.355 requires the domestic entity subject to dissenters'
rights to provide a specific notice to each affected owner who has a right
to obtain an appraisal under Section 10.354.
Section 10.356 sets forth the procedures that a dissenting owner must
follow to perfect the owner's right of dissent and appraisal.
Section 10.357 permits an owner to withdraw a demand for payment of fair
value of an ownership interest.
Section 10.358 specifies how a responsible organization must respond to a
dissenting owner who has given notice of dissent and made a demand for the
fair value of the owner's ownership interest.
Section 10.359 requires the responsible organization to note in its
ownership interest records any demand for payment for a dissenting owner
and place a reference to the demand on any certificate representing that
ownership interest.
Section 10.360 sets forth the rights of a transferee of an ownership
interest that is the subject of a demand for payment made by a dissenting
owner.
Section 10.361 provides for a court proceeding to determine the fair
value of the ownership interest and the owners entitled to payment and for
appointment of appraisers to determine the fair value.
Section 10.362 provides for the method of determining the fair value of
an ownership interest in an organization that is subject to a demand for
appraisal under the Code. This section codifies existing law that the
valuation is to be made as of the date of the fundamental business
transaction without giving any value for appreciation or depreciation
occurring in anticipation of the transaction or as a result of the
transaction. Section 10.362(b) adds a new provision defining how "fair
value" is to be determined. The current statute does not contain a
complete definition of "fair value" and leaves much of that determination
up to the appraiser and court. Section 10.362(b) provides greater clarity
for the determination by providing that the value should be based on a
going concern basis without giving effect to any "control premium" or
"minority discount." This methodology is consistent with that applied in
other states and provides greater certainty to the appraisal process.
Sections 10.363 through 10.365 codify and simplify the current provisions
of the TBCA regarding the court's review of the appraisal process and the
rights of the appraiser. Section 10.363 sets forth the powers and duties
of an appraiser and the appraisal procedures.
Section 10.364 provides for the rights of a dissenting owner or
responsible organization to object to all or a part of the appraisal
report. A court hearing is required if an objection is raised. The
responsible organization must pay the amount required by the court. On
payment of the adjudged amount, the dissenting owner does not have an
interest in the ownership interest or the responsible organization with
respect to that ownership interest.
Section 10.365 provides for payment of the appraiser's fees and
allocation of court costs between the responsible organization and the
dissenting owners by the court.
Sections 10.366 and 10.367 codify the status of an owner and the
ownership interests of an owner who dissents and seeks appraisal under the
Code. Section 10.366 provides for the status of the ownership interest
held or formerly held by the dissenting owner.
Section 10.367 sets forth the rights of owners following termination of
the right of dissent.
Section 10.368 provides that appraisal is the exclusive remedy for
recovery of the value of an ownership interest or money damages in a
challenge of a fundamental business transaction.
Subchapter Z. Miscellaneous Provisions
Sections 10.901 and 10.902 reaffirm that the provisions of the Code
relating to mergers, exchanges, conversions and asset sales do not have
the effect of repealing the antitrust laws or the rights of creditors and
do not limit the power of a entity to acquire ownership interests in an
entity through a voluntary exchange or otherwise.
CHAPTER 11. WINDING UP AND TERMINATION
OF DOMESTIC ENTITY
Subchapter A. General Provisions
Many of the existing organizational statutes address the process of
dissolution in a cursory manner and provide little guidance to governing
persons, legal counsel and courts. The more detailed rules in Chapter 11
provide significant guidance to practitioners, entities and courts with
respect to the process of winding up and termination of entities. The
requirement of filing a withdrawal of an assumed name certificate in the
last sentence of TREITA Section 19.10 is deleted as unnecessary. Any
requirement for filing and withdrawal of an assumed name certificate
should be left to the assumed name law of this state.
Section 11.001 contains definitions of special terms used only in this
Chapter. Terminology for the termination of the existence of a corporation
and partnership vary. For example, a corporation's business and affairs
are "liquidated" prior to the formal filing effecting a "dissolution,"
whereas a partnership's business and affairs are "wound up" after the
occurrence of an event resulting in "dissolution." The Code standardizes
the language relating to the winding up and termination of all domestic
entities. Chapter 11 uses the term "terminated entity" to refer to a
domestic entity whose legal existence has come to an end, either
voluntarily or involuntarily while "terminated filing entity" is a
terminated entity that is a filing entity. The term "winding up" is used
to refer to the liquidation and termination process.
Subchapter B. Winding Up of Domestic Entity
Section 11.051 specifies the events that require the winding up of a
domestic entity. The events include expiration of the entity's period of
duration, a voluntary decision to wind up, an event specified in the
governing documents, an event specified in this code and a court decree.
This Section clarifies for corporations, professional associations and
real estate investment trusts that the governing documents may require
winding up upon a specified event.
Section 11.052 specifies that a domestic entity must cease carrying on
its business, notify its claimants (if not a partnership) and collect and
sell its property and perform other acts required to wind up its business
and affairs, as soon as reasonably practicable. Existing provisions in
the TBCA and TLLCA require a corporation and limited liability company to
mail by registered or certified mail written notice to each known claimant
against the domestic entity. Section 11.052 does not restrict how such
notification must be made and would permit notification by electronic or
other technological means.
Section 11.053 specifies that the proceeds of the property must be
applied to discharge the entity's liabilities or to make adequate
provision for the discharge of the liabilities. If the property is not
sufficient to discharge all liabilities, the entity must apply the
property to the extent possible to the just and equitable discharge of
liabilities or make adequate provision for such discharge. No
distributions may be made to entity's owners unless all liabilities are
discharged or adequately provided for. Subsection (d) permits a domestic
entity to continue its business in whole or in part, including delaying
the disposition of the entity's property, only for the limited period
necessary to avoid unreasonable loss of the entity's property or business.
This provision is similar to TRPA Article 8.03(c) and is made applicable
to all domestic entities.
Section 11.054 authorizes a court to supervise the winding up, appoint a
person to carry out the winding up, or make other orders regarding a
winding up on application of an entity or its owner or member. This
Section is new for nonprofit corporations, cooperative associations and
partnerships.
Section 11.055 permits a domestic entity to continue a court action
during the winding up process.
Section 11.056 provides that, in addition to the events listed under
Section 11.051, the termination of the membership of the last remaining
member of a limited liability company is an event that requires the
winding up of the company unless within 90 days after the termination, the
legal representative or successor of the last remaining member agrees to
continue the company and, from the date of the termination, to become a
member or to nominate another person to become a member of the company.
This Section is new; the source of this Section is Section 18-801(a)(4) of
the Delaware Limited Liability Company Act. In addition, the death,
expulsion, withdrawal, bankruptcy of a member or other event terminating
that member's membership, which provides one of the possible events
causing a dissolution of the limited liability company under TLLCA Art.
6.01(5), is deleted as an event requiring the winding up of a limited
liability company. Changes in the applicable Treasury Regulations since
the passage of the TLLCA make a dissolution of the limited liability
company as a result of such an event no longer helpful to ensure treatment
of the limited liability company as a partnership for federal income tax
purposes.
Section 11.057 sets forth a list of events that, in addition to an event
specified in Section 11.051, require the winding up of a general
partnership. The source of this Section is TRPA Article 8.01.
Section 11.058 provides that in addition to the events specified in
Section 11.051, an event requiring a winding up of a limited partnership
includes: (i) the written consent of all partners to the winding up and
termination of the limited partnership, and (ii) an event of withdrawal of
a general partner. This Section together with Section 153.501 extends the
time for the remaining partners, after an event of withdrawal of a general
partner, to continue the limited partnership from 90 days to one year.
Section 11.059 specifies that an event requiring winding up of a
corporation for purposes of Section 11.051(3) can be set forth in the
certificate of formation or a bylaw adopted by its members or owners.
Subchapter C. Termination of Domestic Entity
Section 11.101 requires the filing entity to file a certificate of
termination upon completion of the winding up process and specifies what
the certificate of termination must contain. The filing requirements and
information required in a certificate of dissolution vary under existing
laws governing professional corporations, for-profit corporations,
nonprofit corporations, limited liability companies, and limited
partnerships. For example, the provisions of Article 6.07 of the TLLCA
require a dissolving limited liability company to attach copies of the
resolution adopted by the members or managers, as appropriate. The
articles of dissolution of a for-profit corporation do not require the
entity to attach copies of the resolution to dissolve adopted by the
shareholders of the corporation. Section 11.101 standardizes the
information to be contained in the certificate of termination, and
eliminates the need to recite certain lengthy information relating to the
winding up process. The resulting standardization and simplification of
the certificate of termination will facilitate the preparation, filing and
review processes for such documents. In addition, existing law does not
clearly specify that a filing be made with the filing officer to reflect a
filing entity's termination by reason of the expiration of the entity's
stated period of duration. Section 11.101 clearly indicates that a
certificate of termination must be filed by the entity under such
circumstances.
Section 11.102 provides that the existence of a filing entity terminates
on the filing of the certificate of termination.
Section 11.103 provides that the existence of a nonfiling entity
terminates on the completion of the winding up of its business and
affairs. The section also requires a nonfiling entity to send a notice of
its termination if required by its governing documents. Existing law does
not require a nonfiling entity to provide notice of termination in the
event of a termination. These provisions are essentially only applicable
to general partnerships.
Section 11.104 directs the Secretary of State to remove from its active
records a domestic entity whose duration has expired. This Section is new
for non-partnerships.
Section 11.105 provides that the certificate of termination of a
nonprofit corporation must include statements in addition to those
provided in Section 11.101 regarding property available for distribution.
Subchapter D. Revocation and Continuation
Section 11.151 permits a domestic entity to revoke a voluntary decision
to wind up in the manner specified in the title governing the entity.
After revocation, the entity may continue its business.
Section 11.152 provides that, within one year after an event requiring
winding up specified either in the governing documents or this code, the
domestic entity may cancel the event requiring winding up in the manner
required by the title of the code governing the entity. A domestic entity
may also extend its period of duration within three years after the
expiration by amending its governing documents. A domestic entity may not
cancel an event requiring winding up if prohibited by its governing
documents. This Section permits cancellation by approval of its owners of
certain types of events requiring winding up, including expiration of the
period of duration, of a corporation, professional association,
cooperative association, real estate investment trust and limited
liability company. This authority is not clear in existing law for all of
these types of events requiring winding up. Existing law for limited
partnerships allowed only 90 days for expiration of the period of duration
and one year for certain other events requiring winding up before
canceling such expiration or events and continuing the business. This
Section also establishes new time limits of one year and three years to
cancel certain events requiring winding up and continue the business of a
general partnership.
Subchapter E. Reinstatement of Terminated Entity
Section 11.201 specifies the alternative conditions under which a
terminated entity may be reinstated. Sections 11.201 and 11.202 permit a
terminated entity to reinstate its status when such action is approved by
its owners, members, or governing persons, and a certificate of
reinstatement is filed with the filing officer before the third
anniversary date of the entity's termination. (The three-year time period
is similar to the period of time set forth in the TBCA and TLLCA
provisions relating to an entity's survival for certain limited purposes
after dissolution.) TBCA Article 6.05.A permits a corporation to revoke
its voluntary dissolution proceedings until 120 days after filing articles
of dissolution. Section 11.201 permits a terminated entity to reinstate
when the termination occurred without the approval of the entity's
governing persons or if the termination was inadvertent or by mistake; or
when the legal existence of the entity is required to complete the process
of winding up, or to permit the entity to take an action, convey or assign
property, or sign an instrument, or settle or release a claim. The power
to revoke the voluntary dissolution after filing articles of dissolution
under TBCA Article 6.05 is not limited to specified circumstances.
Existing law for most entities other than business corporations does not
permit a terminated entity to reinstate or reactivate under any of the
circumstances described. Thus, this Section standardizes the
reinstatement rights across most filing entities.
Section 11.202 requires the entity to complete the procedures specified
in the title of the code governing the domestic entity no later than the
third anniversary of the termination. For a filing entity, the
certificate of reinstatement must be filed before the third anniversary.
This section specifies the contents of a certificate of reinstatement.
Section 11.203 provides that a reinstated filing entity may not violate
the typical similar name requirements of the code.
Section 11.204 specifies that reinstatement of a terminated nonfiling
entity takes effect on the approval.
Section 11.205 provides that the reinstatement of a terminated filing
entity takes effect on the filing of the entity's certificate of
reinstatement.
Section 11.206 provides that the existence of a reinstated terminated
entity is considered to have continued without interruption from the date
of termination and the terminated entity may carry on its business as if
the termination had not occurred.
Subchapter F. Involuntary Termination of Filing Entity by Secretary of
State
Section 11.251 specifies the circumstances under which the secretary of
state may terminate a filing entity's existence, other than a real estate
investment trust. The entity has 90 days to cure the failure after
notice. In addition to authorizing the secretary of state to
involuntarily terminate an entity for its failure to file a report or
maintain a registered agent, Section 11.251 authorizes the secretary of
state to involuntarily terminate a filing entity for its failure to
maintain a registered office address in this state, and for its failure to
pay a fee required in connection with a filing, which would include filing
instruments other than organizational instruments. Existing laws do not
authorize the secretary of state to cancel the certificate or registration
of certain filing entities for failure to maintain a registered office or
to pay a filing fee. Section 11.251 would authorize the involuntary
termination on such grounds.
Section 11.251 eliminates the failure of an entity to pay franchise tax
or a tax deposit as grounds for termination. Although such failure is a
basis for termination in existing provisions of the TBCA, TNPCA, and
TLLCA, the practice of the secretary of state is to use the provisions of
Chapter 171 of the Tax Code to effect a forfeiture of an entity's articles
or certificate. Existing law requires notice to be sent by certified mail
to the entity's registered office, or to its principal place of business,
or the last known address of one of its officers, directors, or managers,
or to any other known place of business of entity. Section 11.251
requires the secretary of state to provide notice by regular or certified
mail to the entity's registered office address or principal place of
business. Present practice of the secretary of state is to mail
notification to the addresses indicated in Section 11.251.
Section 11.252 requires the secretary of state to issue a certificate of
termination and deliver a copy to the filing entity in order to
involuntarily terminate the filing entity. The contents of the certificate
of termination are specified.
Section 11.253 requires the secretary of state to reinstate a filing
entity that corrects the circumstances that led to its involuntary
termination and files a certificate for reinstatement containing specified
information. Existing law requires an involuntarily dissolved entity to
make its application for reinstatement within a specified time frame. The
Code eliminates such variances and permits reinstatement at any time.
This is similar to reinstatement procedures under the Tax Code, which do
not restrict the time within which an entity can reinstate. However,
although Section 11.253 eliminates the time restrictions for
reinstatement, an involuntarily terminated entity is considered to have
continued in existence without interruption from the date of termination
only when the certificate of reinstatement is filed before the third
anniversary date of its involuntary termination. The reinstatement has no
effect on the personal liability of an officer, director, manager, member,
or agent during the period between dissolution or revocation and
reinstatement. This rule is extended to apply to limited partnerships.
Section 11.254 specifies that the procedures in the Tax Code must be
followed to reinstate a certificate of formation forfeited under the Tax
Code.
Subchapter G. Judicial Winding Up and Termination
The provisions of Subchapter G, which relate to the judicial winding up
and termination of a filing entity, the provisions of Subchapter H, which
relate to the resolution of claims upon termination of a filing entity,
and the provisions of Subchapter I, which relate to receiverships of
domestic entities, correspond, in general, to existing provisions found in
the TBCA, TNPCA and TLLCA. Except as noted below, the material changes
effected by Subchapters G, H, and I, result from making these provisions
applicable to certain other domestic entities. Sections 11.301 through
11.315 are new for limited partnerships.
Section 11.301 sets forth the grounds upon which a court may enter a
decree requiring winding up of a filing entity's business and terminating
its existence as a result of state action.
Section 11.302 provides the procedures that must be followed by the
secretary of state in notifying the attorney general and the filing entity
of facts relating to the cause for the winding up and termination.
Section 11.303 provides that the attorney general may file an action
against the filing entity in the name of the state seeking a winding up
and termination if the cause for winding up and termination is not cured
within 30 days after the date the notice is mailed to the filing entity.
Section 11.304 provides that the action is abated if the entity cures the
problems and pays the costs of the action.
Section 11.305 requires a court to enter a judgment no earlier than the
fifth day after the court finds that proper grounds exist for winding up
and termination.
Section 11.306 allows a filing entity to file a sworn application for
stay of entry of the judgment to permit it to cure the problems. The stay
lasts no longer than 60 days after the date the court's findings that a
stay is appropriate. The court must dismiss the action if the problems
are cured during this stay.
Section 11.307 provides the filing entity a procedure for appeal and
remand by an appellate court to grant the filing entity an opportunity to
cure the problems. The trial court to which the action is remanded must
dismiss the action if the filing entity cures the problem during the
period prescribed by the appellate court. The judgment becomes final if
the filing entity does not cure the problem with that period.
Section 11.308 specifies that the Attorney General must bring a action
for involuntary winding up and termination of a filing entity in a
district court of the county where the registered office or principal
place of business of the filing entity in this state is located or a
Travis County district court. The court has jurisdiction over the action.
Section 11.309 provides that other law will govern the citation in an
action for the involuntary winding up and termination of a filing entity.
Section 11.310 specifies that the Attorney General must publish a notice
in a newspaper in the county in which the registered office of the filing
entity in this state is located if process is returned not found. The
contents of the notice are also specified. One notice may cover multiple
entities. The notice must be published once a week for two consecutive
weeks. A default judgment may not be taken until 30 days after the
Attorney General sends a copy of the notice to the filing entity at its
registered office.
Section 11.311 states that the expiration of a filing entity's period of
duration creates no vested right in an owner or creditor to prevent an
action by the Attorney General under this subchapter.
Section 11.312 provides that a filing entity subject to a court decree
requiring winding up must comply with the requirements of the decree and
subchapter B to the extent it does not conflict with the decree.
Section 11.313 permits a court to terminate the existing of a filing
entity by decree when the court considers it necessary or advisable or on
completion of the winding up process.
Section 11.314 permits a district court in the county in which the
registered office or principal place of business of a domestic partnership
or limited liability is located to order the winding up and termination of
the partnership or limited liability company. Application for winding up
and termination may be made by a partner in the partnership if the court
determines the economic purpose of the partnership is likely to be
unreasonably frustrated or another partner has engaged in conduct making
it unreasonably practical to carry on the business in partnership with
that partner. Application for either type of entity may also be made by an
owner if the court determines it is not reasonably practical to carry on
the entity's business in conformity with its governing documents.
Section 11.315 requires a clerk of a court entering a decree terminating
a filing entity to file the decree in accordance with Chapter 4. No fee
will be charged for the filing.
Subchapter H. Claims Resolution Upon Termination
Subchapter H contains provisions relating to escheat of property,
survivability of a terminated entity for limited purposes and
extinguishment of existing claims. These provisions are new for limited
partnerships.
Section 11.351 provides that a terminated filing entity is liable for an
existing claim. This provision is new for limited partnerships and limits
the liability of a terminated limited partnership to claims that existed
before termination and posttermination contractual obligations, in a
manner similar to existing law for corporations.
Section 11.352 requires a terminated filing entity to reduce to cash the
portion of its assets distributable to unknown or unlocatable creditors or
owners. Money from the liquidated assets must be deposited with the
comptroller together with a statement containing specified information.
Section 11.353 releases the person liquidating a filing entity's assets
from further liability with respect to money deposited with the
comptroller.
Section 11.354 sets forth the requirements for a person to claim money
deposited with the comptroller within seven years after the deposit.
Section 11.355 requires the comptroller to publish in a newspaper in
Travis County a notice of the proposed escheat of the money deposited with
the comptroller if no claimant has proved a right to the money. The
contents of the notice are specified by this section. The money becomes
the property of the state if no one properly claims the money within 60
days after the notice is published.
Section 11.356 permits a terminated filing entity to continue in
existence for three years for certain purposes. The terminated filing
entity may also survive beyond the three-year period to defend or
prosecute an existing claim.
Section 11.357 specifies that the governing persons of the terminated
filing entity at the time of termination continue to manage the affairs
using the three-year survival period. The duties and liabilities of the
governing persons are the same as before the termination.
Section 11.358 permits a terminated filing entity to shorten the period
for resolving an existing claim against the entity through a specified
notice procedure. A person making a claim in response to the notice from
the entity must provide specified information. The terminated filing
entity receiving a claim may reject the claim by sending a notice
containing specified information.
Section 11.359 provides that an existing claim by or against a terminated
filing entity is extinguished unless it is brought within three years
after the date of termination of the entity. A person's claim against the
entity may be earlier terminated if the entity fails to properly make a
claim under Section 11.358 or fails to bring an action on a claim rejected
under Section 11.358 before 180 days after the rejection and the third
anniversary of the effective date of the termination.
Subchapter I. Receivership
Subchapter I contains provisions regarding receivership of domestic
entities. These provisions are new for partnerships.
Section 11.401 states that a receiver may be appointed for a domestic
entity or for its property or business only as provided for and on the
conditions set forth in this Code.
Section 11.402 provides that a court has jurisdiction over the property
of a domestic or foreign entity located in this state. A district court
in the county in which the registered office or principal place of
business of a domestic entity is located has jurisdiction to appoint a
receiver for the property and business of the entity or to order the
liquidation of the property and business of a domestic entity.
Section 11.403 authorizes the court having jurisdiction over specific
property to appoint a receiver in certain actions if specified conditions
are satisfied. The court appointing the receiver retains exclusive
jurisdiction over the property. If the condition necessitating the
appointment of a receiver is remedied, the receivership must be
terminated.
Section 11.404 authorizes a court to appoint a receiver for a domestic
entity's property and business if certain matters are established by an
owner or member of the domestic entity or by a creditor of the entity. If
the condition necessitating the appointment of the receiver is remedied,
the receivership must be terminated.
Section 11.405 authorizes a court to order the liquidation of the
property and business of the domestic entity and to appoint a receiver to
effect the liquidation under certain conditions. If the condition
necessitating the appointment of the receiver is remedied, the
receivership must be terminated.
Section 11.406 specifies that a receiver must be either an individual
U.S. citizen or an entity authorized to act as a receiver and must give a
bond required by the court. The entity has the power to sue and other
powers and duties provided by other laws applicable to receivers and as
stated in the order appointing the receiver. A foreign filing entity may
be a receiver if it is registered to transact business in this state. The
Section expands existing law by permitting authorized, noncorporate
entities to serve as receivers.
Section 11.407 provides that a court may require all claimants of a
domestic entity in receivership to file with the court clerk or the
receiver a sworn proof of the claims and sets forth the procedures for the
filing of claims. A court may bar a claimant who fails to file proof of
claim from participating in a distribution of the property of a domestic
entity.
Section 11.408 authorizes the supervising court to pay the receiver or
the receiver's attorney from the property of the domestic entity that is
in receivership. The court appointing the receiver has exclusive
jurisdiction over the domestic entity and all of its property, regardless
of where the property is located.
Section 11.409 authorizes a district court in the county in which the
registered office of a foreign entity doing business in this state is
located to appoint an ancillary receiver for the property and business of
the entity if the court determines circumstances require the appointment.
The receiver serves ancillary to a receiver acting under orders of an out
of state court having appropriate jurisdiction to appoint that receiver.
Section 11.410 provides that a district court may appoint a receiver for
all the property in and outside this state of a foreign entity doing
business in this state and its business if the court determines that
circumstances require the appointment. The appointing court must convert
the receivership to an ancillary receivership if a court in another state
has ordered a receivership of all property and business of the entity and
the appointing court determines the ancillary receivership is appropriate.
Section 11.411 provides that governing persons and owners or members of a
domestic entity are not necessary parties to an action for receivership or
liquidation of the property and business of a domestic entity unless
relief is sought against those persons individually.
Section 11.412 specifies that a entity must be terminated by the court
when the expenses of the action and all obligations and liabilities of the
domestic entity have been paid or adequately provided for and all of the
entity's remaining property has been distributed to its owners and members
or if the entity's property is not sufficient to discharge such expenses,
obligations and liabilities, when all the property of the entity has been
applied toward their payment.
Section 11.413 sets forth supplemental provisions that apply to nonprofit
corporations when a court has ordered distribution of property.
CHAPTER 12. ADMINISTRATIVE POWERS
Chapter 12 contains provisions relating to the administrative powers of
the secretary of state and attorney general regarding filing entities and
foreign filing entities. The provisions utilize the new terminology of the
Code, and expand current provisions to all domestic and foreign filing
entities to achieve standardization, with certain exceptions.
Subchapter A. Secretary of State
Subchapter A contains provisions relating to the power and authority of
the secretary of state regarding filing instruments under the provisions
of this Code. Sections 12.002-12.004 do not apply to domestic real estate
investment trusts.
Section 12.001(a) authorizes the secretary of state to adopt procedural
rules for the filing of instruments under the provisions of the code.
This authority is explicitly provided for under TRPA and TUUNAA, and
implicit under present provisions of TBCA, TNPCA, and TLLCA, but is made
explicit by this Section. Section 12.001(b) confers upon the secretary of
state the power and authority reasonably necessary to perform the duties
imposed by the Code. The power to perform the secretary's duties is
explicitly extended to limited partnerships and limited liability
partnerships, as well as foreign real estate investment trusts.
Section 12.002 authorizes the secretary of state to issue interrogatories
to require a filing entity or foreign filing entity to provide further
information to determine whether the entity has complied with the
provisions of the Code. The section sets forth the time within which the
interrogatory must be answered, and the action to be taken by the
secretary of state when written answers disclose a violation of the code
or the when the entity fails to provide answers to the interrogatory.
This Section makes explicit for nonprofit corporations, cooperative
associations and limited partnerships the interrogatory power of the
secretary of state, which was only implicit under existing law. That same
power is extended also to foreign real estate investment trusts.
Section 12.003 provides that the interrogatory and answer to the
interrogatory issued under Section 12.002 are subject to disclosure under
the provisions of the Public Information Act, Chapter 552, Government
Code. Existing law prohibits disclosure of any facts or information
obtained from an interrogatory except when official duty would require the
information to be made public or when needed as evidence in a criminal
proceeding or other state action.
Section 12.004 requires the secretary of state to provide written
notification within 10 days of the delivery of a filing instrument if the
secretary of state determines that a filing instrument cannot be filed.
The section permits a de novo judicial appeal of the secretary of state's
disapproval, establishes venue in Travis county, and sets forth the
information to be provided in the petition. This permissive court appeal
of a disapproval by the secretary of state of the filing of an instrument
is new for limited partnerships and limited liability partnerships.
Subchapter B. Attorney General
Subchapter B contains general provisions regarding the power and
authority of the attorney general relating to filing entities and foreign
filing entities. These provisions are not contained in the TLLCA, TRLPA
or TREITA and are new for limited partnerships, limited liability
companies, and real estate investment trusts.
Section 12.151 authorizes the attorney general to examine, inspect and
make copies of any of the books and records of a filing entity or foreign
filing entity.
Section 12.152 requires the attorney general to make a written request to
examine the business of a filing entity or foreign filing entity. The
request is to be directed to a managerial official of the entity.
Section 12.153 authorizes the attorney general to examine the management
and conduct of a domestic or foreign filing entity to determine whether
the entity has been or is engaged in acts in violation of its governing
documents or in violation of any law of this state.
Section 12.154 prohibits disclosure of information held by the attorney
general and derived in the course of an examination of the entity's
records or documents. Such information is not public information under
the provisions of Chapter 552, Government Code and may only be disclosed
in the course of an administrative or judicial proceeding in which the
state is a party under the circumstances outlined in the section.
Section 12.155 permits the forfeiture of an entity's right to do business
in the state and the cancellation or forfeiture of the entity's
certificate of formation or registration for its failure to permit the
attorney general to examine or take copies of a record of the entity.
Section 12.156 makes the failure or refusal of a managerial official or
other authorized individual managing the affairs of an entity to permit
the attorney general to make an investigation of the entity or take copies
of a record of the entity a Class B misdemeanor. This designation as a
Class B misdemeanor clarifies existing law, which only establishes a
monetary fine and time of imprisonment.
Subchapter C. Enforcement Lien
Subchapter C contains provisions relating to enforcement liens. These
provisions are not contained in the TLLCA, TRLPA or TREITA and are new for
limited partnerships, limited liability companies, and real estate
investment trusts.
Section 12.201 grants the state a lien on all property of a filing entity
or foreign filing entity in this state upon the filing of a suit by the
attorney general for the violation of a law of this state for which
violation a fine, penalties, or forfeiture of the entity's formation or
registration is provided.
Subchapter D. Enforcement Proceedings
Subchapter D contains provisions relating to enforcement proceedings.
These provisions are not contained in the TLLCA, TRLPA or TREITA and are
new for limited partnerships, limited liability companies, and real estate
investment trusts.
Section 12.251 authorizes a court in which a suit is pending to forfeit a
filing entity's formation instrument or a foreign filing entity's
registration to appoint a receiver for the property and business of an
entity in this state.
Section 12.252 authorizes the attorney general to bring suit to foreclose
a lien created by the chapter and provides procedures for citation in such
suit when the entity is dissolved or has had its formation instrument or
registration forfeited by a judgment.
Section 12.253 authorizes the attorney general to bring an action to
forfeit an entity's formation instrument or registration when the filing
entity or foreign filing entity is insolvent.
Section 12.254 permits a district or county attorney to bring suit under
Sections 12.252 and 12.253 when directed to do so by the attorney general.
Section 12.255 requires the attorney general, or a district or county
attorney, to obtain permission to sue an entity under the provisions of
Sections 12.252 or 12.253 by obtaining the leave of the judge of the court
in which the suit would be filed.
Section 12.256 provides for the examination of the petition and facts by
the judge of the court in which a suit brought under Sections 12.252 or
12.253.
Section 12.257 provides for the dismissal of an action under Section
12.253 or 12.258 if the entity, through its owners or members, reduces its
indebtedness so that it is not insolvent.
Section 12.258 permits a court hearing a proceeding under Section 12.253
to appoint a receiver for the entity and its property to liquidate the
insolvent entity.
Section 12.259 grants the state the remedies of a writ of attachment,
garnishment, sequestration, or injunction, without bond, to aid in the
enforcement of the state's rights.
Section 12.260 provides that the dissolution or forfeiture of a filing
entity's formation instrument or the cancellation of a foreign filing
entity's registration does not abate an action by the state for a fine,
penalty, or forfeiture against the entity.
Section 12.261 provides that the rights and remedies provided by the
chapter are cumulative and do not affect any other right or remedy
provided by law.
TITLE 2. CORPORATIONS
CHAPTER 20. GENERAL PROVISIONS
Chapter 20 contains provisions that are of general applicability to both
for-profit and not-for-profit corporations.
Section 20.001 authorizes officers of corporations to sign filing
instruments.
Section 20.002 is the "ultra vires" provision, and describes the
consequences of a corporate act that is taken by a corporation that lacks
the corporate capacity to take the act.
CHAPTER 21. FOR-PROFIT CORPORATIONS
Chapter 21 contains provisions applicable to for-profit corporations that
supplement Title 1 of the code.
Subchapter A. General Provisions
Subchapter A contains general provisions relating to for-profit
corporations.
Section 21.001 explains that Chapter 21 applies only to domestic
for-profit corporations formed under the code and to foreign for-profit
corporations that transact business in the State of Texas, whether or not
the foreign corporation is registered to transact business in the State of
Texas.
Section 21.002 contains a number of definitions that are used in Chapter
21. The definitions include authorized share, board of directors, cancel,
consuming assets corporation, Investment Company Act, net assets, share
dividend, stated capital, surplus and treasury shares. Special
definitions of corporation and distribution apply in this chapter. The
definition of board of directors clarifies that persons authorized to
perform functions of the board of directors under a shareholders agreement
are treated as directors for most purposes in this Chapter.
Subchapter B. Formation and Governing Documents
Subchapter B contains general provisions relating to the formation of and
governing documents for for-profit corporations, including provisions
relating to the amendment of a corporation's certificate of formation.
Chapter 21 omits the outmoded requirement that an unincorporated business
must publish a notice of intent to incorporate when incorporating without
a name change found in TMCLA Article 13.022.02.
Section 21.051 provides that no shareholder of a corporation has a vested
property right resulting from a certificate of formation.
Section 21.052 states the procedures for adopting amendments to a
certificate of formation.
Section 21.053 provides that the Board of Directors of a corporation may
adopt an amendment to the certificate of formation of the corporation
without shareholder approval if no shares are issued and outstanding.
Section 21.054 requires shareholder approval of an amendment to the
certificate of formation if there are shares issued and outstanding.
Section 21.055 requires that each shareholder receive written notice of
proposed amendment(s) to the certificate of formation, which may be
unlimited in number, and the affirmative vote of shareholders entitled to
vote required by Section 21.364.
Section 21.056 sets forth the procedures that are to be followed by a
corporation to restate its certificate of formation.
Section 21.057 discusses the need for a corporation to have bylaws and
the authority of the board of directors to adopt, amend, and repeal
bylaws.
Section 21.058 provides that, unless the right is expressly denied in a
specified manner, shareholders have the right to adopt, amend, and repeal
bylaws that is at least coextensive with that of the board of directors.
Section 21.059 contains provisions relating to the need for and mechanics
of calling an organization meeting of the board of directors.
Subchapter C. Shareholders' Agreements
Subchapter C contains provisions relating to agreements between or among
shareholders that relate to certain aspects of the internal affairs of the
corporation.
Section 21.101 grants shareholders of a corporation the right to enter
into an agreement with respect to specified matters, including those that
relate to the exercise of corporate powers, the exercise of which was
traditionally reserved to the board of directors. The section also
specifies the manner in which such an agreement may be adopted and
amended.
Section 21.102 limits the term of a shareholders' agreement to ten years
unless otherwise provided in the agreement.
Section 21.103 requires that the existence of a shareholders' agreement
be disclosed in a specified manner.
Section 21.104 makes it clear that a shareholders' agreement that
complies with the provisions of this subchapter is binding on the
shareholders and the corporation even if its terms are inconsistent with
the code.
Section 21.105 gives a purchaser of shares of a corporation the right to
rescind the purchase if the purchase was made without knowledge of the
existence of a shareholders' agreement of the type authorized by this
subchapter.
Section 21.106 shifts the liability normally imposed on directors of a
corporation away from the directors and to the persons who exercise,
pursuant to a shareholders' agreement, the powers normally exercised by
directors.
Section 21.107 clarifies that the existence of a shareholders' agreement
authorized by this subchapter does not authorize the imposition of
personal liability on shareholders for acts or obligations of the
corporation.
Section 21.108 permits an organizer of or subscriber for shares of a
corporation to be a "shareholder" for purposes of adopting a shareholders'
agreement under this subchapter if no shares have been issued at the time
the agreement is signed.
Section 21.109 provides that a shareholders' agreement automatically
ceases to be effective when the corporation's shares are publicly traded
and requires that the corporation elect a board of directors at that time
if it does not already have one. It also permits the board of directors
to amend the corporation's certificate of formation, without shareholder
action, to delete any reference to the shareholders' agreement at that
time.
Subchapter D. Shares, Options, and Convertible Securities
Subchapter D contains provisions that relate to the securities of a
corporation.
Section 21.151 gives a corporation the authority to issue up to the
number of shares stated in its certificate of formation.
Section 21.152 authorizes a corporation, in its certificate of formation,
to divide its authorized shares into classes and to divide classes into
series. It also mandates that all shares of the same class must have the
same par value or be without par value and that all shares within the same
class must be identical unless the class is divided into series, in which
case all shares within the same series must be identical.
Section 21.153 states that the designation, preferences, limitations, and
relative rights of each class or series of shares are to be specified in
the certificate of formation. Express authority is given to the
corporation to provide, deny, or limit the voting rights of a particular
class or series of shares so long as the voting rights are not
inconsistent with the code.
Section 21.154 contains a non-exclusive list of the types of preferences
and rights that a class or series of shares may have.
Section 21.155 permits, if the corporation's certificate of formation
authorizes it, the board of directors of a corporation to establish a
series of unissued shares and to determine the designation, preferences,
limitations, and relative rights of such series. It also permits, subject
to certain limitations, the board of directors to increase or decrease
the number of shares in such series unless the authority to do so is
denied in the certificate of formation, to delete such a series, and to
amend the designation, preferences, limitations, and relative rights of
such a series. The section also contains certain procedures to be followed
by the board of directors to establish such a series and take the other
actions permitted by this section. Section 21.155 adds to the existing
law by allowing the board to amend the characteristics of a series it has
created if none of the shares in that series have been issued.
Section 21.156 requires a corporation that intends to act under Section
21.155 to file a notice with the secretary of state, including a copy of
any resolution required by Section 21.155. The resolution(s) that
accompany the notice filing will become amendments to the certificate of
formation.
Section 21.157 authorizes a corporation to issue shares if authorized by
its board of directors. The shares may not be issued until the
consideration required to be paid or delivered for them has been paid or
delivered. Upon payment or delivery of such consideration, the subscriber
or other person entitled to receive the shares is a shareholder with
respect to such shares, and the shares are considered fully paid and
nonassessable.
Section 21.158 permits a corporation to issue shares as authorized in a
plan of conversion or a plan of merger.
Section 21.159 sets forth the types of consideration for which shares,
whether with or without par value, may be issued, including a tangible or
intangible benefit, cash, a promissory note, services performed or a
contract for services to be performed, a security of the corporation or
any other organization, and any other property.
Section 21.160 provides that the consideration to be received for shares
must be determined by the board of directors or by a plan of conversion or
a plan of merger. However, if the corporation's certificate of formation
reserves to shareholders the right to determine the consideration to be
received for shares without par value, the shareholders and not the board
of directors shall determine the consideration for those shares before
they are issued. This section also permits a corporation to dispose of
treasury shares for consideration determined by the board of directors.
Section 21.161 provides that the consideration to be received by a
corporation for the issuance of shares with par value may not be less than
the par value of the shares. It also contains special rules for
determining the amount of consideration actually received by a corporation
for the issuance of its shares in a share distribution, in connection with
the conversion or exchange of debt, and upon exercise of an option or
right.
Section 21.162 states that, in the absence of fraud, the judgment of the
board of directors, the shareholders, or the party approving a plan of
merger or a plan of conversion is conclusive in determining the value and
sufficiency of the consideration received by a corporation for its shares.
Section 21.163 authorizes a corporation to issue fractional shares and
scrip and contains various provisions relating to the rights of the holder
and the corporation with respect to fractional shares and scrip.
Section 21.164 outlines the rights of holders of fractional shares or
scrip.
Section 21.165 streamlines the language pertaining to subscriptions to
buy shares and makes clear that subscriptions should be treated as
contracts. The corporation can accept a buyer's subscription by notifying
the subscriber in writing, eliminating existing Article 2.14.C's
cumbersome requirement of a formal resolution of acceptance by the board
of directors or a memorandum of acceptance by an authorized officer.
Eliminated are the arcane provisions of existing law that provide that any
subscriptions submitted with the articles of incorporation are deemed
accepted by the corporation and any subscriptions not submitted are deemed
rejected, regardless of the parties' intent.
A written, signed offer to subscribe to a corporation being formed cannot
be revoked by the subscriber for six months, unless the subscription
specifies a different time period or all of the other subscribers agree to
let it be revoked. A written offer to subscribe to a corporation already
formed is a contract between the subscriber and the corporation. TBCA
Article 2.14 requires the shares to be paid for in full before they can be
issued. The new law allows installment payments. After formation, a
corporation may collect on amounts due for preformation subscriptions. As
with existing law, the corporation can require forfeiture of the
subscription on twenty days' written notice to the subscriber. Section
21.166 adds, however, that the corporation may keep any part of the
subscription already paid.
Section 21.166 contains additional provisions that relate to
subscriptions made prior to the formation of a corporation. These
provisions include the right of the corporation to determine the payment
terms (if not specified in the subscription), including terms that require
payment in full or permit installment payments, a requirement that the
corporation call for payment of all subscriptions on a uniform basis,
authority for the corporation to treat unpaid preformation subscriptions
as debt and to forfeit a subscription if an installment or call remains
unpaid for 20 days notice, and the right of the corporation to retain all
amounts paid on a subscription prior to its forfeiture. Minor changes from
current law were made.
Section 21.167 provides that a written commitment to acquire shares of a
corporation may bind the person making the commitment to act in a
specified manner following the acquisition. This provision does not have
a predecessor in the TBCA.
Section 21.168 gives a corporation the express authority to create and
issue options and other rights to acquire its securities and debt that is
convertible into its securities so long as the terms on which such option
or right may be exercised or such debt may be converted are stated in the
option, right, or debt.
Section 21.169 contains a non-exclusive list of the terms and conditions
that may apply to any option or other right to acquire securities of a
corporation. The provisions of Section 21.169 are new and validate
shareholder rights plans and restrictions, conditions, and limitations on
the exercise, transfer, or receipt of rights and options by certain
persons or classes of persons. The provisions also make it clear that the
board of directors has the exclusive right to grant, amend, redeem,
extend, or replace any options or rights, unless otherwise provided in
such option or right or plan under which the option or right was granted,
and a bylaw provision cannot require the board of directors to take any
such action.
Section 21.170 states that, in the absence of fraud, the judgment of the
board of directors as to the adequacy of the consideration received for
options or other rights to acquire the corporation's securities or debt
that is convertible into the corporation's securities is conclusive. It
also permits a corporation to issue, under certain circumstances, rights
and options to its shareholders, employees, and directors without
consideration and requires the consideration to be received by a
corporation upon exercise of an option or right to acquire shares with a
par value to be at least equal to the par value.
Section 21.171 states that treasury shares are considered to be issued
but not outstanding and are not to be included in determining the net
assets of the corporation.
Section 21.172 provides that a corporation may pay or authorize to be
paid out of the consideration received by the corporation as payment for
its shares the reasonable charges and expenses of the organization and
reorganization of the corporation and the sale or underwriting of the
shares without rendering the shares not fully paid and nonassessable.
Section 21.173 specifies the records that a corporation, or its transfer
agent or registrar, must maintain in addition to those required to be kept
under Section 3.151.
Subchapter E. Shareholder Rights and Restrictions
Subchapter E contains provisions relating to the rights of shareholders
and restrictions on those rights.
Section 21.201 gives a corporation the right to treat, for certain
purposes, the person who is the registered owner of a share as the owner
of that share.
Section 21.202 defines "shares," for purposes of Sections 21.203 though
21.208, to include any security that is convertible into shares or that
carries a right to subscribe for or acquire shares.
Section 21.203 states that there are no preemptive rights unless provided
by the certificate of formation. This is a change from the former law,
which provides that preemptive rights exist unless expressly denied in the
certificate of formation.
Section 21.204 describes the rights of a shareholder if the certificate
of formation includes a statement that the corporation "elects to have a
preemptive right." Preemptive rights thus exist only if the certificate
of formation so provides. This section also makes certain changes in the
circumstances under which preemptive rights, even if they exist, do not
apply. Existing law provides that shareholders have preemptive rights
unless denied in the articles of incorporation. This change makes Texas
law consistent with the corporate laws of most other states, including
Delaware, and simplifies the certificate of formation for most
corporations.
Section 21.205 allows a shareholder to waive the preemptive right and
further provides that a written waiver is irrevocable.
Section 21.206 is a statute of limitations to bring an action for
violation of a shareholder's preemptive right.
Section 21.207 limits the ability of a transferee of shares to make a
claim for violation of a preemptive right.
Section 21.208 allows shareholders in an existing corporation to maintain
existing preemptive rights subject to the limitations set forth in
Sections 21.204, 21.206, and 21.207. It further provides a method for
existing corporations to amend the certificate of formation to eliminate
preemptive rights in the future.
Section 21.209 provides that shares and other securities of a corporation
are transferable in accordance with Chapter 8 of the Texas Business and
Commerce Code.
Section 21.210 provides the manner in which restrictions on the transfer
or registration of a security may be imposed and provides the requirements
for making a restriction effective against an existing holder of the
security. No restriction is valid with respect to any security issued
prior to the adoption of the restriction unless the holder of the security
voted in favor of the restriction or was a party to the agreement imposing
the restriction.
Section 21.211 identifies the types of restrictions on the transfer or
registration of securities that will be considered valid, notwithstanding
the provisions of Sections 21.210 and 21.213.
Section 21.212 provides a mechanism for filing a bylaw or agreement that
restricts the transfer of securities with the Secretary of State and for
incorporating such a restriction in the certificate of formation by
amendment.
Section 21.213 contains general rules on the enforceability of
restrictions on transfer of securities of a corporation and provides that
an otherwise enforceable restriction is ineffective against a transferee
for value without actual knowledge of the restriction at the time of
transfer or against a subsequent transferee.
Section 21.214 provides certain rules by which a corporation can deal
with securities registered on its books in the names of joint owners with
the right of survivorship.
Section 21.215 provides that neither a corporation nor its officers,
directors, employees, or agents will have any liability for treating the
registered owner of shares as the owner for the purposes specified in
Section 21.201 regardless of whether such person possesses a certificate
for those shares.
Section 21.216 relieves a corporation from liability for a transfer of
shares or the making of a distribution to a surviving joint owner under
Section 21.214 before the corporation has received a claim from another
person with respect to those shares or distributions.
Section 21.217 provides that an assignee or transferee in good faith and
without knowledge that the full consideration for shares or a subscription
has not been paid may not be held personally liable to the corporation or
a creditor of the corporation for the unpaid portion of the shares or
subscription for shares.
Section 21.218 sets forth the terms upon which shareholders of a
corporation are entitled to inspect records of the corporation.
Section 21.219 requires a corporation to mail, upon written request, to a
shareholder its annual financial statement and any more recent interim
statements.
Section 21.220 imposes a penalty on the officer or agent of a corporation
that fails to prepare the list of the corporation's shareholders and make
it available as required by Sections 21.372 and 21.354.
Section 21.221 imposes on the corporation, rather than the officer or
agent of the corporation, the penalty prescribed by Section 21.220 if the
failure was due to the officer or agent not receiving notice of the
meeting within sufficient time.
Section 21.222 imposes a penalty on a corporation for its failure to
permit shareholders to inspect its records as required by section 21.218.
Section 21.223 specifies that a holder of shares, an owner of any
beneficial interests in shares or a subscriber for shares, or any of their
affiliates, may not be held liable to the corporation or its obligees for
certain obligations in certain circumstances. The circumstances include a
failure of the corporation to observe any corporate formality, on an alter
ego theory or on the basis of actual or constructive fraud. The liability
is not prevented or limited where the person perpetrated an actual fraud
on the obligee primarily for the direct personal benefit of the person.
Section 21.224 provides that the limitation on liability in Section
21.223 is exclusive and preempts liability imposed under common law or
otherwise.
Section 21.225 excludes from the limitations contained in Sections 21.223
and 21.224 obligations that are expressly assumed or guaranteed or for
which the person is otherwise liable under the Code or other applicable
statute.
Section 21.226 specifies that a pledgee of shares is not personally
liable as a shareholder. Likewise, an executor, administrator,
conservator, guardian, trustee, assignee for the benefit of creditors or
receiver is not personally liable, although the estate and funds
administered by such person may be liable.
Subchapter F. Reductions in Stated Capital; Cancellation of Treasury Shares
Subchapter F contains provisions dealing with the manner in which stated
capital may be reduced and treasury shares may be canceled. Outmoded and
antiquated provisions of existing law requiring filing of statements of
cancellation of redeemable shares, cancellation of treasury shares and
reduction of stated capital have been deleted. Modern corporate laws have
decreased any emphasis on the concepts of stated capital and generally
eliminated public filings relating to changes in stated capital.
Section 21.251 provides that a redemption or purchase of redeemable
shares by the issuing corporation effects a cancellation of those shares
and, unless the certificate of formation provides otherwise, restores the
shares to the status of authorized but unissued shares. It also states
that, if the corporation is prohibited from reissuing shares acquired in a
redemption or repurchase, the number of shares of the class is reduced by
the number of cancelled shares. Upon the redemption or purchase, the
stated capital of the corporation is reduced by the stated capital
represented by the shares that are redeemed or purchased.
Section 21.252 sets forth the procedures by which treasury shares may be
canceled.
Section 21.253 contains the procedures by which a corporation may reduce
its stated capital by action of the board of directors and shareholders.
Section 21.254 imposes certain limitations on the reduction of stated
capital that may be effected under this subchapter.
Subchapter G. Distributions and Share Dividends
Subchapter G contains provisions relating to distributions and share
dividends.
Section 21.301 contains certain definitions that are used in this
subchapter.
Section 21.302 gives the board of directors the authority to authorize
distributions.
Section 21.303 places certain limitations on distributions that may be
made by a corporation.
Section 21.304 contains requirements that relate to distributions that
are effected by means of a redemption of shares, including requirements
concerning how shares are chosen for redemption if less than all of the
outstanding shares of the class are being redeemed and a requirement that
the redemption be effected by call and written notice.
Section 21.305 describes the provisions to be included in a notice of
redemption.
Section 21.306 provides that, if a corporation deposits, in a specified
manner, the funds required to make a redemption, the shares called for
redemption are deemed to cease to be outstanding at the redemption date.
Section 21.307 indicates that receipt of the redemptive price for
certificated shares is conditioned upon surrender of the certificate and
provides the terms upon which a redeeming corporation may appoint a
transfer agent to pay the redemptive price.
Section 21.308 states that, in general, the obligation of a corporation
created by the declaration of a distribution, and any indebtedness of a
corporation issued in a distribution have the same priority as any other
general, unsecured obligation of the corporation.
Section 21.309 authorizes a corporation to establish, increase, decrease,
and abolish reserves out of its surplus.
Section 21.310 permits a board of directors to authorize a share dividend.
Section 21.311 places certain limits on share dividends that may be paid
by a corporation.
Section 21.312 provides the method for valuing the shares issued in a
share dividend.
Section 21.313 provides the mechanics for transferring surplus to stated
capital in connection with a share dividend.
Section 21.314 specifies how a corporation's solvency, net assets, stated
capital, and surplus are to be determined.
Section 21.315 provides the date as of which a determination of solvency,
net assets, stated capital, and surplus are to be made for purposes of
this subchapter.
Section 21.316 imposes liability on directors of a corporation that votes
for a distribution that is prohibited by Section 21.303 and describes
defenses available to a director for prohibited distributions.
Section 21.317 is the statute of limitations with respect to actions
against a director for a prohibited distribution.
Section 21.318 provides for contribution from a shareholder who knowingly
received a wrongful distribution and from any director also liable for the
distribution to achieve equity and provides that this is the only
liability of a shareholder of a corporation for receiving prohibited
distributions, except for claims under the U.S. Bankruptcy Code or the
fraudulent transfer statute in Chapter 24, Business & Commerce Code.
Subchapter H. Shareholders' Meetings; Voting and Quorum
Subchapter H contains provisions relating to meetings of shareholders,
including voting and quorum requirements.
Section 21.351 requires the holding of an annual meeting of shareholders
of a corporation (except certain investment companies) but provides that
the failure to hold an annual meeting does not result in the winding up or
termination of the corporation. It also gives to a shareholder the right
to petition a court to order an annual meeting. Although implicit in
existing law, this Section clarifies that no annual meeting may be ordered
if the annual meeting has been effectively held by written consent of the
shareholders. The Section also requires the shareholder to request the
corporation to hold an annual meeting before attempting to obtain a court
order to that effect, which is a change from existing law.
Section 21.352 authorizes the manner in which a special meeting of
shareholders may be called and limits the business that may be conducted
at a special meeting.
Section 21.353 requires that, subject to certain exceptions, written
notice of a meeting of shareholders be given to all shareholders entitled
to vote at the meeting no later than ten days and no earlier than 60 days
before the meeting. It also requires that a notice of a special meeting
of shareholders contain a statement of the purpose for which the meeting
is called.
Section 21.354 permits any shareholder to inspect the list of
shareholders entitled to vote at a meeting, which is required to be
prepared by Section 21.372, and requires the list to be produced and
available at the meeting. This section also states that the original
share transfer records of a corporation are prima facie evidence of the
shareholders entitled to inspect the list.
Section 21.355 mandates that the stock transfer records of a corporation
that, in accordance with Section 6.101, closes its stock transfer records
for purposes of determining the shareholders entitled to vote at a meeting
of shareholders are to remain closed for at least ten days immediately
preceding the meeting.
Section 21.356 states that the record date for determining shareholders
entitled to execute a written consent to action on a matter, as
established in accordance with Section 6.102(a), may not be more than ten
days after the date on which the board of directors adopts the resolution
setting the record date.
Section 21.357 states that the record date for determining shareholders
that is selected under Section 6.101, which is a record date for any
purpose other than a written consent to action, must be at least ten days
before the date on which the action for which the record date is
determined is to be taken.
Section 21.358 specifies that the holders of a majority of the shares
entitled to vote at a meeting that are present, in person or by proxy, is
a quorum unless the certificate of formation provides a different
measurement that is permitted by this section. This section also provides
that, in general, once a quorum is present at a meeting, business may
continue to be conducted at the meeting despite the subsequent departure
or refusal to vote of shareholders. It also gives the shareholders of a
corporation the right to adjourn any meeting at which a quorum is not
present.
Section 21.359 provides that directors are elected by a plurality vote
unless a different measurement is provided by the certificate of formation
or bylaws in accordance with this section.
Section 21.360 provides that cumulative voting is not permitted in the
election of directors unless expressly permitted in the certificate of
formation of a corporation formed after the effective date of the code or
expressly denied in the certificate of formation of a corporation formed
before the effective date of the code. This is a change from existing
law, which provides that cumulative voting is available to shareholders
unless the certificate of formation expressly denies it. This change
makes Texas law consistent with the laws of most other states, including
Delaware.
Section 21.361 provides the mechanics for how the right to cumulatively
vote is exercised.
Section 21.362 provides that the shareholders of a corporation that
exists prior to the date the code becomes effective will continue to have
the right to vote cumulatively in the election of directors unless the
right was denied in the corporation's certificate of formation or the
certificate of formation is later amended to deny the right.
Section 21.363 provides that, in general, the vote required to approve
any matter (other than the election of directors) is the affirmative vote
of the holders of a majority of the shares entitled to vote on such matter
who actually vote for, against, or abstain on such matter at a meeting at
which a quorum is present. This section also permits this general
requirement to be modified in certain ways in the certificate of formation
or bylaws.
Section 21.364 provides that, in general, the vote required to approve a
fundamental action is the affirmative vote of the holders of two-thirds of
the outstanding shares entitled to vote on such action. It also contains
provisions relating to when separate class or series voting is required
and permits the certificate of formation or bylaws to alter, within
certain parameters, the voting requirements set forth in the code.
Fundamental actions are defined to include amendments to the certificate
of formation, voluntary winding up and termination, and the revocation of
voluntary winding up and termination.
Section 21.365 indicates how the vote required for certain matters may be
altered.
Section 21.366 provides that, unless altered by the certificate of
formation, each outstanding share, regardless of class, has one vote on
each matter submitted to a vote of shareholders and provides that, when
shares have more or less than one vote per share, references in the code
to a specified portion of the shares should be read as a reference to the
specified portion of the votes.
Section 21.367 permits a shareholder to vote by proxy and sets forth the
manner in which a proxy may be executed. This section expands existing
law by specifically permitting a proxy by electronic and telephonic
transmission so long as it is accompanied by information that verifies it
was authorized by the shareholder. This change is consistent with the
trend of modern corporate law and similar to Delaware corporate law.
Section 21.368 provides that a proxy is not effective for more than 11
months unless it otherwise provides.
Section 21.369 states that a proxy is always revocable unless it states
that it is irrevocable and is coupled with an interest. The section also
indicates certain circumstances that are deemed to create a proxy that is
coupled with an interest.
Section 21.370 permits an irrevocable proxy to be specifically enforced
under the circumstances specified in that section.
Section 21.371 authorizes a corporation to establish procedures for
determining the validity of a proxy in its bylaws.
Section 21.372 request a corporation to prepare a listing of shareholders
entitled to vote at a shareholder meeting not later than the 11th day
before the date of the meeting. The required contents of the shareholders
list is also set forth. Failure to comply does not affect the validity of
any action taken at the meeting. The original share transfer records are
prima facie evidence of the shareholders entitled to vote at the meeting.
Subchapter I. Board of Directors
Subchapter I contains provisions relating to the board of directors of a
corporation that are supplemental to the provisions with respect to
governing persons found in Title I.
Section 21.401 provides that a corporation is to be governed by a board
of directors except as provided by Section 21.101 (shareholders'
agreements) or Subchapter O (close corporations).
Section 21.402 generally negates residency or shareholder status as
necessary qualifications for directors and permits the certificate of
formation and bylaws to specify qualifications.
Section 21.403 specifies that there must be at least one director and
provides how the actual number of directors must be set.
Section 21.404 requires the certificate of formation to include the names
of the initial board of directors.
Section 21.405 states that directors will be elected at each annual
meeting of shareholders and authorizes a certificate of formation to
provide the holders of a class or series to elect one or more directors.
Section 21.406 permits a director elected by the holders of a class or
series of shares to cast more or less than one vote and provides that
references in the code to voting by directors are to interpreted in
accordance with such a provision.
Section 21.407 provides that the term of a director is generally until
the next annual meeting of shareholders and the date the director's
successor is elected and qualified.
Section 21.408 permits the certificate of formation or bylaws to divide
the directors into two or more classes that have staggered terms and
provides the mechanics for effecting such a provision.
Section 21.409 specifies the terms on which directors may be removed. It
clarifies that shareholders have the right to remove directors with or
without cause unless otherwise provided in the certificate of formation or
bylaws. This change makes Texas law in this area consistent with Delaware
corporate law and the Model Business Corporation Act.
Section 21.410 provides the manner in which vacancies on the board of
directors may be filled.
Section 21.411 specifies the notice requirements for meetings of the
board of directors.
Section 21.412 specifies the terms upon which notice of a meeting of the
board of directors may be waived. This Section clarifies that a written
waiver of notice of a directors' meeting is effective, which conforms with
current legal practice but was not clear in existing law.
Section 21.413 specifies the manner in which a quorum of the board of
directors is determined.
Section 21.414 states that a director who is present at a meeting of the
board of directors is presumed to have consented to any action taken at
such meeting unless the director takes certain specified steps to negate
that presumption.
Section 21.415 specifies the vote required for a board of directors to
take action on any matter.
Section 21.416 authorizes the board of directors to create committees,
places certain limits on the authority of such a committee, and sets forth
certain mechanics for the operation of such a committee.
Section 21.417 requires the board of directors to elect a president and
secretary of a corporation and authorizes it to elect other officers.
Section 21.418 contains provisions that validate a transaction between a
corporation and a director or officer or an affiliate of the director or
officer if certain procedures are followed.
Subchapter J. Fundamental Business Transactions
Subchapter J contains provisions relating to how for-profit corporations
approve mergers, conversions, interest exchanges, and sales of all or
substantially all of the corporation's assets, which transactions are
defined as fundamental business transactions in Section 1.102.
Section 21.451 contains the definitions of certain terms that are used
in Subchapter J.
Section 21.452 sets out the procedures by which a corporation approves a
merger.
Section 21.453 sets out the procedures by which a corporation approves a
conversion.
Section 21.454 sets out the procedures by which a corporation approves an
interest exchange.
Section 21.455 sets out the procedures by which a corporation approves a
sale of all or substantially all of its assets.
Section 21.456 sets out the general procedures by which a corporation
submits a fundamental business transaction to shareholders for approval.
Section 21.457 specifies the vote of shareholders generally necessary to
approve a fundamental business transaction.
Section 21.458 requires class voting on certain fundamental business
transactions.
Section 21.459 specifies circumstances under which no shareholder
approval is required for a fundamental business transaction.
Section 21.460 grants to shareholders the rights of dissent and
appraisal, which are contained in Subchapter H of Chapter 10, with respect
to fundamental business transactions.
Section 21.461 authorizes the board of directors to cause the corporation
to pledge or mortgage the corporation's assets without shareholder
approval unless required by the certificate of formation.
Section 21.462 authorizes the board of directors to cause the corporation
to convey its real property.
Subchapter K. Winding Up and Termination
Subchapter K contains provisions that supplement Chapter 11 with respect
to the winding up and termination of a for-profit corporation.
Section 21.501 states that a corporation must approve a voluntary winding
up permitted by Chapter 11, a cancellation of an event requiring winding
up under Section 11.152, a revocation of a voluntary decision to wind up
permitted by Section 11.151, and a reinstatement of the corporation
permitted by Section 11.202.
Section 21.502 specifies procedures by which a corporation may approve a
voluntary winding up permitted by Chapter 11, a cancellation of an event
requiring winding up under Section 11.152, a revocation of a voluntary
decision to wind up permitted by Section 11.151, and a reinstatement of
the corporation permitted by Section 11.202. If the corporation has not
commenced business and has not issued any shares, a majority of the
incorporators or the board of directors must adopt a resolution to wind
up, to reinstate, to cancel, or to revoke a voluntary decision to wind up.
If shares have been issued, all shareholders may consent in writing to a
winding up, a reinstatement, a cancellation, or a revocation of voluntary
decision to wind up. Alternatively, the board of directors may adopt a
resolution recommending winding up, reinstatement, cancellation or
revocation of a voluntary decision to wind up and submit it to the
shareholders for approval at an annual or special meeting of shareholders.
The shareholders must approve such a recommendation in accordance with
Section 21.503.
Section 21.503 specifies the requirements for the notice of a meeting of
shareholders to consider the winding up, reinstatement, a cancellation, or
revocation of the voluntary decision to wind up of a corporation. Section
21.503 also specifies the vote of shareholders required at such a meeting
for approval of a winding up, reinstatement, cancellation or revocation of
voluntary decision to wind up. A resolution to wind up, reinstate, cancel
or revoke a voluntary decision to wind up must be approved by the
affirmative vote required by Section 21.362 (generally, two-thirds of the
outstanding shares entitled to vote on the action).
Section 21.504 specifies that the directors of the corporation must
manage the process of winding up its business or affairs. This Section is
a clarification of existing law.
Subchapter L. Derivative Proceedings
Subchapter L contains provisions relating to derivative proceedings by
shareholders of corporations.
Section 21.551 contains definitions specifically applicable to this
Subchapter.
Section 21.552 states the requirements for a shareholder to have standing
to bring a derivative proceeding under this subchapter.
Section 21.553 states the requirement that, with certain exceptions, a
written demand must have been filed with the corporation and a 90-day
waiting period must have expired prior to a shareholder filing a
derivative proceeding under this Subchapter.
Section 21.554 provides that a determination of how to proceed on
allegations made in a demand or petition relating to a derivative
proceeding must be made under specified conditions by affirmative vote of
(1) a majority of independent and disinterested governing persons present
at a meeting of only disinterested governing persons, (2) the majority of
a committee of two or more independent and disinterested persons appointed
by a majority of independent and disinterested governing persons present
at a meeting of the governing authority, or (3) a panel of one or more
independent and disinterested persons appointed by a court on motion of a
corporation. This section also provides the standards for court
appointment of such a panel and limits the liability of persons appointed
to such a panel.
Section 21.555 provides that if a corporation that is the subject of a
derivative proceeding commences an inquiry into the allegations made in
the demand or petition and the persons described in Section 21.554 are
conducting an active review of the allegations in good faith, the court
shall stay the derivative proceeding until the review is complete and the
persons have determined what further action, if any, should be taken. The
section further provides for review of the stay for continued necessity
every 60 days.
Section 21.556 states limits on discovery by a shareholder after the
filing of a derivative proceeding under this Subchapter if the corporation
proposes to dismiss the derivative proceeding under Section 21.558.
Section 21.557 provides that a written demand filed with the corporation
under Section 21.553 tolls the statute of limitations on the underlying
claim until the earlier of the 91st day after the date of the demand or
the 31st day after the date that the corporation advises the shareholder
that the demand has been rejected or the review completed.
Section 21.558 requires a court to dismiss a derivative proceeding on a
motion by the corporation if the persons described in Section 21.554
determine in good faith, after conducting a reasonable inquiry and based
on factors they consider appropriate under the circumstances, that
continuation of the derivative proceeding is not in the best interests of
the corporation. The Section also states the burden of proof for such a
motion.
Section 21.559 provides that if a derivative proceeding is instituted
after a demand is rejected, the petition must allege with particularity
facts that establish that the rejection was not made in accordance with
the requirements of Sections 21.554 and 21.558.
Section 21.560 provides that a derivative proceeding may not be
discontinued or settled without court approval and also that the court
direct that notice be given to shareholders whose interests the court
determines may be substantially affected by a proposed discontinuance or
settlement.
Section 21.561 states the requirements for a court to order the payment
by another party of the reasonable expenses incurred by a party in a
derivative proceeding.
Section 21.562 states the extent of the application of this Subchapter
and of the laws of its jurisdiction of organization to derivative
proceedings brought in the right of a foreign corporation.
Section 21.563 provides that in the case of a "closely held corporation"
having fewer than 35 shareholders and no shares listed on a national
securities exchange or regularly quoted in an over-the-counter market, the
provisions of Sections 21.552 through 21.559 do not apply except that, if
justice requires, a derivative proceeding brought by a shareholder may be
treated by a court as a direct action brought by the shareholder for the
shareholder's own benefit and any recovery by the shareholder may be paid
directly to the plaintiff or to the corporation if necessary to protect
the interests of creditors or other shareholders of the corporation.
Subchapter M. Affiliated Business Combinations
Subchapter M contains provisions governing certain business combinations
between an "issuing public corporation" and certain of its affiliates.
The provisions are derived from Articles 13.01 through 13.08 of the TBCA
and are substantively the same.
Section 21.601 contains the definitions of "issuing public corporation,"
"shares acquisition date," "subsidiary," and "voting shares," as such
terms are used in this subchapter.
Section 21.602 defines "affiliated shareholder" for purposes of this
subchapter.
Section 21.603 contains a definition of "beneficial owner" as used in
this subchapter.
Section 21.604 contains a definition of "business combination" as used in
this subchapter.
Section 21.605 contains a definition of the term "control" as used in
this subchapter.
Section 21.606 establishes a three-year moratorium on business
combinations between an issuing public corporation and an affiliated
shareholder.
Section 21.607 sets forth the circumstances under which the three-year
moratorium imposed by Section 21.606 are inapplicable.
Section 21.608 makes clear that subchapter M does not affect the validity
of or prevent any action other than a business combination and that the
board of directors does not have any liability based on whether an
election is made or not made under subchapter M.
Section 21.609 states that subchapter M controls over any conflicting
provision elsewhere in the Code.
Section 21.610 specifies that the required shareholder vote may be
increased but not decreased under Section 21.365.
Subchapter N. Provisions Relating to Investment Companies
Subchapter N contains provisions that relate only to corporations that
are registered as open-end companies under the Investment Company Act.
Section 21.651 defines the term "investment company" as used in
Subchapter N.
Section 21.652 permits the board of directors of an investment company to
take certain actions with respect to creating classes and series of shares
and increasing and decreasing the number of shares within a class or
series that are in addition to those permitted elsewhere in the Code.
Section 21.653 provides that a statement concerning any class or series
of shares that is modified by the board of directors of an investment
company as contemplated by Section 21.652 must be filed with the Secretary
of State and specifies the content of that statement.
Section 21.654 states that the term of a director of an investment
company is the term for which the director is elected and until the
successor is elected and qualified. As a result, the typical one-year
term is not applicable to investment companies. This is to permit
investment companies to hold elections only when mandated by the
Investment Company Act.
Section 21.655 states that, if provided in the certificate of formation
or bylaws, an investment company need not hold annual meetings of
shareholders or elect directors in a year in which an election is not
required by the Investment Company Act.
Subchapter O. Close Corporation
Subchapter O contains provisions relating to the creation, governance,
and treatment of a close corporation.
Section 21.701 contains the definitions of "close corporation," "close
corporation provision," "ordinary corporation," and "shareholders'
agreement." "Close corporation provision" is a new definition that refers
to provisions contained in a certificate of formation or shareholders'
agreement of a close corporation.
Section 21.702 indicates that Subchapter O applies only to close
corporations and that the remaining provisions of the Chapter apply to
close corporations to the extent not inconsistent with Subchapter O.
Section 21.703 states that a close corporation is to be formed in
accordance with Chapter 3.
Section 21.704 states that bylaws need not be adopted if the provisions
required by law to be in the bylaws are in the certificate of formation or
a shareholders' agreement. A close corporation terminating its close
status must adopt bylaws.
Section 21.705 describes the procedure by which an ordinary corporation
may become a close corporation and requires the affirmative vote of all of
the shareholders.
Section 21.706 permits a surviving or new corporation resulting from a
merger or conversion, or a corporation that acquires a corporation in an
interest exchange, to become a close corporation. Approval of all of the
shareholders of each corporation is required.
Section 21.707 continues the close corporation status of an existing
corporation that elected to become a close corporation before the
effective date of the code, and provides that the existing agreement among
the shareholders is considered to be a shareholders' agreement. However,
any share certificate representing shares of the close corporation issued
or delivered after the effective date of the code must conform with the
code requirements.
Section 21.708 describes the procedure for elective termination of close
corporation status by filing a statement of termination, amending the
certificate of formation to delete the statement that it is a close
corporation, or by engaging in a merger, interest exchange, or conversion
unless the plan provides that the surviving or new corporation will
continue as or become a close corporation. Status as a close corporation
would also be terminated when decreed in a judicial proceeding to enforce
a provision providing for termination.
Section 21.709 provides that a time or event specified in a close
corporation provision requiring termination of close corporation status
will have the effect of terminating that status. After the time or
occurrence of the event, a statement of termination of close corporation
status must be signed by an officer on behalf of the close corporation and
filed with the Secretary of State. The section specifies the required
contents of the statement of termination and requires that a copy be
delivered or mailed to each shareholder.
Section 21.710 addresses the effects of termination of close corporation
status on the corporation.
Section 21.711 provides the procedure for calling a shareholders' meeting
after termination of a close corporation status for the purpose of
electing directors.
Section 21.712 provides the term of directors succeeding to management of
a former close corporation and directs that shareholders act as directors
until directors are elected.
Section 21.713 describes the management alternatives for close
corporations.
Section 21.714 provides for shareholders' agreements in close
corporations and describes generally how the business and affairs of a
close corporation or the relationships among the shareholders may be
regulated by such an agreement. TBCA allows for arbitration of issues
when the decision makers are deadlocked, and this section adds mediation
as an additional means of dispute resolution.
Section 21.715 specifies who is required to sign a shareholders'
agreement and generally requires all shareholders or subscribers, whether
or not they have voting rights, to execute a shareholders' agreement in a
close corporation.
Section 21.716 provides the procedure for amending the shareholders'
agreement in a close corporation.
Section 21.717 details the requirements of delivery of a shareholders'
agreement to various persons affected and states that failure to deliver
the agreement will not invalidate the shareholders' agreement.
Section 21.718 requires a close corporation that conducts its business
and affairs under a shareholders' agreement to file a statement of
operation with the Secretary of State and provides that this filing causes
the fact that the close corporation conducts its business and affairs
under a shareholders' agreement to be a matter of public record.
Section 21.719 provides that a shareholders' agreement is enforceable
despite the fact that it eliminates the board of directors, imposes
restrictions on the authority of the board of directors, or treats the
affairs of the close corporation as if it were a partnership. It also
authorizes a close corporation, any of its shareholders, or any party to a
shareholders' agreement to seek to enforce the shareholders' agreement.
Section 21.720 provides that a shareholders' agreement that is executed
as provided in Section 7.15 is binding on all shareholders and assignees
of shares, regardless of whether such shareholder or assignee had
knowledge of the shareholders' agreement.
Section 21.721 requires a shareholder of a close corporation to deliver a
copy of the shareholders' agreement before making a transfer of shares but
makes clear that the failure to do so does not invalidate the
enforceability of the shareholders' agreement.
Section 21.722 states that each holder of or other person claiming an
interest in shares of a close corporation is presumed to have knowledge of
a close corporation provision that exists at the time of transfer if a
certificate representing those shares contains the statement required by
Section 21.732 and the shareholders' agreement was delivered as required
by Section 21.717.
Section 21.723 specifies the manner in which a person ceases to be a
party to and bound by a shareholders' agreement and the consequences of
such cessation.
Section 21.724 provides when a shareholders' agreement terminates.
Section 21.725 states that Sections 21.726 through 21.729 apply only to
close corporations that are not managed solely by the board of directors
but are instead at least partly managed by shareholders or other persons.
Section 21.726 states that shareholders of a corporation described in
Section 21.725 are considered to be directors under Chapter 21, other than
with respect to provisions relating to the election and removal of
directors and the procedure for making filings that require a statement
that a specified action has been taken by the board of directors.
Section 21.727 imposes on the shareholders of a corporation described in
Section 21.725, in connection with the exercise of managerial acts or
omissions by the shareholders or other persons who manage the close
corporation, the liabilities imposed on directors of corporations.
Section 21.728 states that actions normally taken by the board of
directors of a corporation may be taken by the shareholders of a
corporation described in Section 21.725 at a meeting or without a meeting
as permitted by the shareholders' agreement, subchapter O, or chapter 21.
It also sets out the means by which shareholders may authorize an action,
including by actual majority vote or by unanimous consent, which need not
be written but may be demonstrated in one of the specified ways.
Section 21.729 negates the liability of a shareholder of a close
corporation described in Section 21.725 with respect to any matter
approved by the shareholders or other persons who manage the corporation
pursuant to the shareholders' agreement if the shareholder did not have
the right to vote on the matter or dissented from and did not vote for
such matter.
Section 21.730 states that the fact that a close corporation fails to
follow the normal formalities observed by most corporations may not be
used to impose personal liability on the shareholders, invalidate the
shareholders' agreement, or affect the status of the close corporation as
a corporation. This protection now applies to all close corporations and
is no longer limited to close corporations described in Section 21.725,
which is the case under TBCA Article 12.37.
Section 21.731 provides that the provisions of Sections 21.713 through
21.730 do not prohibit or impair any other agreement between shareholders
of an ordinary corporation permitted by law.
Section 21.732 contains supplemental provisions concerning the
information required on certificates that represent shares of a close
corporation and states that the failure to include such information does
not affect the close corporation's status as such.
Subchapter P. Judicial Proceedings Relating to Close Corporations
Subchapter P contains provisions relating to the filing of various
judicial proceedings relating to close corporations, such as those
intended to enforce the close corporation provision, appoint a provisional
director, or appoint a custodian for the corporation.
Section 21.751 provides general definitions for use in interpreting the
provisions of Subchapter P.
Section 21.752 provides that, in addition to any other judicial
proceedings that may be brought by a corporation, a close corporation may
institute a proceeding intended to enforce a close corporation provision,
appoint a provisional director, or appoint a custodian for the
corporation.
Section 21.753 sets forth notice requirements for judicial proceedings
relating to close corporations and authorizes the corporation or a
shareholder thereof to intervene in the proceeding.
Section 21.754 provides that the right of a close corporation or a
shareholder thereof to institute a judicial proceeding is in addition to
any other lawful right or remedy available to the plaintiff.
Section 21.755 prohibits a shareholder of a close corporation from
instituting a judicial proceeding before exhausting any non-judicial
remedy set forth in a close corporation provision regarding dispute
resolution unless irreparable harm will result before a non-judicial
remedy is exhausted. Section 21.755 also prohibits a shareholder of a
close corporation from instituting a proceeding seeking damages or other
monetary relief if the shareholder is entitled to dissent and receive the
fair value of the shares under the code or a shareholders' agreement.
Section 21.756 provides that in a judicial proceeding brought to enforce
a close corporation provision, the court must enforce the provision
regardless of whether there is an adequate remedy at law. Section 21.756
further authorizes the court to enforce the provision by any fair and
equitable means, including damages, specific performance, the appointment
of a provisional director, custodian, or receiver, the liquidation of the
assets of the corporation, and the termination of close corporation
status. The court may not, however, order termination of close corporation
status unless no other remedy at law is adequate and the size, nature of
the business, or number of or relationship between the shareholders is
such as to make the continuation of close corporation status wholly
impractical.
Section 21.757 provides that when a shareholder is entitled to wind up
and terminate a close corporation under a shareholders' agreement, the
court may not order liquidation, involuntary termination, or receivership
unless no other remedy at law is adequate.
Section 21.758 requires the court to appoint a provisional director for
the corporation "upon presentation of proof that the persons empowered to
manage the corporation are so divided, with respect to the management of
the business and affairs of the corporation, that the business and affairs
are not being conducted in a manner that is to the general advantage of
the shareholders." The section further requires the provisional director
to be an impartial person and enables the court to determine any further
qualifications. The section also provides that the provisional director
serve until removed by court order or by a vote of the requisite majority
of directors or shareholders as provided in the relevant close corporation
provisions.
Section 21.759 provides that a provisional director has all the rights
and powers of a duly elected director or a shareholder, if the
shareholders have been empowered to manage the business under a
shareholders' agreement.
Section 21.760 provides that the compensation of a provisional director
will be determined by agreement between the director and the close
corporation; provided, however, that the court may set the compensation in
the absence of agreement or in the case of a disagreement between the
director and the corporation.
Section 21.761 requires the court to appoint a custodian for the
corporation upon presentation of proof that (i) the shareholders are so
divided as not to be able to elect successor directors to replace those
whose terms have expired or would have expired upon qualification of a
successor, (ii) the business of the corporation is so divided with respect
to their views on the management of the business and affairs of the
corporation, that the votes or consents required to take action on behalf
of the corporation cannot be obtained and any deadlock remedy provision
has failed, or (iii) the plaintiff or intervenor has the right to wind up
and terminate the corporation under a shareholders' agreement. The section
further requires the custodian to comply with the qualifications required
to serve as a receiver under Section 11.406.
Section 21.762 provides that a custodian has the same powers and duties
as granted to a receiver appointed under Sections 11.404 through 11.406 of
the Code. The section requires that the custodian continue the business
of the corporation and not liquidate the corporation except as provided by
court order or Section 21.761(a)(3).
Section 21.763 requires that if the condition requiring the appointment
of the custodian is remedied through means other than winding up and
termination, then the custodianship will be immediately terminated and
management of the corporation will be returned to the shareholders,
directors, or other persons empowered to manage the corporation's
business, as appropriate.
Subchapter Q. Miscellaneous Provisions
Subchapter Q contains miscellaneous provisions that apply to for-profit
corporations.
Section 21.801 states that, except as otherwise provided by the Code,
shares and other securities of a corporation are personal property.
Section 21.802 provides for penalties if a corporation does not file a
change of registered office or agent, a certificate of voluntary
withdrawal or a certificate of termination within thirty (30) days after
the date of the change, withdrawal or termination or the date the filing
is otherwise required by law. The civil penalty may not exceed $2,500.00
for each violation. The attorney general can bring suit to recover the
civil penalty or enjoin a person from violating this Section. A plaintiff
in an action or proceeding may bring suit to recover reasonable costs and
attorney's fees incurred to locate and effect service of process on the
violating person.
CHAPTER 22. NONPROFIT CORPORATIONS
Chapter 22 codifies the provisions relating to nonprofit corporations
currently located in Art. 1396-1.01 et seq. This subtitle utilizes the
new terminology of the Code and, except as noted below, is a
nonsubstantive codification. Obsolete transitional provisions enacted
with the TNPCA in 1959 have been eliminated.
Subchapter A. General Provisions
Section 22.001 defines the following terms: board of directors, bylaws,
corporation, foreign corporation, nonprofit corporation, and ordinary
care.
Section 22.002 imposes limits on meetings by remote electronic
communications systems. Participants must consent to the meeting being
held in that manner and be able to communicate concurrently with each
other participant.
Subchapter B. Purposes and Powers
Section 22.051 allows a nonprofit corporation to be formed for any lawful
purpose.
Section 22.052 contains the provisions relating to creation of a
nonprofit corporation as a dental health service corporation.
Section 22.053 prohibits a corporation created under this Chapter from
paying dividends or distributing income to its members, directors, or
officers.
Section 22.054 authorizes a corporation to pay reasonable compensation
for services rendered, confer benefits upon its members in conformity with
its purposes, and make distributions to members as permitted under this
Chapter upon winding up and termination.
Section 22.055 prohibits a corporation from making loans to its directors
and restricts the authority of the corporation to make loans to officers
to specified circumstances and amounts.
Section 22.056 provides that nonprofit corporations may be formed that
are jointly owned, managed and controlled by doctors of medicine,
osteopathy and podiatry under certain circumstances. The section also
limits the authority of each type of practitioner to practice within the
scope of their respective licenses.
Subchapter C. Formation and Governing Documents
Section 22.101 allows an existing nonprofit organization to incorporate
with the consent of a majority of its members.
Section 22.102 authorizes the board of directors or, members if the
corporation is member-managed, to adopt bylaws for the regulation of
management of the affairs of the corporation not inconsistent with law of
the certificate of formation. Bylaws may be amended or repealed by the
directors unless the certificate of formation or this chapter reserves the
power to the members, management is vested in the members, or the bylaws
expressly provide that the directors may not amend or repeal the bylaws.
Section 22.103 provides that a provision of the certificate of formation
that is inconsistent with a bylaw controls over the bylaw except a change
in the number of directors by an amendment to the bylaws controls unless
the certificate of formation specifically provides that a change in the
number of directors may be made only by amendment.
Section 22.104 requires the organizers or directors to call and give
notice of an organizational meeting of the board of directors for the
purpose of adopting bylaws, electing officers, and such other purposes as
may come before the meeting. If the corporation is member-managed, the
organizers shall call and give notice of an organizational meeting of the
members.
Section 22.105 outlines the procedure for amending the certificate of
formation when there are members having voting rights. The procedure
requires the board of directors to adopt a resolution to amend and
directing that the amendment be submitted to a vote of the members.
Written notice of the meeting is required and the proposed amendments
shall be adopted on receiving at least two-thirds of the votes of the
members present at the meeting.
Section 22. 106 outlines the procedure for amendment when the management
of the affairs of the corporation is vested in the corporation's members
under Section 22.202.
Section 22.107 outlines the procedure for amendment by the board of
directors when the corporation has no members or no members having voting
rights, or for limited purposes without membership approval. These
purposes include action taken to extend the duration; delete the names and
addresses of the initial directors; delete the registered agent
information, if a statement of change is on file with the secretary of
state; or change the name of a corporation to delete or substitute one of
the words or abbreviations on incorporation, or by adding, deleting or
changing a geographical attribution to the name.
Section 22.108 specifies that more than one amendment may be voted on at
any one meeting of the members.
Subchapter D. Members
Section 22.151 authorizes a nonprofit corporation to have one or more
classes of members or no members. Such designation of classes to be set
forth in the certificate of formation or bylaws. The section allows a
nonprofit corporation to issue instruments evidencing membership, voting
or ownership rights.
Section 22.152 provides that the members shall not be personally liable
for the debts, liabilities, or obligations of the corporation.
Section 22.153 requires a corporation to have an annual meeting of the
members as fixed in the bylaws unless the bylaws require more than one
regular meeting of members each year.
Section 22.154 gives a member the right to make demand on the corporation
to hold an annual meeting, and authorizes legal action to compel the
holding of such annual meeting. Further, the section specifies that the
failure to hold an annual meeting shall not cause a winding up and
termination of the corporation.
Section 22.155 allows special meetings of the corporation to be called by
the president, board of directors, by members having not less than
one-tenth of the voting rights, and other officers or persons as
authorized in the certificate of formation or bylaws.
Section 22.156 directs a corporation, other than a church, to provide
written or printed notice of a meeting to each member entitled to vote
stating the time and place of the meeting, and in the case of a special
meeting, the purpose of the meeting. Notice of members of a church is
considered sufficient if announced at a regularly scheduled worship
service or as otherwise provided in the certificate of formation or
bylaws.
Section 22.157 allows a corporation to adopt a bylaw that provides that
notice of an annual or regular meeting is not required. A corporation
with more than 1,000 members may, if permitted by the bylaws, provide
notice of the meeting through publication.
Section 22.158 mandates that a corporation shall, after fixing a record
date for a meeting, prepare a list of voting members identifying those
members entitled to notice, those members not entitled to notice of the
meeting, the address of each voting member and the number of votes each
voting member is entitled to cast. Such list must be available for
inspection and copying by any member entitled to vote not later than two
business days after notice is given, and must also be available at the
meeting.
Section 22.159 specifies that unless otherwise provided in the
certificate of formation or bylaws, members holding one-tenth of the votes
shall constitute a quorum. A vote of the majority of the votes entitled to
be cast shall be the act of the members unless a greater vote is required
by law, the certificate of formation, or the bylaws. In the case of a
church formed prior to May 12, 1959, the effective date of the TNPCA, the
members present at a meeting shall constitute a quorum.
Section 22.160 specifies that each member shall be entitled to one vote
except to the extent that voting rights are limited, denied or enlarged by
the certificate of formation or bylaws. Further, the section allows
members to vote by proxy unless the certificate of formation or bylaws
otherwise provide. The period for which a proxy may be irrevocable is
limited to 11 months. The default provisions provide that, unless
otherwise provided in the proxy, the proxy is revocable and expires 11
months after execution. The certificate of formation or bylaws may
authorize elections to be conducted by mail, by facsimile, by electronic
message or by a combination of those methods.
Section 22.161 provides that the members of the corporation may vote in
person or by proxy for as many persons as there are directors to be
elected. If expressly authorized by the certificate of formation, a
member may cumulate the member's vote for directors after giving written
notice of the intention to cumulate votes.
Section 22.162 allows a corporation to mandate a greater voting
requirement for actions of members than stated in the Subtitle so long as
the greater requirement is set forth in the certificate of formation.
Section 22.163 outlines the procedures for fixing the record date for
determining members entitled to vote at a meeting or an adjournment of the
meeting.
Section 22.164 combines into one section the similar voting requirements
found in multiple sections of existing law. For any "fundamental action,"
the vote required for approval is generally at least two-thirds of the
votes that members present in person or by proxy are entitled to cast at
the meeting. Voting by class of members on the fundamental action may
also be required.
Subchapter E. Management
Section 22.201 provides that the affairs of a corporation shall be
managed by a board of directors and that the board may be designated by
any name.
Section 22.202 allows a corporation to vest management in its members.
The certificate of formation or bylaws may also limit the authority of the
board. A corporation is considered to have vested management in its board
of directors in the absence of a provision in the certificate of formation
or bylaws otherwise unless the corporation is a church operating under a
congregational system incorporated before January 1, 1994 and is
member-managed.
Section 22.203 provides that a director is not required to be a resident
of this state or a member of the corporation unless the certificate or
bylaws of the corporation imposes that requirement. The certificate or
bylaws may prescribe other qualifications for directors.
Section 22.204 requires that the number of directors shall be not less
than three (3) and otherwise fixed in the manner provided in the
certificate of formation or bylaws. Further, the section provides that the
number of the initial board of directors be set by the certificate of
formation. The number of directors may be increased or decreased by
amendment to the certificate of formation or bylaws.
Section 22.205 mandates that the certificate of formation name the
initial directors.
Section 22.206 provides that the directors, other than the initial
directors, shall be elected, appointed or designated in the manner and for
the terms specified in the certificate of formation or bylaws.
Section 22.207 allows the directors to be elected by an association or
corporation if there are no members having voting rights and the
certificate of formation or bylaws provided for that election. The
directors of a religious, charitable, educational or eleemosynary
corporation may be affiliated with, elected or controlled by another
incorporated or unincorporated convention, conference or association.
Section 22.208 provides that the term of the initial directors is until
the first annual election of directors or for the period specified in the
certificate of formation or bylaws. Other directors hold office for the
term provided in the certificate of formation or bylaws. Unless otherwise
provided, a director holds office until a successor is election, appointed
or designated and qualified.
Section 22.209 permits a corporation to divide directors into classes.
The terms of office of each class are not required to be uniform.
Section 22.210 authorizes a corporation to have ex officio members of the
board. Such members are entitled to received notice of board meetings and
attend meetings but do not have voting rights unless entitled under the
certificate of formation or bylaws. If the member does not have voting
rights, the member does not have the duties or liabilities of a director.
Section 22.211 permits a corporation to remove any director from office
in the manner provided in the certificate of formation or bylaws. In the
absence of a provision for removal, a director may be removed from office,
with or without cause, by the persons entitled to elect, designate, or
appoint the director.
Section 22.212 authorizes a corporation to fill a vacancy in the board of
directors by affirmative vote of a majority of the remaining directors.
Further, the section allows any directorship created by reason of an
increase in the number of directors to be filled at an election at an
annual or special meeting of the members, or if no members have voting
rights in the manner provided in the certificate of formation or bylaws.
Section 22.213 provides that a quorum of directors is a majority of the
directors fixed by the bylaws, stated in the certificate of formation, or
three, whichever is less. This section specifically provides that
directors present by proxy may not be counted toward a quorum.
Section 22.214 specifies that the act of the majority of the directors at
a meeting at which a quorum is present is the act of the board of
directors unless the certificate of formation requires the vote or
concurrence of a greater number
Section 22.215 sets forth the proxy provisions for directors. A director
may vote by proxy if permitted in the certificate of formation or bylaws
and the proxy is executed in writing.
Section 22.216 specifies that a director's proxy expires three months
after the date the proxy is signed and is revocable unless otherwise
provided by the proxy or made irrevocable by law.
Section 22.217 sets forth the requirements for notice for director's
meetings.
Section 22.218 permits a corporation by resolution of the board of
directors to designate one or more committees consisting of at least two
members to have and exercise the authority of the board of directors in
the management of the corporation. The majority of the persons on the
committee must be directors. Designation of a committee does not relieve
the board or an individual member of the board from any responsibility
imposed by law. A committee member who is not a director has the same
responsibility with respect to the committee as a member who is also a
director.
Section 22.219 authorizes the establishment of committees for purposes
other than exercising the authority of the board of directors. Committee
membership may be limited to directors.
Section 22.220 allows action by directors or committees without a meeting
if consent is signed by a sufficient number of directors or committee
members as would be necessary to take action at a meeting and meets other
requirements for consent.
Section 22.221 mandates that a director discharge the director's duties
in good faith, with ordinary care, and in a manner that the director
reasonably believes to be in the best interest of the corporation, and
puts the burden of proof on any person seeking to establish otherwise.
Section 22.222 allows a director of a religious corporation to rely in
good faith on information presented by a religious authority, or a
minister, priest, rabbi or other person whose position or duties in the
corporation the justifies reliance or confidence.
Section 22.223 specifies that a director does not have the duties of a
trustee of a trust with respect to the corporation or property held or
administered by the corporation.
Section 22.224 authorizes the directors to delegate investment authority.
Section 22.225 prohibits a corporation from making a loan to a director
and provides liability to a director or officer who participates in making
the loan.
Section 22.226 imposes liability on directors under certain
circumstances, including when a director votes for a distribution of
assets when the corporation is insolvent, and during liquidation without
payment and discharge or adequate provision for all known debts. Further,
the section provides that the director is not liable if the director, in
good faith and with ordinary care, relied on information under section
3.102 of the Code or considered the corporation's assets to equal at least
their book value or relied on financial statements or other information
concerning a person who has agreed to discharge some or all of the
liabilities or obligations of the corporation.
Section 22.227 presumes that a director who is present at a meeting has
assented to the action unless the director's dissent is entered in the
minutes, the director files a written dissent with the secretary at the
meeting or sends the dissent to the secretary immediately following the
meeting.
Section 22.228 provides that a director is not liable under Section
22.226 or 22.227 if, in the exercise of ordinary care, the director acted
in good faith and in reliance on the written opinion of an attorney.
Section 22.229 gives a director the right to seek contributions if held
liable on a claim from those persons who accepted or received the
distribution knowing the distribution to have been made in violation of
Section 22.226 or 22.227.
Section 22.230 applies to contracts or transactions between a corporation
and a director, officer, or member of the corporation, as well as between
an organization in which a director, officer, or member of the corporation
is also a director, officer, or member of the organization or has a
financial interest in the organization. The Section provides that an
otherwise valid contract or transaction between a corporation and an
interested party is valid if certain disclosure and approval procedures
are followed. These provisions have been changed to be similar to the same
provisions in Chapter 21. The presumption will be that the contract is
valid if the material facts of the relationship and the contract have been
disclosed and one of certain approval procedures are followed. Currently,
in the TNPCA, the presumption is that the contract is not void or
voidable.
Section 22.231 requires that the officers of a corporation shall consist
of a president and secretary and such other officers as deemed necessary
by the directors, or prescribed in the certificate of formation or bylaws.
Further, the section does not allow the offices of president and secretary
to be held by the same person and authorizes a properly designated
committee to perform the functions of an officer.
Section 22.232 provides that the officers of a corporation shall be
elected or appointed in the manner and for the terms prescribed by the
certificate of formation or bylaws provided that the term of an officer
may not exceed three years. In the absence of a provision to the contrary
in the certificate or bylaws, the officers are elected or appointed by the
board of directors or the members is management is vested in the members.
Section 22.233 relieves a church from the necessity of having officers as
provided by this subchapter and allows the duties and responsibilities of
the officers to be vested in the board of directors or other designated
body in the manner provided in the certificate of formation or bylaws.
Section 22.234 allows an officer of a religious corporation to rely in
good faith on information presented by a religious authority, or a
minister, priest, rabbi or other person whose position or duties in the
corporation that justifies reliance or confidence.
Section 22.235 specifies an officer is not liable to the corporation or
any other person for an action in the officer's capacity unless the
officer's conduct was not exercised in good faith, with ordinary care and
in a manner the officer reasonably believes to be in the best interest of
the corporation. The liability of the corporation is not affected.
Subchapter F. Fundamental Business Transactions
Section 22.251 requires that a plan of merger be approved by its members
or directors. The procedures for approval are also specified.
Section 22.252 requires that the sale of all or substantially all of the
assets be approved by its members or directors. The procedures for
approval are also specified. The members may authorize the sale and set,
or authorize the directors to set, the terms and conditions of the sale.
Further, the directors are given the authority to abandon a sale without
further action of the members. Additionally, the section allows the
directors without membership approval to sell all or substantially all of
the assets of the corporation when the corporation is insolvent. This
Section provides a definition of sale of all or substantially all of the
assets which is updated to parallel the more modern forprofit corporate
provisions.
Section 22.253 sets forth the requirements for written notice of the
meeting to approve a plan of merger or the sale of all or substantially
all of the assets of the corporation.
Section 22.254 specifically allows the board of directors, or the members
if management is vested in the members, to authorize, without membership
consent, any pledge, mortgage, deed of trust or trust indenture and any
sale resulting therefrom.
Section 22.255 authorizes a corporation to convey real property when
authorized by its directors or members, as appropriate.
Section 22.256 sets forth the procedures for approval of a conversion of
the corporation under Chapter 10.
Section 22.257 sets forth the procedures for approval of an interest
exchange by the corporation under Chapter 10.
Subchapter G. Winding Up and Termination
Section 22.301 requires the approval of a winding up and termination of a
corporation, a reinstatement, a cancellation of an event requiring winding
up, a revocation of a voluntary decision to wind up or a distribution plan
by complying with the procedures in this Subchapter.
Section 22.302 specifies the procedures to approve a winding up and
termination, a reinstatement, a cancellation, a revocation of a voluntary
decision to wind up or a distribution plan.
Section 22.303 sets forth the requirements for written notice of the
meeting to approve a winding up, a reinstatement, a cancellation, a
revocation of a voluntary decision to wind up or a distribution plan.
Section 22.304 outlines the procedures for applying and distributing
property of a corporation in the process of winding up.
Section 22.305 authorizes a corporation to approve a plan for
distribution of property in accordance with this subchapter.
Section 22.306 allows a corporation that was terminated by expiration of
its duration to amend its duration in the three-year period following
expiration, and specifically provides that an act or contract of a
corporation during this three-year period is not invalidated by the
expiration of the period of duration.
Section 22.307 designates whether the directors or members are
responsible for management of the winding up of the corporation's affairs.
Subchapter H. Records and Reports
Section 22.351 gives a member of a corporation to right to examine and
copy the books and records of the corporation.
Section 22.352 mandates that a corporation maintain current and accurate
financial records with respect to all financial transactions and prepare a
report of the financial activity of the corporation for each year.
Section 22.353 requires that a corporation keep all records, books and
annual reports at the registered or principal office of the corporation
for at least three years and make them available for public inspection.
Section 22.354 provides that a corporation that fails to maintain the
record, prepare the report, or make the record or report available is
guilty of a Class B misdemeanor.
Section 22.355 sets forth the exemptions from the requirements relating
to the financial records and annual reports. The exemptions include
corporations that solicit funds only from members; corporations that do
not receive contributions from sources other than its own membership in
excess of $10,000 annually; certain educational institutions and related
foundations; religious institutions; trade associations or professional
societies; insurers; charitable organizations whose activities relate to
conservation and protection of wildlife, fisheries and natural resources;
and alumni associations. This Section clarifies that private institutions
of higher education described in the Education Code and their foundations
are exempt from the specific recordkeeping and reporting obligations in
this Subchapter.
Section 22.356 provides that a corporation designed to assist a state
agency shall file a report of financial activity with the Secretary of
State.
Section 22.357 authorizes the Secretary of State to require a periodic
report from nonprofit corporations and sets forth the information to be
contained in the report.
Section 22.358 directs the Secretary of State to notify a corporation of
the need to file the report.
Section 22.359 directs the corporation to file the report within 30 days
of notification.
Section 22.360 authorizes the Secretary of State to forfeit the right of
a corporation to conduct its affairs in Texas if it fails to timely file
the report.
Section 22.361 provides that the Secretary of State shall notify the
corporation of the forfeiture under 22.360.
Section 22.362 outlines the effects of the forfeiture.
Section 22.363 specifies the procedures to be followed to revive the
right of the corporation to conduct affairs.
Section 22.364 gives the Secretary of State the right to terminate a
domestic corporation, or revoke the registration to transact business in
Texas of a foreign corporation for any corporation that fails to revive
its right to conduct affairs.
Section 22.365 allows a corporation to make application for reinstatement
and setting aside of a termination of any domestic corporation or
revocation of registration to transact business of any corporation when
the corporation files the report and for the secretary of state to
reinstate the corporation or registration to transact business without
judicial action.
Subchapter I. Church Benefit Boards
Section 22.401 defines a "church benefits board."
Section 22.402 permits a Texas or foreign nonprofit corporation formed
for a religious purpose to provide, through a church benefits board, for
the support and payment of benefits to ministers, and other functionaries
of the church, of other organizations controlled or affiliated with a
church, or the beneficiaries of the ministers or other functionaries.
Section 22.403 allows the board to collect contributions to aid in
providing support, pensions and benefits.
Section 22.404 authorizes the board to act as a trustee and agent under a
trust created by contract, will or otherwise.
Section 22.405 permits the board to provide certificates or agreements of
participation to its program participants.
Section 22.406 allows the board to agree to indemnify its ministers,
directors and other functionaries and their families, as well as other
churches that are controlled or affiliated with the board.
Section 22.407 provides that money or other benefits provided to a
participant or beneficiary are not subject to execution or other process
other than a qualified domestic relations order.
Section 22.408 provides that any attempted assignment or transfer of
benefits is void if the plan or program contains a prohibition against
assignment or transfer without written consent and the beneficiary
attempts an assignment or transfer without consent.
Section 22.409 specifically excludes church benefits boards from the
provisions of the Insurance Code.
CHAPTER 23. SPECIAL-PURPOSE CORPORATIONS
Subchapter A. General Provisions
Section 23.001 makes the Code provisions applicable to special purpose
corporations as well as corporations created under special statutes other
than this Code. The Code is applicable only to the extent not inconsistent
with the special statute and applies when a special statute contains no
provisions in regard to some of the matters set forth in the Code.
Additionally, the Code applies if a special statute provides that the
general laws of incorporation supplement the provisions of the special
statute. These general applicability provisions are derived from similar
provisions in the Texas Miscellaneous Corporation Laws Act, the Texas
Business Corporation Act, and the Texas Non-Profit Corporation Act.
Section 23.002 makes the filing provisions of Chapter 4 applicable to
documents filed with the Secretary of State under a special statute.
Section 23.003 provides that a corporation created under a special
statute is not considered to be a domestic corporation formed under this
Code.
Subchapter B. Business Development Corporations
Section. 23.051 defines terms used in the chapter which are not otherwise
defined in the Code or are used with a different meaning in this chapter,
including corporation to mean business development corporation, financial
institution, loan limit, and member.
Section 23.052 provides that 25 or more persons may form a business
development corporation.
Section 23.053 indicates that a business development corporation may be
formed under either Chapter 21 as a for-profit corporation or Chapter 22
as a nonprofit corporation. Further, the section outlines the purposes
for which a business development corporation may be organized.
Section 23.054 enumerates those powers conferred upon business
development corporation. Those powers are in addition to the powers
normally granted a nonprofit or for-profit corporation.
Section 23.055 specifies that a business development corporation is a
state development company as defined under federal law, and is permitted
to operate on a statewide basis.
Section 23.056 sets forth the requirements for the certificate of
formation.
Section 23.057 provides for the management of the corporation to be
vested in a board of directions of not less than 15 or more than 21
directors.
Section 23.058 provides for the naming of the initial directors by the
organizers and for election of directors otherwise. Two-thirds of the
directors shall be elected by the members with the shareholders to elect
the remaining members.
Section 23.059 sets forth the term of office of directors and the manner
in which a vacancy in the office of a director shall be filled.
Section 23.060 authorizes the board of directors to appoint a president,
treasurer, and any other agent of officer of the corporation and to fill a
vacancy for an officer.
Section 23.061 outlines those persons who may acquire the shares, bonds,
securities or evidences of indebtedness of the business development
corporation and participate as an owner of the corporation.
Section 23.062 provides that any financial institution may become a
member of the corporation and provide loans to the corporation and further
sets forth the limitations on membership.
Section 23.063 specifies the procedure for withdrawal from membership in
the corporation.
Section 23.064 designates the powers of the shareholders and members of
the corporation.
Section 23.065 designates the voting rights of the shareholders and
members.
Section 23.066 sets forth the procedures for loans from the members.
Section 23.067 outlines the restrictions and the prohibition on loans.
Section 23.068 designates the loan limits.
Section 23.069 requires the corporation to set aside earned surplus for
losses and contingencies.
Section 23.070 authorizes the corporation to deposit funds in any banking
institution that has been designated as a depository.
Section 23.071 requires the corporation to make annual reports of
condition to the banking commissioner and the Texas department of
insurance.
Subchapter C. Grand Lodges
Section 23.101 provides for the incorporation of grand lodges.
Section 23.102 makes Chapter 22 of the Code relating to nonprofit
corporations applicable to lodges.
Section 23.103 allows a grand lodge incorporating under this subchapter
to be created for a term of years or to have perpetual succession.
Section 23.104 provides that the incorporation of the grand body includes
each of its subordinate lodges or bodies; that those subordinate bodies
have all of the rights of other corporations; that the subordinate body is
subject to the jurisdiction and control of the grand body; and that the
warrant or charter of the subordinate body may be revoked by the grand
body.
Section 23.105 authorizes a grand body to elect directors or to appoint
directors from among their officers.
Section 23.106 exempts corporations formed under this subchapter from the
payment of franchise taxes.
Section 23.107 provides that a grand body and a subordinate of the grand
body may take action directed or provided by law for other corporations,
and may make constitutions and bylaws.
Section 23.108 gives a grand body or subordinate body the authority to
acquire, hold , sell or mortgage property as necessary to erect homes and
schools for member's widows or orphans or elderly, disabled, or indigent
members.
Section 23. 109 permits a grand body to loan money for charitable
purposes, to take liens on relay property, and purchase real property
secured by a lien.
Section 23.110 provides that when a subordinate body terminates, all
property and rights pass to the grand body, and that the liability for
debt is limited to the actual cash value of the subordinate body's
effects.
TITLE 3. LIMITED LIABILITY COMPANIES
CHAPTER 101. LIMITED LIABILITY COMPANIES
Chapter 101 contains provisions relating to limited liability companies.
Unless otherwise noted, the provisions of this chapter are nonsubstantive
revisions of comparable provisions found in the TLLCA. The provisions
utilize the new terminology of the Code.
Subchapter A. General Provisions
Subchapter A contains provisions generally applicable to limited
liability companies under this Chapter.
Section 101.001 provides definitions specifically applicable to this
Chapter. The term "company agreement" is new and replaces the term
"regulations" under existing law. The definition of "company agreement"
is based upon Section 18-101(7) of the Delaware Limited Liability Company
Act but is consistent with existing Texas law regarding regulations. The
definition of "limited liability company" or "company" is based upon Art.
1.02A(3) of the TLLCA. The definition of "foreign limited liability
company" is based upon, but narrower than, Art. 1.02A(9) of the TLLCA.
The company agreement may contain any provisions not inconsistent with law
or the certificate of formation. Foreign entities of a type that have no
counterpart under existing Texas law (for example, business trusts) can
register to do business in Texas as a foreign limited liability company.
The Code eliminates this provision but requires under Section 9.001 that
any foreign entity affording limited liability to its owners or members
must register with the Secretary of State to transact business in Texas.
Subchapter B. Formation and Governing Documents
Subchapter B contains provisions relating to the governing documents
(certificate of formation and company agreement [see discussion of Section
101.052, below]) of limited liability companies governed by this Chapter,
including provisions stating the order of precedence of application of
provisions of this code and the governing documents of the limited
liability company.
Section 101.051 allows any provision that may be included in the company
agreement of a limited liability company to also be included in the
certificate of formation, and that any reference in this title to the
company agreement includes any such provision.
Section 101.052 provides that, except as provided by the code, the
company agreement of a limited liability company governs the relations
among the members, managers and officers of the company, assignees of
membership interests, and the company itself, as well as the internal
affairs of the company. To the extent that the company agreement does not
otherwise provide, the provisions of this title and the provisions of
Title 1 applicable to a limited liability company govern the internal
affairs, and those provisions may, except as provided in Section 101.054,
be waived or modified by the company agreement. The company agreement may
contain any provisions not inconsistent with law or the certificate of
formation.
This section represents a change from existing law in two respects:
first, the name of the governing document for a limited liability company
other than its certificate of formation (articles of organization under
prior law) has been changed to "company agreement" rather than
"regulations," the term used under existing law. This change was intended
to emphasize the underlying contractual nature of this governing document
for a limited liability company and to make Texas law more consistent with
laws governing limited liability companies in other states. This first
change is not a substantive change, but, like the new Code terminology
change from "articles of organization" to "certificate of formation," is a
significant change in terminology.
Second, this Section and Section 101.054 represent a significant change
in the structure of the limited liability company statute. The prior
statute contained numerous provisions that were qualified with the
language "unless otherwise provided in the articles of organization or
regulations," or similar limitations. In the interest of clarity and
economy of language, the new law takes the approach that, except as
provided in Section 101.054, every provision of the code governing limited
liability companies may be waived or modified by the company agreement of
a limited liability company, and that the terms of the company agreement
will, with that qualification, take precedence over the terms of the Code.
In the absence of a governing provision in the company agreement, the
provisions of the code will govern as a "default" provision. This order
of precedence is also reflected by Section 101.252.
Because of the reversal of the prior assumption that each provision of
the limited liability company statute was mandatory (unless expressly
qualified) to the new assumption in Sections 101.052 and 101.054 that most
provisions of the code governing limited liability companies may be waived
or modified, a number of the provisions of this title are now stated in
such a way that the new provision appears to be the converse of the
corresponding provision under the TLLCA; however, because the actual
effect of the operation of this Section, Section 101.054 and the
provisions in question is the same as existing law in most cases, these
reversals in the form of provisions are not noted separately in this bill
analysis unless there is actually a substantive change from existing law
as a result of the reversal. One example of a change in the way a
provision is stated without a substantive change in the law is found in
the rewording of Art. 5.05 of the existing law to Section 101.107 of this
Chapter.
Section 101.052 is similar in structure to TRPA Sections 1.03(a),
4.01(i), and Uniform Limited Liability Company Act Sections 103(a),
404(c)(1).
Section 101.053 provides that the company agreement of a limited
liability company may be amended only if each member of the company
consents to the agreement. As with most other provisions of Chapter 101,
this rule may be revised by a provision in the company agreement.
Section 101.054 lists the provisions of the Code that may not be waived
or modified by the company agreement of a limited liability company, or
may be waived or modified only in certain circumstances. This section
represents a significant structural change to existing law, as stated in
the discussion of Section 101.052, above. This section is structured
similar to TRPA Section 1.03(b) and Uniform Limited Liability Company Act
Section 103(b).
Subchapter C. Membership
Subchapter C contains provisions relating to members of and membership
interests in limited liability companies.
Section 101.101 provides that a limited liability company may have one or
more members and, except as provided by this Section, must have at least
one member. This Section clarifies that the limited liability company
need not have a member for a reasonable time (i) between the formation
date of a manager-managed limited liability company and the admission of
its first member, and (ii) between the date of termination of the last
remaining member and the date of an agreement to continue the company.
This Section is in part similar to the Uniform Limited Liability Company
Act Section 202(a).
Section 101.102 provides that a person may be a member of a limited
liability company unless the person lacks capacity apart from the code.
In addition, Subsection (b) is a new provision stating that a person is
not required to make a contribution, otherwise pay cash or contribute
property, to the limited liability company, or assume an obligation to do
so, as a condition to becoming a member or acquiring a membership
interest. With respect to subsection (b), this Section is similar to
Delaware Limited Liability Company Act Section 18-301(d).
Section 101.103 states the effective date that a person becomes a member
of a limited liability company upon acquiring a membership interest. A
person who is assigned or acquires directly a membership interest becomes
a member upon approval of all of the company's members.
Section 101.104 provides for the establishment of classes or groups of
members or membership interests by the company agreement of a limited
liability company.
Section 101.105 permits the issuance of membership interests after the
formation of the limited liability company, with the approval of all of
the members of the company, and, if necessary, the establishment of a new
class or group of members or membership interests under Section 101.104.
This section represents a change from Art. 2.23D(2) of the TLLCA, which
provides that additional membership interests may be issued with the
approval of a majority of the members. The rule in Section 101.105 makes
the default rule regarding issuance of additional membership interests and
creation of new classes of interests consistent with the default rules
under the TLLCA and the code requiring consent of all members to admit a
new member and consent of all members to amend the regulations or company
agreement.
Section 101.106 provides that a membership interest in a limited
liability company is personal property, and that a member of a limited
liability company or assignee of a membership interest does not have an
interest in any specific property of the company.
Section 101.107 provides that a member of a limited liability company may
not withdraw or be expelled from the company.
Section 101.108 provides that a membership interest in a limited
liability company may be wholly or partly assigned. It states that an
assignment of a membership interest is not an event requiring the winding
up of the company, and does not entitle the assignee to participate in the
management of the affairs of the company, become a member, or exercise any
rights of a member.
Section 101.109 states the rights and duties of an assignee of a
membership interest in a limited liability company but who has not become
a member of the limited liability company. Subsection (b) provides that
an assignee of a membership interest is entitled to become a member upon
approval of all of the company's members.
Section 101.110 states the rights and duties of an assignee of a
membership interest in a limited liability company following the
assignee's admission as a member of the company.
Section 101.111 states the rights and duties of an assignor of a
membership interest in a limited liability company.
Section 101.112 provides that, upon application by a judgment creditor of
a member or any other owner of a membership interest in a limited
liability company, a court may charge the membership interest of the
member or owner with payment of the unsatisfied amount of the judgment;
the judgment creditor then has only the rights of an assignee of the
membership interest, although this section does not deprive the member or
owner of the benefit of any exemption laws applicable to the membership
interest.
Section 101.113 provides that a member of a limited liability company may
be named as a party in an action brought by or against the company only if
the action is brought to enforce the member's right against or liability
to the company.
Section 101.114 provides that a member or manager is not liable for a
debt, obligation or liability of a limited liability company except as and
to the extent the company agreement specifically provides otherwise.
Subchapter D. Contributions
Subchapter D contains provisions relating to contributions of members to
limited liability companies.
Section 101.151 provides that a promise to make a contribution or
otherwise pay cash or transfer property to a limited liability company is
enforceable only if it is in writing and signed by the person making the
promise.
Section 101.152 provides that the enforceability of a member's promise to
make a contribution or otherwise pay cash or transfer property to a
limited liability company is unaffected by the death, disability or other
change in circumstances of the member.
Section 101.153 states the consequences for the failure of a member of a
limited liability company to perform an enforceable promise to make a
contribution or otherwise pay cash or transfer property to a limited
liability company.
Section 101.154 provides that an obligation of a member of a limited
liability company to make a contribution or otherwise pay cash or transfer
property to a limited liability company, or to return cash or property
improperly distributed to the member, may only be released or settled by
the consent of each member of the company.
Section 101.155 provides that a creditor of a limited liability company
that extends credit or acts in reasonable reliance on an enforceable
promise of a member of the company that is released under Section 101.154
may enforce the original obligation if it is stated in a document signed
by the member and not amended or canceled to evidence the release or
settlement of the obligation.
Section 101.156 states the requirements for enforcement by a creditor
under Section 101.155 of a conditional obligation of a member, including a
contribution payable on a discretionary call of the limited liability
company before the call occurs.
Subchapter E. Allocations and Distributions
Subchapter E contains provisions relating to allocations to members of
limited liability companies of profits and losses of the company, and to
distributions to members from limited liability companies.
Section 101.201 provides that the profits and losses of a limited
liability company are allocated to the members of the company in
accordance with their interests in the company on the date of the
allocation, as stated in the company's records.
Section 101.202 provides that a member of a limited liability company is
only entitled to receive or demand distributions from the company in the
form of cash, regardless of the form of the member's contribution to the
company.
Section 101.203 provides that distributions of cash and other assets of a
limited liability company shall be made to the members of the company on
the basis of the agreed value of each member's contribution to the company
as stated in the company's records. Because Section 101.202 provides that
members are only entitled to receive or demand distributions in the form
of cash, that section would need to be modified by the company agreement
for the limited liability company to distribute other assets to the
members.
Section 101.204 provides that until the company is wound up, no member of
a limited liability company is entitled to receive or demand a
distribution from the company until the company's governing authority
declares a distribution to each of the members or to a class or group that
includes the member in question. This is a substantive change to
existing law, which leaves the determination and timing of such
distributions to the company's regulations.
Section 101.205 provides that a member of a limited liability company who
validly exercises a right to withdraw from the company that is granted in
the company agreement is entitled to receive, within a reasonable time
after withdrawal, the fair value of the member's interest in the company,
determined as of the date of withdrawal. A company agreement that granted
such a right to withdraw would modify the requirement of Section 101.107
that a member may not withdraw or be expelled from the company.
Section 101.206 provides that a limited liability company may not make a
distribution to a member if, immediately after the distribution, the
company's total liabilities (subject to certain exceptions) exceed the
fair value of the company's total assets. A member who receives such a
distribution is required to return it to the company if the member had
knowledge of the violation.
Section 101.207 provides that, with certain exceptions, a member of a
limited liability company who is entitled to receive a distribution from
the company has the same status and is entitled to the same remedies as a
creditor of the company.
Subchapter F. Management
Subchapter F contains provisions relating to the management of limited
liability companies, whether by managers or members of the company.
Section 101.251 provides that the governing authority of a limited
liability company consists of the managers of the company, if the
certificate of formation states that the company will have managers, or
the members of the company, if the certificate of formation states that
the company will not have managers. This Section clarifies that there is
no default rule as to the form of management (e.g., member-managed or
manager-managed) because the form of management must be addressed in the
certificate of formation.
Section 101.252 provides that the governing authority of the limited
liability company will manage the business and affairs of the company as
provided by the company agreement, or, to the extent that the company
agreement does not so provide, as provided by this title and the
provisions of Title 1 applicable to limited liability companies. This
Section clarifies that a limited liability company, whether membermanaged
or manager-managed, is governed first by its company agreement and second
by the Code to the extent the company agreement does not provide for
management of the company.
Section 101.253 provides that the governing authority of a limited
liability company may designate one or more committees and that such a
committee may exercise the authority of the governing authority as
provided in the resolution designating the committee, but that the
designation of a committee under this section does not relieve the
governing authority of any responsibility imposed by law. This is a
substantive change from existing law, which allows the designation of
committees only if the regulations so provided. This Section omits
language requiring an express authority in resolutions, the certificate of
formation or the company agreement for a committee to authorize a
distribution or the issuance of membership interests. This Section
specifies that the committee's authority is provided by the resolution
designating the committee.
Section 101.254 provides that, with certain exceptions, each governing
person of a limited liability company and each officer and agent of the
limited liability company vested with actual or apparent authority is an
agent of the company for the purpose of carrying out the company's
business. An act committed by such an agent of the company apparently for
the purpose of carrying out the ordinary course of the company's business
binds the company unless the agent does not have actual authority to act
for the company and the person dealing with the agent has knowledge of
such lack of authority. This Section makes explicit what was only
implicit in the TLLCA, namely that acts committed by such an agent of the
company that are not apparently for the purpose of carrying out the
ordinary course of the company's business do not bind the company unless
authorized in accordance with this title.
Section 101.255 states the conditions under which an otherwise valid
contract or transaction between a limited liability company and certain
persons affiliated with the limited liability company is not rendered
invalid.
Subchapter G. Managers
Subchapter G contains provisions relating to managers of limited
liability companies, and applies only to limited liability companies that
have one or more managers.
Section 101.301 provides that this Subchapter applies only to a limited
liability company that has one or more managers. This Section makes
explicit that the rules applicable to managers do not apply to limited
liability companies without managers, which is only implied in the TLLCA.
Section 101.302 provides that the managers of a limited liability company
consist of one or more persons, the number being determined by the number
of initial managers listed in the company's certificate of formation
unless increased or decreased by amendment to, or as provided by, the
company agreement for the company. Managers are not required to be
residents of this state or members of the limited liability company.
Section 101.303 states the term for which the manager of a limited
liability company serves.
Section 101.304 provides that, subject to Section 101.306(a), a manager
of a limited liability company may be removed, with or without cause, at a
meeting of the company's members called for that purpose. Section 101.304
makes clear the right of the members to remove a manager even if the
company agreement is silent regarding removal. TLLCA Art. 2.13 states
that "[t]he regulations may provide that at any meeting of the members
called expressly for that purpose any managers may be removed, with or
without cause, as provided therein." Thus the right of members to remove
managers absent provisions in the regulations is unclear under existing
law.
Section 101.305 states the procedure for filling the vacancy in the
position of a manager of a limited liability company and the term of a
person elected to fill such a vacancy.
Section 101.306 states the requirements for removal of a manager elected
by a class or group of members of the limited liability company by
authority of the company agreement, and states the requirements for
filling a vacancy in the position of such a manager.
Section 101.307 provides that methods of classifying managers of a
limited liability company, including providing for staggered terms of
office or terms that are not uniform, may be established in the company
agreement of a limited liability company.
Subchapter H. Meetings and Voting
Subchapter H contains provisions relating to meetings of the members,
governing authority, and committees of the governing authority of a
limited liability company, and relating to voting by the members,
governing authority, and committees of the governing authority of a
limited liability company.
Section 101.351 provides that this Subchapter applies to a meeting of and
voting by the governing authority of a limited liability company, the
members of the limited liability company if they do not constitute the
governing authority of the limited liability company, and committees of
the governing authority of a limited liability company.
Section 101.352 states the requirements for notice of regular and special
meetings of the members, governing authority, and committees of the
governing authority of a limited liability company. This is a substantive
change to existing law in that existing law left notice requirements
solely to the provisions of the regulations.
Section 101.353 provides that a majority of all of the governing persons,
members, or committee members of a limited liability company constitutes a
quorum for the purpose of transacting business at a meeting.
Section 101.354 provides that each governing person, member, or committee
member of a limited liability company has an equal vote at a meeting of
the governing authority, members, or committee, respectively.
Section 101.355 provides that, with certain exceptions, the affirmative
vote of the majority of the governing persons, members, or committee
members of a limited liability company present at a meeting at which a
quorum is present constitutes an act of the governing authority, members,
or committee, respectively.
Section 101.356 provides that, except as otherwise provided in this
Section and other sections in this title, an action of a limited liability
company may be approved by the company's governing authority as provided
in Section 101.355. Specific approval requirements are given for actions
apparently not for carrying out the ordinary course of business of the
company, for fundamental business transactions, for actions that would
make it impossible for a limited liability company to carry out the
ordinary course of its business, and for amendment of the certificate of
formation of the limited liability company; requirements that an action be
approved by the members of the limited liability company, however, do not
apply during the period specified by Section 101.101(b). Certain
transactions listed in TLLCA Art. 2.23D have not been included in Section
101.356 in order to correct inconsistencies in current provisions of the
TLLCA regarding the default vote required for certain actions (issuance of
additional membership interests, change from member-management to
manager-management or vice versa and acts in contravention of
regulations).
Section 101.357 provides that a member of a limited liability company may
vote in person or by written proxy, and, in a substantive change to TLLCA,
Subsection (b) provides that a manager or committee member of a limited
liability company may, if authorized by the company agreement, vote in
person or by written proxy.
Section 101.358 provides that, notwithstanding Sections 6.201 and 6.202,
an action required or authorized to be taken at an annual or special
meeting of the members, governing persons, or committee members of a
limited liability company may be taken without holding a meeting or
providing notice or taking a vote if a written consent or consents stating
the action to be taken is signed by the number of members, governing
persons, or committee members necessary to have taken the action at a
meeting at which each member, governing person, or committee member
entitled to vote on the action is present and votes.
Subchapter I. Modification of Duties; Indemnification
Subchapter I contains provisions relating to indemnification of persons
by limited liability companies and modification of fiduciary and other
duties of persons relating to limited liability companies and to members,
managers, and officers of the companies and assignees of membership
interests.
Section 101.401 provides that the company agreement of a limited
liability company may expand or restrict any duties (including fiduciary
duties) and related liabilities that a member, manager, officer or other
person has to the company or to a member or manager of the company.
Section 101.402 provides that a limited liability company may indemnify a
person, advance or reimburse expenses incurred by a person, and purchase
insurance or make other arrangements to indemnify a person, including a
member, manager, or officer of a limited liability company or an assignee
of a membership interest in the company.
Subchapter J. Derivative Proceedings
Subchapter J contains provisions relating to derivative proceedings by
members of limited liability companies.
Section 101.451 contains definitions specifically applicable to this
Subchapter.
Section 101.452 states the requirements for a member to have standing to
bring a derivative proceeding under this Subchapter.
Section 101.453 provides that, with certain exceptions, a written demand
must have been filed with the limited liability company and a 90-day
waiting period must have expired prior to a member filing a derivative
proceeding under this Subchapter.
Section 101.454 provides that a determination of how to proceed on
allegations made in a demand or petition relating to a derivative
proceeding must be made under specified conditions by affirmative vote of
(1) the majority of independent and disinterested governing persons
present at a meeting of only disinterested governing persons, (2) the
majority of a committee of two or more independent and disinterested
persons appointed by a majority of independent and disinterested governing
persons present at a meeting of the governing authority, or (3) the
majority of a panel of one or more independent and disinterested persons
appointed by a court on motion of a limited liability company. This
section also provides the standards for court appointment of such a panel
and limits the liability of persons appointed to such a panel.
Section 101.455 provides that if a limited liability company that is the
subject of a derivative proceeding commences an inquiry into the
allegations made in the demand or petition and the persons described in
Section 101.454 are conducting an active review of the allegations in good
faith, the court shall stay the derivative proceeding until the review is
complete and the persons have determined what further action, if any,
should be taken. The section further provides for review of the stay for
continued necessity every 60 days.
Section 101.456 states limits on discovery by a member after the filing
of a derivative proceeding under this Subchapter if the limited liability
company proposes to dismiss the derivative proceeding under Section
101.458.
Section 101.457 provides that a written demand filed with the limited
liability company under Section 101.453 tolls the statute of limitations
on the underlying claim until the earlier of the 91st day after the date
of the demand or the 31st day after the date that the limited liability
company advises the member that the demand has been rejected or the review
completed.
Section 101.458 requires a court to dismiss a derivative proceeding on a
motion by the limited liability company if the persons described in
Section 101.454 determine in good faith, after conducting a reasonable
inquiry and based on factors they consider appropriate under the
circumstances, that continuation of the derivative proceeding is not in
the best interests of the limited liability company. The Section also
states the burden of proof for such a motion.
Section 101.459 provides that if a derivative proceeding is instituted
after a demand is rejected, the petition must allege with particularity
facts that establish that the rejection was not made in accordance with
the requirements of Sections 101.454 and 101.458.
Section 101.460 provides that a derivative proceeding may not be
discontinued or settled without court approval and also that the court
direct that notice be given to members whose interests the court
determines may be substantially affected by a proposed discontinuance or
settlement.
Section 101.461 states the requirements for a court to order the payment
by another party of the reasonable expenses incurred by a party in a
derivative proceeding.
Section 101.462 states the extent of application of this Subchapter and
of the laws of its jurisdiction of organization to derivative proceedings
brought in the right of a foreign limited liability company.
Section 101.463 provides that in the case of a "closely held limited
liability company" having fewer than 35 members and no membership
interests listed on a national securities exchange or regularly quoted in
an over-the-counter market, the provisions of Sections 101.452 through
101.459 do not apply; except that, if justice requires, a derivative
proceeding brought by a member may be treated by a court as a direct
action brought by the member for the member's own benefit and any recovery
by the member may be paid directly to the plaintiff or to the limited
liability company if necessary to protect the interests of creditors or
other members of the limited liability company.
Subchapter K. Supplemental Recordkeeping Requirements
Subchapter K contains provisions stating the recordkeeping requirements
for limited liability companies in addition to the requirements of Section
3.151, and providing certain inspection rights of members with respect to
the records kept by the limited liability company.
Section 101.501 states a list of the books and records that a limited
liability company is required to keep at its principal office (and make
available upon certain requests) in addition to the books and records
required by Section 3.151. The company is not required to keep
information listed in Subsection (a)(7) of this Section at its office if
the information is stated in the company agreement. The Section further
requires that a limited liability company keep at its registered office in
this state and make available on reasonable request the street address at
which the records required by this Section and Section 3.151 are
maintained.
Section 101.502 provides that the limited liability company must provide
to each member or assignee of a membership interest, on written request
and for a proper purpose, access to records required under Sections 3.151
and 101.501, and certain other information about the business, affairs and
financial condition of the company. Copies of the company's certificate
of formation and amendments, company agreement and amendments (if in
writing), and tax returns must be provided for free.
Subchapter L. Supplemental Winding Up and Termination Provisions
Subchapter L contains provisions that apply to the winding up of limited
liability companies in addition to the provisions of Chapter 11 of this
code.
Section 101.551 provides that after an event requiring the winding up of
a limited liability company occurs, unless revoked under Section 11.151 or
canceled under Section 11.152, the winding up of the company must be
carried out by the company's governing authority or one or more persons
designated by the governing authority, the members or the governing
documents; a person designated by the court under Sections 11.405, 11.409
or 11.410; or, if the winding up is caused by the termination of the
membership of the last member of the company, the legal representative or
successor of the last member or one or more persons designated by the
legal representative or successor.
Section 101.552 provides that the requirements for approval of the
voluntary winding up of a limited liability company, or the revocation of
that winding up, or the cancellation of an event requiring the winding up,
or a reinstatement of a terminated limited liability company are a
majority vote of the limited liability company's members or, if the
company has no members, a majority vote of all of the company managers.
This section makes a substantive change in existing law, which requires
the written consent of all members to revoke voluntary dissolution (TLLCA
Art. 6.06A), and the vote of all members (or a different voting
requirement stated in the company regulations) to continue the business of
the company following certain events of dissolution (TLLCA Art. 6.01.B).
There was no specific provision in the TLLCA governing reinstatement of a
terminated limited liability company. The change made by this Code
results in the standardization of the voting requirement for these actions
to a majority of the members, and adds the additional alternative of the
approval of the actions by the managers of the limited liability company
if it has no members.
TITLE 4. PARTNERSHIPS
CHAPTER 151. GENERAL PROVISIONS
Chapter 151 contains provisions generally applicable to general
partnerships and limited partnerships under this Title.
Section 151.001 provides definitions specifically applicable to this
Title, including the terms "capital account," "distribution," "foreign
limited partnership," "majority-in-interest," and "partnership agreement."
The definition of "foreign limited partnership" is narrower for purposes
of Title 4 than for purposes of Title 1. This Section defines that term
to include only limited partnerships formed under laws of another state
while the Title 1 definition allows non-U.S. limited partnerships to
constitute a part of that term. As a result, a non-U.S. limited
partnership may register to do business in this state under Chapter 9 as a
foreign limited partnership.
Section 151.002 provides when a person has knowledge of a fact for
purposes of this Title.
Section 151.003 provides when a person has notice of a fact for purposes
of this Title.
CHAPTER 152. GENERAL PARTNERSHIPS
Subchapter A. General Provisions
Section 152.001 contains definitions applicable to general partnerships
under this Chapter, including the defined terms "event of withdrawal,"
"event requiring a winding up," "foreign limited liability partnership,"
and "withdrawn partner." The defined term "other partnership provisions"
is new and is defined to mean the provisions of Chapters 151 and 154 and
Title 1 to the extent applicable to partnerships.
Section 152.002(a) sets forth the following principles: first, that the
partnership agreement governs the relations of the partners and between
the partners and the partnership; and second, this Chapter and the other
partnership provisions govern the relationships of partners and between
the partners and the partnership to the extent that the partnership
agreement does not otherwise provide. Section 152.002(b) lists the
provisions of the Code that may not be waived or modified by the
partnership agreement or that may be waived or modified only in certain
circumstances. The list of provisions has been revised from existing law
to reflect the move of certain provisions of TRPA to Title 1. Section
152.002(b)(9) provides that, with certain exceptions, a partnership
agreement or the partners may not waive or modify specific Chapters in
Title 1.
Sections 152.002(c) and (d) are new and provide certain exceptions.
Section 152.002(c) provides that a partnership agreement or the partners
may waive or modify a statutory provision listed in Section 152.002(b)(9)
if such statutory provision expressly permits a waiver or modification in
the partnership's governing documents. Section 152.002(d) provides that a
partnership agreement or the partners may modify a statutory provision
listed in Section 152.002(b)(9) to the extent that such statutory
provision specifies the persons or group of persons which are entitled to
approve an action of the partnership or the vote or other method by which
such action is to be approved.
Section 152.003 provides that this Chapter and the other partnership
provisions are supplemented by the principles of law and equity.
Section 152.004 eliminates the application of the rule that statutes in
derogation of the common law are to be strictly construed.
Section 152.005 provides that the rate of interest that applies in the
absence of an agreement among the partners is that specified in Section
302.002 of the Texas Finance Code.
Subchapter B. Nature and Creation of Partnership
Section 152.051(a) provides that a partnership is created by the
association of two or more persons to carry on a business for profit as
owners. Section 152.051(b) provides that an association or organization
created under statutes, other than this Title and the provisions of Title
1 to the extent applicable to partnerships and limited partnerships, is
not a partnership. Section 152.051(c) is new and clarifies that an
"association," as used in Section 152.051(b), does not have the same
meaning as the defined term "association" contained in Chapter 1.
Subsection (d) provides that Chapter 152 governs limited partnerships only
to the extent provided by Sections 153.003 and 153.152 and Subchapter H of
Chapter 153.
Section 152.052 sets forth various factors for determining whether a
partnership has been created.
Section 152.053(a) provides that a person may be a partner unless the
person lacks capacity apart from this Chapter. Section 152.053(b)
provides that, with certain exceptions, a person who is not a partner in a
partnership is not liable to third persons as a partner.
Section 152.054 provides that a representation or conduct indicating
that a person is a partner with another person or that a person is a
partner is an existing partnership do not, in themselves, create a
partnership or make the person a partner in a partnership.
Section 152.055 permits doctors of medicine, osteopathy and podiatry to
jointly own professional partnerships. Subsection (b) prohibits any
professional from exercising control over another professional's clinical
authority if beyond the scope of that professional's license.
Section 152.056 specifies that a partnership is an entity distinct from
its partners.
Subchapter C. Partnership Property
Section 152.101 states that partnership property is not property of the
partners.
Section 152.102 sets forth the rules for determining when property is
acquired by a partnership and, therefore, becomes partnership property.
Subchapter D. Relationship Between Partners and Between Partners and
Partnerships
This subchapter establishes many of the rules that govern the relations
among partners when the partners fail to address the issues in a
partnership agreement. Subject to Section 152.002, however, these
provisions are subject to contrary agreement of the partners.
Section 152.201 provides that no person may become a partner without the
consent of all of the other partners.
Subsections (a) and (b) of Section 152.202 provide that each partner is
credited with the partner's contributions and share of the partnership
profits and charged with distributions to the partner and the partner's
share of partnership losses. This Section does not affirmatively require
that a partnership maintain records of partners' capital accounts, but
instead provides that, absent an agreement among the partners to the
contrary, the financial rights and obligations of the partners among
themselves will be determined in this manner. Section 152.202(c) provides
that each partner is credited with an equal share of the partnership's
profits and is charged with the share of the losses in proportion to the
partner's share of the profits.
Section 152.203 lists certain rights and duties of a partner, all of
which are subject to the contrary agreement of the partners.
Section 152.204 provides that a partner owes the duties of loyalty and
care and has an obligation to discharge all duties in good faith and in a
manner reasonably believed by the partner to be in the best interest of
the partnership.
Section 152.205 delineates three specific elements of a partner's duty of
loyalty.
Section 152.206 defines a partner's duty of care.
Section 152.207 provides that the prescribed standards of conduct (i.e.,
the duties of loyalty and care and the obligation of good faith) apply
equally to a person engaged in winding up the partnership business as the
personal or legal representative of the last surviving partner, as if the
person were a partner.
Section 152.208 provides that, absent an agreement of the partners to the
contrary, a partnership agreement may be amended only with the consent of
all partners.
Section 152.209 provides that matters arising in the ordinary course of
the partnership's business may be decided by a majority in interest of the
partners, whereas an act outside the ordinary course of business may be
undertaken only with the consent of all partners.
Section 152.210 provides that a partner is liable to the partnership for
any breach of the partnership agreement or for the violation of any duty
to the partnership or the other partners that causes harm to the
partnership or the other partners.
Section 152.211 pertains to remedies for enforcement in the event a
partner breaches the partnership agreement or violates a duty to the
partnership. Subsection (a) provides that the partnership itself may
maintain an action. Subsection (b) states that a partner may bring a
direct suit against the partnership or another partner for a cause of
action arising out of the conduct of the partnership business. Such
action may include seeking a formal accounting, but a formal accounting is
not a prerequisite to pursuing the claim. Subsection (c) provides that
causes of action of the type covered by Section 152.211 accrue, and are
subject to time limitations, as provided by general law. Subsection (d)
provides that a cause of action barred by the applicable statute of
limitations cannot be revived by the right to a final accounting.
Section 152.212 sets forth certain provisions with respect to a
partnership's books and records, if any, and the rights of access thereto.
Section 152.213 sets forth the circumstances upon which a partner and the
partnership are required to furnish information regarding the partnership
to a partner, the legal representative of a deceased partner or a partner
who has a legal disability, or an assignee.
Section 152.214 provides that a partner can still bind the partnership
under the agency principles set forth in Sections 152.301 and 152.302,
even though the partner's authority has been limited under the various
sections in Subchapter D enumerated in Section 152.214 without the
knowledge of the third party with whom the partner was dealing.
Subchapter E. Relationship Between Partners and Other Persons
Section 152.301 provides that each partner is an agent of the partnership
for the purpose of its business.
Section 152.302 provides that unless a partner lacks authority to act for
the partnership and the person with whom the partner is dealing knows that
the partner does not have authority, an act of a partner binds the
partnership if the act is apparently for carrying on in the ordinary
course of partnership business or business of the kind carried on by the
partnership. This Section further provides that an act not apparently for
carrying on in the usual way the partnership business or business of the
same kind does not bind the partnership unless the action was actually
authorized by the other partners. This Section also contains a special
rule for real estate conveyances to the effect that an otherwise
unauthorized conveyance nonetheless is binding if the grantee subsequently
conveys to a purchaser for value without knowledge of the lack of
authority.
Section 152.303 (a) provides that a partnership is liable for the
wrongful actions or omissions of its partners who are acting in the
ordinary course of business of the partnership or with the authority of
the partnership. Section 152.303(b) provides that a partnership is liable
for the loss of money or property of a person who is not a partner that is
received in the course of its business.
Section 152.304(a) continues the rule under TRPA that all partners are
liable jointly and severally for all debts and obligations of the
partnership unless the claimant agrees otherwise or other law provides a
limitation on liability. This Section also recognizes that the foregoing
rule is subject to the provisions in Chapter 152 regarding limited
liability partnerships. Section 152.304(b) pertains to the liability of
an incoming partner and provides that a new partner has no personal
liability for obligations of the partnership that arose before the
partner's admission to the partnership or relate to actions taken or
commitments entered into before the partner's admission to the
partnership.
Section 152.305 provides that an action may be brought against the
partnership and any or all of the partners in the same action or in
separate actions.
Section 152.306(a) provides that a judgment against the partnership is
not, standing alone, a judgment against any of the partners, but that a
judgment may be entered against any partner who has been served with
process in the same suit. Section 152.306(b) provides that a claimant
asserting its claim against the partnership may satisfy a claim against
the individual assets of a partner only if a judgment is also obtained
against the partner based upon the same claim and the judgment obtained
against the partnership remains unsatisfied for ninety (90) days after
entry. Section 152.306(c) sets forth certain instances in which,
notwithstanding Section 152.306(b), a creditor may proceed directly
against a partner without first seeking satisfaction from partnership
property. Section 152.306(d) states that Section 152.306 does not limit
the effect of the statutory provisions pertaining to a limited liability
partnership.
Section 152.307 provide that the rights of a person extending credit in
reliance on a representation described by Section 152.054 (i.e., a false
representation indicating that a partnership exists or that a person is a
partner in an existing partnership) and the rights and duties of persons
held liable for such a representation are determined by the law other than
this Chapter and the other partnership provisions, including the law of
estoppel, agency, negligence, fraud or unjust enrichment.
Subchapter F. Transfer of Partnership Interests
Section 152.401 provides that a transfer of a partner's partnership
interest is permissible, in whole or in part.
Section 152.402 provides that a transfer of a partner's partnership
interest: (i) is not an event of withdrawal; (ii) does not by itself cause
a winding up of the partnership business; and (iii) does not, as against
the partners or the partnership, entitle the transferee during the
continuance of the partnership, to participate in the management or
conduct of the partnership business.
Section 152.403 provides that after a transfer, the transferor continues
to have the rights and duties of a partner other than the interest
transferred.
Section 152.404(a) provides that a transferee of a partner's partnership
interest is entitled to receive, to the extent transferred, distributions
to which the transferor would otherwise be entitled. Section 152.404(b)
provides that the transferee is entitled to receive, to the extent
transferred, the net amount otherwise distributable to the transferor upon
a winding up of the partnership business. Section 152.404(c) provides
that unless a transferee becomes a partner, a transferee does not have
liability as a partner solely as a result of the transfer. Section
152.404(d) provides that for any proper purpose, a transferee may require
reasonable information or an account of partnership transactions and make
reasonable inspection of the partnership books. In addition, the Section
provides that in a winding up, a transferee may require an accounting only
from the date of the latest account agreed to by all of the partners.
Section 152.404(e) provides that a partnership has no duty to give effect
to a transferee's rights until the partnership receives notice of the
transfer.
Section 152.405 provides that a partnership has no duty to give effect to
a transfer prohibited by the partnership agreement.
Section 152.406 pertains to the effect of death or divorce on a
partnership interest and provides that: (i) on the divorce of a partner,
the partner's spouse is to be regarded as a transferee of the partnership
interest from a partner; (ii) on the death of a partner, the partner's
surviving spouse and the partner's beneficiaries are regarded as
transferee's of the partnership interest from the partner; (iii) on the
death of a partner's spouse, the spouse's beneficiaries are regarded as
transferees of the partnership interest from the partner; (iv) the death,
bankruptcy and other occurrences with respect to a partner's spouse are
not events of withdrawal; and (v) this Chapter does not impair buy-sell or
other agreements for the purpose or sale of a partnership interest at the
death of the owner of the partnership interest or at any other time.
Subchapter G. Withdrawal of Partner
Section 152.501 provides that a partner ceases to be a partner on the
occurrence of an event of withdrawal and enumerates the circumstances with
respect to which an event of withdrawal of a partner is deemed to occur.
This Section expands the provision permitting expulsion of a corporate or
partnership partner under certain circumstances to other types of entities
that are partners.
Section 152.502 states that, upon withdrawal of a partner, the
partnership continues. The event of withdrawal nonetheless has the
effects on the relationships among the withdrawn partner, the partnership
and the continuing partners have provided in Sections 152.503 through
152.506 and Subchapter H.
Section 152.503(a) provides that a partner has the power to withdraw at
any time before the occurrence of an event requiring a winding up.
Section 152.503(b) sets forth the circumstances in which a partner's
withdrawal is wrongful. Section 152.503 (c) provides that a wrongfully
withdrawn partner is liable to the partnership and to the other partners
for damages caused by the withdrawal, in addition to any other liability
of the partner to the partnership or to the other partners.
Section 152.504 pertains to a withdrawn partner's power to bind the
partnership and the partner's liability to the partnership for any loss
caused by the exercise of this power. Subsection (a) provides that the
action of a withdrawn partner within one year after the person's
withdrawal binds the partnership if the transaction is one that would bind
the partnership before the person's withdrawal and the other party to the
transaction (i) does not have notice of the person's withdrawal as a
partner, (ii) had done business with the partnership within one year
preceding the withdrawal, and (iii) reasonably believed that the withdrawn
partner was a partner a the time of the transaction. Subsection (b)
provides that a withdrawn partner is liable to the partnership for any
loss arising from an obligation incurred by the withdrawn partner after
withdrawal for which the partnership is liable under Subsection (a).
Section 152.505 contains provisions relating to the effect of the
withdrawal on a partner's existing liability for partnership obligations.
Section 152.506 provides that a withdrawn partner remains liable as a
partner to a third party in transactions entered into by the partnership
within two years after the partner's withdrawal, if the other party does
not have notice of the partner's withdrawal and reasonably believes when
entering into the transaction that the withdrawn partner is still a
partner.
Subchapter H. Redemption of Withdrawing Partner or Transferee's Interest
Subchapter H contains provisions relating to the redemption of a
withdrawing partner or transferee's interest.
Section 152.601 sets forth the circumstances upon which the interest of
the withdrawn partner is automatically redeemed by the partnership as of
the date of withdrawal.
Section 152.602 specifies the redemption price of a withdrawn partner's
partnership interest.
Section 152.603 specifies the obligation of a withdrawn partner to make
contributions to the partnership. Specifically a withdrawn partner is
obligated to make a contribution to eliminate any deficit in the partner's
capital account under Section 152.708 and to satisfy partnership
obligations under Section 152.709. The amount of such contributions is
calculated as if an event requiring a winding up occurred at the time of
withdrawal.
Section 152.604 provides that the partnership may offset against the
redemption price payable to the withdrawn partner all other amounts owing
from the withdrawn partner to the partnership, regardless of whether
currently due.
Section 152.605 provides that interest owed under Sections
152.602-152.604 accrue from the date of withdrawal to the date of payment.
Section 152.606 requires the partnership to indemnify a withdrawn partner
against all partnership liabilities incurred before the withdrawal except
for liabilities then unknown to the partnership and liabilities incurred
by an act of the withdrawn partner after withdrawal under Section 152.504.
Section 152.607(a) provides that, if no agreement for the purchase of the
withdrawn partner's interest is reached within one hundred twenty days
after the written demand for payment by other party, then within thirty
days thereafter the partnership must either pay in cash to the withdrawn
partner the amount the partnership estimates to be the net redemption
price or make written demand for payment of its estimate of the net amount
owed by the withdrawn partner to the partnership. Section 152.607(b)
provides that if a deferred payment of the redemption price is authorized
under Section 152.608 or an amount is owed by the withdrawn partner to the
partnership, the partnership may tender a written offer to pay or deliver
a written statement of demand for the amount that it estimates to be the
net amount owed to it, stating the amount and other terms and conditions
of the obligation. Section 152.607(c) provides that a withdrawn partner
may request and receive certain financial information from the partnership
and an explanation of the computation of any estimated payment obligation.
Further, this Section permits the partnership to request and receive from
the withdrawn partner an explanation of the amount the partner believes to
be due. Section 152.607(d) sets forth a mechanism for eliminating the
period of time during which the payments or tenders under Section 152.603
or Section 152.604 may be challenged by the other party.
Section 152.608 permits a partnership to defer payment of the redemption
price to a partner who lawfully withdraws before the expiration of a
definite term, the completion of a particular undertaking or the
occurrence of a specified event, unless the partner establishes to the
satisfaction of the court that the earlier payment will not cause undue
hardship to the partnership.
Section 152.609 provides that the withdrawn partner or the partnership
may maintain an action against the other party to determine the terms of
redemption of the partner's interest.
Section 152.610 provides that if an event requiring winding up occurs
within sixty days of a partner's withdrawal, then the partnership may
defer paying a redemption price until the partnership makes a winding up
distribution to the remaining partners. Further, this Section provides
that the redemption price or the contribution obligation of the withdrawn
partner is the amount the withdrawn partner would have received or
contributed if the event requiring a winding up had occurred at the time
of the partner's withdrawal.
Section 152.611(a) sets forth certain circumstances upon which a
partnership must redeem the partnership interest of a transferee for its
fair value. Section 152.611(b) is similar to Section 152.607 and provides
that if no agreement for the redemption price of a transferee's interest
is reached within one hundred twenty days after written demand for
redemption, then within thirty days the partnership must pay in cash to
the transferee the amount the partnership estimates to be the redemption
price, plus accrued interest from the date of demand. Section 152.611(c)
requires the payment to the transferee, on request of the transferee, to
be accompanied or followed by the same type of information that is
required by Section 152.607(c) with respect to a withdrawn partner.
Section 152.611(d) provides that if the payment to a transferee is
accompanied by written notice that payment is in full satisfaction of the
partnership's obligation, then the payment shall be the redemption price
unless within one year of the written notice the transferee commences an
action to determine the redemption price.
Section 152.612 permits a transferee to maintain an action against the
partnership to determine the purchase price of the transferee's interest.
Subchapter I. Supplemental Winding Up and Termination Provisions
Subchapter I contains provisions pertaining to the winding up and
termination of a partnership, in addition to those set forth in Chapter
11.
Section 152.701 provides that on the occurrence of an event requiring
winding up (i) the partnership continues until the winding up of its
business is completed, at which time the partnership is terminated, and
(ii) the relationship among the partners is changed as provided by
Subchapter I.
Section 152.702 specifies the persons eligible to wind up the partnership
business.
Section 152.703 specifies the rights and duties of a person winding up
the partnership business.
Section 152.704 provides that partners have the power to bind the
partnership after an event requiring a winding up only in transactions
that are appropriate for winding up the partnership business or, if the
party does not have notice of the event requiring a winding up, in
transactions that would bind the partnership under Sections 152.301 and
152.302.
Section 152.705 sets forth the rights of partners among themselves with
respect to a post-dissolution liability. Subsection (a) provides that,
after an occurrence of an event requiring winding up, the losses with
respect to which a partner must contribute include losses from any
liabilities incurred under Section 152.704. Subsection (b) provides that
a partner who, with notice that an event requiring a winding up has
occurred, incurs a partnership liability by an act that is not appropriate
for winding up the partnership business is liable to the partnership for
any loss caused to the partnership arising from that liability.
Section 152.706 provides that in winding up the partnership business, the
property of the partnership must first be applied to discharge the
partnership's obligation to creditors, with anything remaining to be paid
to partners in cash. This Section further provides that creditors who are
partners are on parity with other creditors.
Section 152.707 provides that each partner is entitled to a settlement of
all partnership accounts on winding up of the partnership business. This
Section further specifies the manner in which such accounts are to be
settled and provides (i) that the partnership shall make a distribution to
a partner in an amount equal to that partner's positive capital account
balance and (ii) subject to the provisions governing registered limited
liability partnerships, that a partner shall contribute to the partnership
an amount equal to that partner's negative balance in the partner's
capital account.
Section 152.708 provides that, to the extent not taken into account in
settling the partner's accounts, each partner must contribute, in
proportion to the partner's sharing of partnership losses, the amount
necessary to satisfy partnership obligations (exclusive of any liabilities
that creditors have agreed are nonrecourse).
Section 152.709(a) provides that an agreed continuation of the
partnership by all the partners after an event that would otherwise
require winding up effectively amends the partnership agreement to delete
the requirement to wind up on that event. Section 152.709(b) provides
that if the partnership is continued by the partners for ninety days
without any settlement or liquidation of the business, and without any
objection from any partner, the continuation is prima facie evidence of an
agreement by all the partners to continue the business. Section
152.709(c) provides that the continuation of the business by those who
habitually acted in the business before the notice, other than the partner
giving the notice, without any settlement or liquidation of the
partnership business, is prima facie evidence of an agreement to continue
the partnership. Subsections (d) and (e) specify what partners must agree
in writing to revoke a voluntary decision to wind-up and continue the
business of the partnership under Section 11.151.
Section 152.710 requires all remaining partners, unless another group or
percentage is specified in the partnership agreement, to agree in writing
to reinstate and continue the business of the partnership under Section
11.202.
Subchapter J. Limited Liability Partnerships
Section 152.801(a) provides that except as provided by Subsection (b), a
partner in a limited liability partnership is not individually liable,
directly or indirectly, for a debt or obligation of the partnership
incurred while the partnership is a limited liability partnership.
Section 152.801(b) sets forth the instances in which a partner in a
limited liability partnership is individually liable for a debt or
obligation of the partnership arising from the errors or omissions of
another partner or a representative of the partnership. Section
152.801(c) provides that Sections 2.101(1), 152.305 and 152.306 do not
limit the effect of Subsection (a) in a limited liability partnership.
Section 152.801(d) sets forth the definition of "representative" for
purposes of this Section. Section 152.801(e) provides that Subsections (a)
and (b) do not effect (i) the liability of the partnership to pay its
debts and obligations from partnership property, (ii) the liability of a
partner, if any, imposed by law or contract independently of the partner's
status as a partner, or (iii) the manner in which service of citation or
other civil process may be served in an action against the partnership.
Section 152.802(a) sets forth the information that must be contained in
the application filed by a partnership seeking to register as a limited
liability partnership. Section 152.802(b) specifies the requirements as to
who must sign the application. Section 152.802(c) provides that a
partnership is registered as a limited liability partnership by the
Secretary of State on the date on which a completed initial or renewal
application is filed or a later date specified in such application.
Section 152.802(d) provides that a registration is not affected by later
changes in the partners of the partnership. Section 152.802(e) specifies
the term for which the registration of a limited liability partnership is
effective. Section 152.802(f) provides that a registration may be
withdrawn by filing a withdrawal notice with the Secretary of State in
accordance with Chapter 4 and specifies the contents of the withdrawal
notice and the requisite signature requirements. Section 152.802(g)
provides that an effective registration may be renewed before its
expiration by filing an application with the Secretary of State in
accordance with Chapter 4. This Section further provides that a renewal
application continues an effective registration for one year after the
date the registration would otherwise expire and sets forth the
information the renewal application must contain. Section 152.802(h)
provides that the Secretary of State may remove from its active records
the registration of a partnership the registration of which has either
been withdrawn or revoked or expired and not renewed. Section 152.802(i)
provides that the Secretary of State is not responsible for determining
whether a partnership is in compliance with the insurance or financial
responsibility requirements set forth in Section 152.804(a). Section
152.802(j) contains provisions dealing with the amendment of documents
filed under this Subchapter.
Section 152.803 provides that the name of a limited liability partnership
must comply with Section 5.063.
Section 152.804 contains provisions specifying the insurance or other
financial requirements a limited liability partnership must comply with.
Section 152.805 provides that a limited partnership may become a limited
liability partnership by complying with the applicable provisions of
Chapter 153.
Subchapter K. Foreign Limited Liability Partnerships
Section 152.901(a) provides that a foreign limited liability partnership
is subject to Section 2.101 with respect to its activities in the State of
Texas to the same extent as a domestic registered limited liability
partnership. Section 152.901(b) provides that a foreign limited liability
partnership may not be denied registration because of a difference between
the laws of the State under which the partnership is formed and the laws
of the State of Texas.
Section 152.902 specifies that the name of a foreign limited liability
partnership must comply with Section 5.063 and the requirements of the
state of formation.
Section 152.903 provides that a foreign limited liability partnership is
not considered to be transacting business in the State of Texas for
purposes of the Code because it carries on in this State one or more of
the activities listed in Section 9.101.
Section 152.904 provides that a foreign limited liability partnership
subject to this Chapter must maintain a registered office and registered
agent in accordance with Chapter 5.
Section 152.905 provides that before transacting business in the State of
Texas, a foreign limited liability partnership must file an application
for registration in accordance with Chapter 4. This Section specifies the
time at which a partnership is registered as a foreign limited liability
partnership and further states that a registration is not affected by
later changes in the partners of the partnership. Finally, this Section
specifies that the registration of a foreign limited liability partnership
is effective until the first anniversary of the date after the date of
registration or a later effective date, unless the statement is withdrawn
or revoked at an earlier time or renewed in accordance with Section
152.908.
Section 152.906 provides that a registration may be cancelled by filing a
certificate of cancellation. This Section also specifies the information
that the certificate of cancellation must contain.
Section 152.907 provides that a certificate of cancellation terminates
the registration of the partnership as a foreign limited liability
partnership as of the date on which the notice is filed or a later date
specified in the notice, but not later than the expiration date.
Section 152.908 provides that an effective registration may be renewed
before its expiration by filing a renewal application for registration
with the Secretary of State in accordance with Chapter 9. This Section
further sets forth what information the renewal application must contain
and states that an application for registration filed under this Section
continues an effective registration for one year after the date the
registration would otherwise expire.
Section 152.909 provides that the Secretary of State may remove from its
active records the registration of a foreign limited liability
partnership, the registration of which has (i) been withdrawn or revoked
or (ii) expired and not renewed.
Section 152.910(a) provides that a foreign limited liability partnership
that transacts business in the State of Texas without being registered is
subject to Subchapter B, Chapter 9. Section 152.910(b) provides that a
partner of a foreign limited liability partnership is not liable for a
debt or obligation of the partnership solely because the partnership
transacted business in the State of Texas without being registered.
Section 152.911 provides that a document filed under this Subchapter may
be amended by filing with the Secretary of State an application for
amendment for registration in accordance with Chapter 4. This Section
further specifies the information that must be contained in an application
for amendment.
Section 152.912 specifies the execution requirements with respect to an
application for amendment.
Section 152.913 specifies the requirements for execution of a statement
of a change of registered office or registered agent of a foreign limited
liability partnership.
CHAPTER 153. LIMITED PARTNERSHIPS
Subchapter A. General Provisions
Section 153.001 provides that the term "other limited partnership
provisions" shall mean the provisions of Chapters 151 and 154 and of Title
1 to the extent applicable to limited partnerships. This is a new
definition.
Section 153.002(a) provides that Chapter 153 and the other limited
partnership provisions shall be applied and construed to affect its
general purpose to make uniform the law with respect to limited
partnerships among states that have similar laws. Section 153.002(b)
provides that the rule that a statute in derogation of the common law is
to be strictly construed does not apply to Chapter 153 and the other
limited partnership provisions.
Section 153.003 provides that in a case not provided for by Chapter 153
and the other limited partnership provisions, the applicable provisions of
Chapters 152 and 154 governing partnerships that are not limited
partnerships and the rules of law and equity govern. The provisions of
subsections (b) and (c) of Section 153.003 are new and are clarifications
necessitated by the new structure of the Code. The definition of
"partner" in Chapter 1 includes limited partners but should not be applied
to limited partners in certain provisions. In particular, the provisions
of Chapter 152 governing general partnerships are generally inconsistent
with the nature of a limited partner, even though there is no literal
conflict with the provisions of Chapter 153. This Section clarifies that
Chapter 152 does not apply to limited partners if it would be inconsistent
with the nature and role of a limited partner as contemplated by Chapter
153.
Section 153.004 lists the provisions of Title 1 that may not be waived or
modified by the partnership agreement or that may be waived or modified
only in certain circumstances. This is a new provision but similar to
Section 152.002(b)(9). It has been added for the same reasons as
explained for that section.
Section 153.005 provides that rights granted to a third party may not be
waived or modified in the Partnership Agreement unless the third party
consents to the waiver or modification.
Subchapter B. Supplemental Provisions Regarding Amendment to Certificate
of Formation
Section 153.051(a) sets forth events the occurrence of which require that
the general partner file a certificate of amendment not later than the
thirtieth day after the date on which the event occurred. Section
153.051(b) provides that general partners are required to properly correct
false statements in the certificate of formation, including those
resulting from changed circumstances.
Section 153.052(a) provides that a certificate of information may be
amended at any time for a proper purpose as determined by the general
partners. Section 153.052(b) provides that a certificate of formation may
be amended to state the name, mailing address and street address of the
business or residence of each person winding up the limited partnership's
affairs if, after an event requiring winding up of the limited partnership
but before the limited partnership is reconstituted or a certificate of
cancellation is filed, (i) the certificate of formation has been amended
to reflect the withdrawal of all general partners or (ii) a person who is
not shown on the certificate of formation as a general partner is carrying
out the winding up of a limited partnership's affairs. Section 153.052(c)
provides that if a certificate of formation is amended under Section
153.052(b), each person winding up the limited partnership's affairs shall
execute and file the certificate of amendment. This Section also provides
that a person winding up the partnership's affairs is not subject to the
liabilities of general partner because of the filing of the certificate of
amendment. Section 153.052(d) provides that a general partner who is not
winding up the limited partnership's affairs is not required to execute
and file a certificate of amendment as provided by Section 153.052.
Subchapter C. Limited Partners
Section 153.101 provides when a person becomes a limited partner. This
Section also provides that any person may be a limited partner unless the
person lacks capacity apart from Chapter 153 and the other limited
partnership provisions.
Section 153.102(a) states that, except as provided by Section
153.102(c), a limited partner is not liable for the obligations of the a
limited partnership unless (i) the limited partner is also a general
partner or (ii) in addition to the exercise of the limited partner's
rights and powers as a limited partner, the limited partner participates
in the control of the business. Section 153.102(b) provides that if a
limited partner participates in the control of the business, the limited
partner is only liable to a person who transacts business with the limited
partnership reasonably believing, based on the limited partner's conduct,
that the limited partner is also a general partner. Section 153.102(c)
provides that, except as otherwise provided, a limited partner who
knowingly permits its name to be used in the name of the limited
partnership is liable to a creditor who extends credit to the limited
partnership without actual knowledge that the limited partner is not a
general partner.
Section 153.103 sets forth a list of activities a limited partner may
engage in or have the right to engage in without being deemed to take part
in the control of the business of the limited partnership.
Section 153.104 provides that the list of activities enumerated in
Section 153.103 is non-exclusive.
Section 153.105 provides that Sections 153.102(c) 153.103 and 153.104 do
not create rights of limited partners; rather, such rights may be created
only by (i) the certificate of formation, (ii) the partnership agreement,
(iii) other Sections of Chapter 153 or (iv) other limited partnership
provisions.
Section 153.106 sets forth certain protective steps a person can take
who has made a contribution to a limited partnership and erroneously
believes is a limited partner thereof, including filing with the Secretary
of State a written statement in accordance with Section 153.107.
Section 153.107 sets forth the requirements with respect to a written
statement filed under Section 153.106(2) and provides that such statement
is effective for one hundred eighty days.
Section 153.108 sets forth the actions a person must take for protection
against liability if an appropriate certificate of formation or
certificate of amendment has not been filed before the expiration of the
one hundred eighty day period for a written statement.
Section 153.109 imposes liability on a contributor to a limited
partnership who erroneously believes he is a limited partner to third
parties who deal with the partnership before such contributor takes any of
the steps set forth in Section 153.106, provided (i) the contributor had
knowledge or notice that no certificate had been filed or that the
certificate inaccurately referred to the contributor as a general partner
and (ii) the third party reasonably believed, based on the contributor's
conduct, that the contributor was a general partner at the time of the
transaction and extended credit to the partnership in reasonable reliance
on the credit of the contributor.
Section 153.110 provides that a limited partner may withdraw from a
limited partnership on the occurrence of an event specified in a written
partnership agreement and in accordance with the partnership agreement.
Section 153.111 provides that, except as provided in Subchapter C or in
the partnership agreement, on withdrawal a withdrawing limited partner is
entitled to receive, not later than a reasonable time after withdrawal,
the fair value of that limited partner's interest in the limited
partnership as of the date of withdrawal.
Section 153.112 provides that a limited partner who receives a wrongful
distribution (i.e., a distribution not permitted under Section 153.210) is
not required to return the distribution unless the limited partner knew
that the distribution violated the prohibition of Section 153.210.
Section 153.113 provides that in the instance of a deceased or
incapacitated limited partner, the rights of the limited partner shall be
conferred on the limited partner's representative.
Subchapter D. General Partners
Section 153.151 sets forth how additional general partners may be
admitted to a limited partnership after its formation. This Section
further provides that a person may be a general partner unless a person
lacks capacity apart from Chapter 153.
Section 153.152 sets forth the general powers and liabilities of a
general partner in a limited partnership. Subsection (a) states that,
except as provided in Chapter 153 and the other limited partnership
provisions or in a partnership agreement, a general partner of a limited
partnership (i) has the rights and powers and is subject to the
restrictions of a partner in a partnership without limited partners and
(ii) has the liabilities of a partner in a partnership without limited
partners to the partnership and to the other partners. Subsection (b)
states that, except as provided by Chapter 153 and the other limited
partnership provisions, a general partner of a limited partnership has the
liabilities of a partner in a partnership without limited partners to a
person other than the partnership and the other partners.
Section 153.153 sets forth the power and liabilities of the person who is
both a general partner and a limited partner.
Section 153.154 provides that a general partner of a limited partnership
may make a contribution to, be allocated profits and losses of, and
receive a distribution as a general partner, a limited partner, or both.
Section 153.155(a) sets forth a list of events which constitute events of
withdrawal and provides that a person ceases to be a general partner upon
the occurrence of an event of withdrawal. Section 153.155(b) provides
that a general partner may withdraw at any time from a limited partnership
and cease to be a general partner by giving written notice to the other
partners.
Section 153.156 provides that if an event of withdrawal is attributable
to an insolvency or bankruptcy event enumerated in Section 153.155(a)(4)
or (5), the subject general partner shall notify the other partners of the
event not later than the thirtieth day after the date on which the event
occurred.
Section 153.157 provides that unless otherwise set forth in the
partnership agreement, a withdrawal by a general partner of a partnership
for a definite term or a particular undertaking before the expiration of
that term or completion of the undertaking is a breach of the partnership
agreement.
Section 153.158(a) provides that unless otherwise set forth in a written
partnership agreement, if a general partner ceases to be a general partner
by virtue of the occurrence of the event of withdrawal, the remaining
general partners, or if there are no remaining general partners, a
majority in interest of the limited partners, may take certain actions
with respect to the withdrawing general partner, including converting that
general partner's partnership interest to that of a limited partner.
Section 153.158(b) provides that until an action described in Section
153.158(a) is taken, the owner of the partnership interest of the
withdrawn general partner has the status of an assignee. Section
153.158(c) provides that if there are no remaining general partners
following the withdrawal of the general partner, the partnership may be
reconstituted in accordance with Section 153.503.
Section 153.159 provides that if the partners convert a partnership
interest under the circumstances described in Section 153.158, the limited
partnership interest may be reduced pro rata with all other partners to
provide compensation, an interest in the partnership, or both, to a
replacement general partner.
Section 153.160 sets forth the voting rights of a withdrawn general
partner after an amendment to the certificate of formation reflecting the
general partner's withdrawal as a general partner is filed.
Section 153.161 provides that a withdrawn general partner is not
personally liable as a general partner for partnership debt incurred
post-withdrawal unless the applicable creditor at the time the debt was
incurred reasonably believed that the partner remained a general partner.
This Section further provides when a creditor of the partnership is deemed
to have reason to believe that a partner remains a general partner.
Section 153.162 provides that if a general partner's withdrawal from a
limited partnership violates the partnership agreement, the partnership
may recover damages from the withdrawing general partner for breach of the
partnership agreement. This section further provides that in addition to
other remedies, the partnership may effect the recovery of damages by
offsetting them against the amount otherwise distributable to the
withdrawing general partner, reducing the limited partnership interest
into which the withdrawing general partner's interest maybe converted, or
both.
Subchapter E. Finances
Section 153.201 provides that the contribution of a limited partner may
consist of a tangible or intangible benefit to the limited partnership or
other property of any kind or nature.
Section 153.202(a) provides that no promise by a limited partner to pay
cash or transfer property to a limited partnership is enforceable unless
set out in a writing signed by the limited partner. Section 153.202(b)
provides that a partner and the partner's successors are bound to perform
the partner's contribution obligation. Section 153.202(c) provides that a
partner and the partner's successors are required to contribute cash to
the limited partnership in an amount equal to the value of outstanding,
unperformed contribution obligations that are not performed as required.
Section 153.202(d) provides that a partnership agreement may specify
consequences that can result from the failure of a partner to satisfy the
partner's financial obligations to the limited partnership.
Section 153.203 provides that, unless otherwise set forth by the
partnership agreement, a partner's obligation to the partnership may not
be compromised or released without the consent of all of the partners.
Section 153.204 provides that even if the partners compromise or release
a partner's obligation to the partnership, a creditor of the limited
partnership who extends credit, or otherwise acts, in reasonable reliance
on that obligation while it is enforceable is not precluded from enforcing
the partner's obligation.
Section 153.205 provides that a conditional obligation (which includes a
contribution payable on a discretionary call of a limited partnership
before the time the call occurs) of a limited partner may not be enforced
by a partnership creditor unless the condition of the obligation has been
satisfied or waived as to or by the limited partner.
Section 153.206 provides that the profits and losses of a limited
partnership are to be allocated among the partners in a manner provided
by a written partnership agreement. If a written partnership agreement
does not provide for the allocation of profits and losses, the profits and
losses are to be allocated (i) in accordance with the current percentage
or other interest in the partnership stated in the partnership's records
or (ii) if the allocation of profits and losses is not provided for in the
partnership records, in proportion to capital accounts.
Section 153.207 provides that, with certain exceptions, a partner who is
entitled to receive a distribution from the partnership has the same
status and is entitled to all remedies available to a creditor of the
limited partnership.
Section 153.208 sets forth the general rule that the terms of the
partnership agreement govern the sharing of distributions of cash and
other assets of the limited partnership among the partners. If the
partnership agreement, however, fails to state the basis for sharing
distributions, this Section provides that distributions be shared in one
of two ways: (i) distributions that are a return of capital are to be
shared on the basis of the agreed value of each partner's contributions
that have not been returned to the partner and (ii) distributions that are
not a return of capital are to be shared in proportion to the allocation
of profits as determined under Section 153.206.
Section 153.209 provides that, with certain exceptions, a partner is
entitled to receive a distribution from a limited partnership to the
extent and at the times or on the occurrence of events specified in the
partnership agreement before the partner withdraws from the partnership
and before the winding up of the partnership business.
Section 153.210 provides that a limited partnership may not make a
distribution to a partner if, immediately after the distribution, the
limited partnership's total liabilities (subject to certain exceptions)
exceed the fair value of the limited partnership's total assets.
Subchapter F. Partnership Interests
Section 153.251 provides that a partnership interest may be wholly or
partly assigned. This Section further provides that an assignment of a
partnership interest does not dissolve a limited partnership, does not
entitle the assignee to become, or to exercise the rights or powers of a
partner and entitles the assignee to be allocated income, gain, loss,
deduction, credit or similar items and to receive distributions to which
the assignor was entitled to the extent those items are assigned.
Section 153.252 provides that until an assignee becomes a partner, the
assignor partner continues to be a partner in the partnership. This
Section further provides, however, that on the assignment by a general
partner of all the general partner's rights as a general partner, the
general partner's status as a general partner may be terminated by the
affirmative vote of majority in interest of the limited partners.
Section 153.253 provides that an assignee of a partnership interest may
become a limited partner if and to the extent that (i) the partnership
agreement provides or (ii) all partners consent. This Section further
provides that an assignee who becomes a limited partner, to the extent of
the rights and powers assigned, has the rights and powers and is subject
to the liabilities of a limited partner under a partnership agreement and
the Code.
Section 153.254(a) provides that until an assignee of a partnership
interest becomes a partner, the assignee does not have liability as a
partner solely as a result of the assignment. Section 153.254(b)
specifies the liability of an assignee who becomes a limited partner.
Section 153.255 provides that an assignor is not released from liability
to the partnership for, among other things, its obligation to make agreed
upon contributions or to return wrongfully received distributions,
regardless of whether an assignee of a partnership interest becomes a
limited partner.
Section 153.256 contain provisions pertaining to the ability of a
judgment creditor of a partner to obtain a charging order against such
partner's partnership interest and the rights and remedies available if a
partnership interest is so charged.
Section 153.257 provides that Section 153.256 does not deprive a partner
of the benefit of any exemption law applicable to that partner's
partnership interest.
Subchapter G. Reports, Records and Information
Section 153.301 provides that the Secretary of State may require a
domestic limited partnership or a foreign limited partnership registered
to transact business to file a report of the type contemplated by Section
153.302 not more than once every four years.
Section 153.302 specifies the contents of the report.
Section 153.303 states that the filing fee for the report shall be as
provided in Chapter 4.
Section 153.304 provides that the report must be delivered to the
Secretary of State not later than the thirtieth day after the date on
which the notice specified in Section 153.305 is mailed. This Section
eliminates the requirements in existing law that two (2) copies of the
report must be delivered.
Section 153.305 provides that the Secretary of State shall send a notice
that the report required under Section 153.301 is due and specifies the
contents of the notice. This Section further provides that the Secretary
of State shall include with the notice a copy of the report form.
Section 153.306 sets forth the actions the Secretary of State is required
to take if the Secretary of State finds that the report complies with this
Subchapter. This Section also specifies the effect of filing the report.
Section 153.307 provides that a domestic or foreign limited partnership
that fails to file timely a report under Section 153.301 forfeits the
limited partnership's right to transact business in the State of Texas.
Section 153.308 specifies the address at which notice of a forfeiture of
a right to transact business must be mailed.
Section 153.309 specifies the effects on a limited partner arising from
its forfeiture of a right to transact business in the State of Texas.
Section 153.310 specifies the procedure by which a limited partnership
that may revive its right to transact business in the State of Texas after
having forfeited such right under Section 153.307.
Section 153.311 provides that the Secretary of State may cancel the
certificate of formation of a domestic limited partnership or the
registration of a foreign limited partnership if the limited partnership
has forfeited its right to transact business in the State of Texas under
Section 153.307 and fails to revive that right under Section 153.310.
Section 153.312 sets forth the procedure by which a limited partner may
reinstate a certificate of formation or registration which has been
canceled as provided by Section 153.311.
Subchapter H. Limited Partnership as Limited Liability Partnership
Section 153.351 sets forth the requirements a limited partnership must
comply with in order to register as a limited liability partnership.
Section 153.352 provides that for purposes of applying the limited
liability partnership provisions contained in Chapter 152 to a limited
partnership: (i) an application to become a limited liability partnership
or to withdraw registration must be signed by at least one general
partner, and (ii) other references to a partner mean a general partner
only.
Section 153.353 provides that if a limited partnership is a limited
liability partnership, Section 152.801 applies to a general partner and to
a limited partner who is liable under other provisions of Chapter 153 for
the debts or obligations of the limited partnership.
Subchapter I. Derivative Actions
Section 153.401 sets forth the conditions to a limited partner bringing
an action derivatively for a limited partnership.
Section 153.402 provides that the plaintiff in a derivative action must
be a limited partner at the time of bringing suit and either (i) must have
been a limited partner at the time of the transaction that is the subject
of the action, or (ii) the person's status as a limited partner must have
arisen by operation of law or under the terms of the partnership agreement
from a person who was a limited partner at the time of the transaction.
Section 153.403 provides that in a derivative action, the plaintiff must
plead efforts to have the general partner sue or reasons for not making
the effort.
Section 153.404 provides that in a derivative action, the court has the
discretion to require the plaintiff to give security for the defendant's
expected expenses of defense.
Section 153.405 states that if a derivative action is successful or
anything is received by the plaintiff as a result of a judgment,
compromise or settlement, the court may award the plaintiff reasonable
attorney's fees and expenses and direct the plaintiff to remit to parties
identified by the court the remainder of the proceeds received by the
plaintiff.
Subchapter J. Cancellation of Certificate of Formation
Section 153.451 provides that a limited partnership shall cancel its
certificate of formation by filing a certification of cancellation with
the Secretary of State in accordance with Chapter 4: (i) on the
completion of the winding up of the partnership business, (ii) when there
are no limited partners, or (iii) subject to certain exceptions, upon a
merger or conversion as provided by Chapter 10. Subchapter (c) provides
that all remaining partners, or another group or percentage of partners
specified in the partnership agreement, must agree to reinstate and
continue the business of the limited partnership under Section 11.202.
Section 153.452 sets forth the items of information that must be included
in a certificate of cancellation.
Subchapter K. Supplementary Winding Up and Termination Provisions
Section 153.501 sets forth certain circumstances whereby the limited
partnership may cancel or revoke an event requiring a winding up and the
partners may continue the business of the limited partnership. All
remaining partners, or another group or percentage of partners specified
by the partnership agreement, must agree to revoke a voluntary decision to
wind up and continue the business of the limited partnership under Section
11.151.
Section 153.502 provides that the winding up of the partnership's affairs
shall be accomplished by either the general partners who have not
wrongfully dissolved the limited partnership or, in the absence of such
general partners, the limited partners or a person chosen by the limited
partners. On application by or for a partner, a court, on cause shown,
may wind up a limited partnership, appoint a liquidator and make other
orders and inquiries as required.
Section 153.503 provides that a person winding up the limited
partnership's business may take the action specified in Sections 11.052
and 11.053.
Section 153.504 sets forth the priority for disposition of partnership
assets in the course of winding up.
Subchapter L. Miscellaneous Provisions
Section 153.551 specifies the records that a domestic limited partnership
is required to maintain.
Section 153.552 provides that on written request stating a proper
purpose, a partner or an assignee of a partnership interest may examine
and copy, in person or through a representative, records required to be
kept under Section 153.551 and other information regarding the business,
affairs and financial condition of the limited partnership as is just and
reasonable for the person to examine and copy. This Section also contains
other provisions relating to the examination and copying of such records
and other information.
Section 153.553 specifies the person or persons who must execute each
certificate required by the Code to be filed by a limited partnership with
the Secretary of State. This Section also provides that such certificates
are executed subject to penalties for perjury for inaccuracies.
Section 153.554 provides that if a person fails or refuses to execute a
certificate as required by Chapter 153 or to execute a partnership
agreement, another person adversely affected by the failure or refusal may
petition the court to direct the execution or filing of the certificate or
the execution of the partnership agreement, as appropriate.
Section 153.555 provides that the transfers enumerated in such Section
are not prohibited under the Section 6.12(a) of the Texas Racing Act.
CHAPTER 154. PROVISIONS APPLICABLE TO BOTH
GENERAL AND LIMITED PARTNERSHIPS
Subchapter A. Partnership Interests
Section 154.001(a) provides that a partner's partnership interest is
personal property for all purposes. Section 154.001(b) provides that
partner's partnership interest may be community property under applicable
law. Section 154.001(c) provides that a partner is not a co-owner of
partnership property.
Section 154.002 provides that a partner does not have an interest that
can be transferred, voluntarily or involuntarily, in partnership property.
Subchapter B. Partnership Agreement
Section 154.101 provides that a written partnership agreement may
establish or provide for the future creation of additional classes or
groups of one or more partners that have certain express relative rights,
powers and duties. The future creation of additional classes or groups
may be expressed in a partnership agreement or at the time of creation of
a class or group. The rights, powers or duties of a class or group of
partners may be senior to those partners of an existing class or group.
Section 154.102 provides that a written partnership agreement that
accords partners voting rights may contain provisions relating to
procedural matters in respect of the exercise of such voting rights.
Section 154.103 provides that prompt notice of the taking of an action by
fewer than all of the partners without a meeting must be given to the
partners who did not consent to the action in writing.
Subchapter C. Partnership Transactions and Relationships
Section 154.201 provides that, except as otherwise provided by the
partnership agreement, a partner may lend money to and transact other
business with a partnership and, subject to other applicable law, such
partner has the same rights and obligations with respect to those matters
as a person who is not a partner.
Section 154.202 provides that the relationships between a partnership and
its creditors are not affected by the withdrawal of a partner or addition
of a new partner.
Section 154.203 pertains to distributions in kind and provides that,
except as provided by the partnership agreement: (i) a partner,
regardless of the nature of the partner's contribution, is not entitled to
demand or receive from a partnership a distribution in any form other than
cash and (ii) a partner may not be compelled to accept a disproportionate
distribution of an asset in kind from a partnership to the extent that the
percentage portion of assets distributed to the partner exceeds the
percentage of those assets that equals the percentage in which the partner
shares in distributions from the partnership.
TITLE 5. BUSINESS TRUSTS
CHAPTER 200. REAL ESTATE INVESTMENT TRUSTS
Subchapter A. General Provisions
Subchapter A contains general provisions relating to Chapter 200.
Section 200.001 sets forth the definition of "real estate investment
trust" for purposes of this chapter.
Section 200.002 incorporates the law of for-profit corporations to the
extent Chapter 200 or Title 1 has no provision governing an issue. An
unincorporated trust that is not a real estate investment trust is
considered to be an unincorporated association.
Section 200.003 states that Chapter 200 controls over conflicting
provisions in Chapters 20 and 21 governing for-profit corporations.
Section 200.004 states that lack of capacity of a real estate investment
trust is not a defense at law or in equity and the act or transfer of
property by a real estate investment trust is not invalid by the act or
transfer was beyond the scope of the purpose for the trust or inconsistent
with a limitation on authority of an officer or trust manager. However, a
shareholder may enjoin the act or transfer of property and the real estate
investment trust has an action against the officer or trust manager who
exceeds authority. If the court enjoins the performance of a contract,
the other party may recover resulting damages from the real estate
investment trust.
Section 200.005 authorizes a real estate investment trust to engage in
activities mandated or authorized by the Internal Revenue Code and related
regulations, subject to limitations in the trust certificate of formation,
the Code or another law of the State of Texas.
Section 200.006 permits a filing instrument to be signed by an officer of
the real estate investment trust.
Subchapter B. Formation and Governing Documents
Subchapter B contains provisions relating to the formation of a real
estate investment trust and its governing documents and organization. The
requirement that a real estate investment trust have $1,000 of minimum
capital has been deleted as outmoded and unnecessary. A $1,000 minimum
capitalization in today's terms does not provide anyone any comfort as to
adequate capitalization. This change mirrors a change in the for-profit
corporation provisions in Title 2. The $1,000 minimum capital provisions
are currently found in TREITA Sections 3.10(A)(9) and 15.10(A)(3).
Section 200.051 specifies that a declaration of trust is the certificate
of formation of a real estate investment trust.
Section 200.052 provides that a shareholder of a real estate investment
trust does not have a vested property right resulting from the certificate
of formation.
Section 200.053 specifies that the trust managers must adopt a resolution
stating the proposed amendment in order to adopt an amendment to the
certificate of formation and follow the procedures specified in Sections
200.053 through 200.057. An amendment may be contained in a restated
certificate of formation.
Section 200.054 provides that the trust managers may amend the
certificate of formation if the real estate investment trust has no
outstanding shares.
Section 200.055 specifies that the resolution adopted by the trust
managers must direct that the proposed amendment be submitted to a vote
of shareholders at a meeting if the real estate investment trust has any
outstanding shares.
Section 200.056 specifies the procedures for notice of and meeting of
shareholders to consider a proposed amendment to the certificate of
formation. The proposed amendment must be adopted by the affirmative vote
of shareholders required by Section 200.262.
Section 200.057 specifies the procedures for adopting a restated
certificate of formation. Shareholder approval is not required if no
amendment is effected. The section specified whether an officer or the
trust managers must sign the restated certificate of formation.
Section 200.058 requires the trust managers to adopt initial bylaws which
regulate and manage the affairs of the real estate investment trust in a
manner consistent with law and the certificate of formation. The bylaws
may be amended or repealed and new bylaws adopted by the trust managers
unless the certificate of formation or Chapter 200 reserves the power to
the shareholders or unless the shareholders expressly provide that the
trust managers may not amend repeal or readopt a bylaw that has been
amended, repealed or adopted by the shareholders.
Section 200.059 states that the shareholders may amend, repeal or adopt
bylaws unless the certificate of formation or bylaw adopted by the
shareholders provides otherwise.
Section 200.060 requires the initial trust managers to hold an
organization meeting and specifies the notice and call requirements for
the meeting.
Subchapter C. Shares
Subchapter C contains provisions relating to the shares issued by a real
estate investment trust.
Section 200.101 states that the number of shares that a real estate
investment trust may issue must be stated in the certificate of formation.
Section 200.102 provides that a real estate investment trust certificate
of formation may create classes of shares with specified preferences,
rights, restrictions and qualifications consistent with law.
Section 200.103 authorizes the trust managers to classify or reclassify
unissued shares by setting or changing their preferences, rights, voting
powers, restrictions, limitations as to dividends, qualifications or terms
or conditions of redemption, if authorized by the certificate of
formation. A statement of designation containing a description of the
shares must be filed with the county clerk of the county of the principal
place of business of the real estate investment trust.
Section 200.104 specifies that shares may not be issued until the
consideration has been paid to the real estate investment trust or its
wholly-owned subsidiary. A shareholder becomes entitled to the shares
when the consideration is paid.
Section 200.105 specifies the types of consideration for which shares
with or without par value may be issued. This Section expands the kind of
property that can serve as consideration for stock to conform to the
corporate law.
Section 200.106 specifies that the consideration for the issuance of
shares must be determined by the trust managers.
Section 200.107 states that the consideration for the issuance of shares
with par value must at least equal the par value.
Section 200.108 states that, in the absence of fraud in the transaction,
the judgment of the trust managers or shareholders, as appropriate, is
conclusive in determining the value of the consideration received for the
shares.
Section 200.109 limits the personal liability of an assignee or
transferee of shares or a subscription for shares who acted in good faith
and without knowledge that the full consideration for the shares or
subscription had not been paid.
Section 200.110 specifies how a real estate investment trust accepts a
subscription and specifies that a preformation subscription is irrevocable
for six months unless the subscription provides for a longer or shorter
period or all of the other subscribers agree that the subscription may be
revoked. A post formation written subscription is a contract between the
subscriber and the real estate investment trust. The provisions of TREITA
Section 7.10 relating to subscriptions for shares were based on the
similar provisions of TBCA Art. 2.14. These provisions have become
antiquated and are rarely invoked. Sections 200.110-200.112 contain
revised provisions that modernize the law relating to subscriptions, are
based primarily on the subscription provisions contained in the Revised
Model Business Corporation Act and are intended to parallel similar
revisions to the subscription provisions in Chapter 21.
Section 200.111 provides that the real estate investment trust may
determine payment terms of a preformation subscription unless the terms
are specified in the subscription. The real estate investment trust must
make uniform calls on the subscription and may collect the subscription
like any other debt. Defaulting subscribers forfeit amounts previously
paid on the subscription.
Section 200.112 specifies that written commitments to act in a specified
manner with respect to shares after their acquisition are binding. The
commitment constitutes a contract between the shareholder and the real
estate investment trust.
Subchapter D. Shareholder Rights and Restrictions
Subchapter D sets forth provisions relating to the rights of
shareholders, restrictions on transfers of shares and ownership of shares.
Section 200.151 states that a real estate investment trust may consider,
subject to the Code and Chapter 8, Business & Commerce Code, that the
person registered as the owner of a share in the share transfer records
as the owner of that share.
Section 200.152 provides that a shareholder does not have a preemptive
right to acquire securities of the real estate investment trust unless
specifically provided by the certificate of formation.
Section 200.153 specifies that shares and other securities of a real
estate investment trust are personal property and transferable in
accordance with Chapter 8 of the Business & Commerce Code except as
otherwise provided by the Code.
Section 200.154 provides that a security of a real estate investment
trust may have its transfer restricted by the certificate of formation,
bylaws or a written agreement. If the real estate investment trust is a
party to the agreement, a copy of the agreement must be made available for
examination by interested shareholders at the principal place of business
to interested shareholders. The restriction is not binding on previously
issued securities unless their holders voted in favor of the restriction
or entered into the restrictive agreement.
Section 200.155 specifies the requirements for the validity of a transfer
restriction on a security of a real estate investment trust.
Section 200.156 authorizes a real estate investment trust to file with
the county clerk of the county of the principal place of business of the
real estate investment trust a copy of a bylaw or agreement that
restricts the securities of the trust. The securities must state the fact
of the filing if required by Section 3.202. The trust may also make the
agreement restricting the transfer part of the certificate of formation by
complying with this Code or amending the certificate of formation. The
contents of the certificate of amendment are specified by this section.
Section 200.157 provides that a transfer restriction is specifically
enforceable against the holder or a successor or transferee of the holder
if the restriction is reasonable and noted conspicuously on the
certificate representing the security, or with respect to uncertificated
securities, noted in the notice sent with respect to the security under
Section 3.205. Otherwise the restriction is ineffective against a
transferee for value without actual knowledge of the restriction's
existence.
Section 200.158 provides that the real estate investment trust may
transfer shares and pay distributions to a surviving joint owner when two
or more persons are registered as joint owners of the shares and one owner
dies. This recording and distribution may not be made after receipt of a
written notice that a party other than the surviving joint owner is
claiming an interest in the shares or distribution. Any cause of action
existing in favor of an owner of an interest in the shares or distribution
against the surviving owner is not affected by the trust's discharge.
Section 200.159 provides that a real estate investment trust or its
officer, trust manager, employee or agent may not be held liable for
considering a registered owner to be the owner of a share for a purpose
described by Section 200.151.
Section 200.160 provides that a real estate investment trust that
transfers shares or makes a distribution to a surviving joint owner under
Section 200.158 before receiving a written claim is discharged from
liability.
Section 200.161 specifies that a holder of shares, an owner of any
beneficial interests in shares or a subscriber for shares, or any of their
affiliates, may not be held liable to the real estate investment trust or
its obligees for certain obligations in certain circumstances. The
circumstances include a failure of the real estate investment trust to
observe any corporate formality, on an alter ego theory or on the basis of
actual or constructive fraud. The liability is not prevented or limited
where the person perpetrated an actual fraud on the obligee primarily for
the direct personal benefit of the person.
Section 200.162 provides that the limitation on liability in Section
200.161 is exclusive and preempts liability imposed under common law or
otherwise.
Section 200.163 excludes from the limitations contained in Sections
200.161 and 200.162 obligations that are expressly assumed or guaranteed
or for which the person is otherwise liable under the Code or other
applicable statute.
Section 200.164 specifies that a pledgee of shares is not personally
liable as a shareholder. Likewise, an executor, administrator,
conservator, guardian, trustee, assignee for the benefit of creditors or
receiver is not personally liable, although the estate and funds
administered by such person may be liable.
Subchapter E. Distributions and Share Dividends
Subchapter E contains provisions governing distributions and share
distributions by real estate investment trusts.
Section 200.201 provides that the trust managers may authorize a
distribution and the real estate investment trust may make a distribution
subject to Section 200.202 and any restriction in the certificate of
formation.
Section 200.202 prohibits a real estate investment trust from making a
distribution if the trust would be insolvent after the distribution or the
distribution is more than the surplus of the trust. However, a real
estate investment trust may purchase or redeem its own shares under
specified circumstances.
Section 200.203 provides that debt arising as a result of declaration of
a distribution is general, unsecured debt unless subordinated or secured
by agreement.
Section 200.204 permits the trust managers to create a reserve out of the
surplus or designate or allocate part of the real estate investment trust
surplus for a proper purpose.
Section 200.205 authorizes trust managers to make share dividends subject
to Section 200.206 and any restrictions in the certificate of formation.
Section 200.206 prohibits a real estate investment trust from making a
share dividend if its surplus is less than the amount required by Section
200.208 to be transferred to stated capital. A share dividend of one
class may not be made on shares of another class unless the certificate of
formation provides for the dividend or the share dividend is authorized by
the shares of the shareholders in the class being dividended.
Section 200.207 states that a share dividend is issued at the par value
of the shares while no par value shares are issued at the value set by the
trust managers when the share dividend is authorized.
Section 200.208 requires a surplus of not less than the aggregate par
value of the shares issued in a share dividend to be transferred to stated
capital. The amount of surplus transferred to stated capital with respect
to no par value shares is determined by the trust managers.
Section 200.209 permits the trust managers to determine the solvency of
the real estate investment trust and its net assets, stated capital or
surplus to be based on certain financial statements, financial
information, projections, fair valuations or any combination of the
foregoing.
Section 200.210 requires the determination of the solvency of the real
estate investment trust or its surplus to be made on the date the
distribution or share dividend is authorized by the trust managers if it
is made not later than 120 days after the authorization date or on a date
designated by the trust managers if a distribution or share dividend is
made more than 120 days after the authorization and the date designated by
the trust managers is not later than the 121st day before the date the
distribution or share dividend is made. In addition, if neither of the
foregoing apply, the determination is made on the date the distribution or
share dividend is made if it is made more than 120 days after the
authorization date. With respect to a debt, deferred payment obligation
or contract to acquire any of its own shares, the date is the date the
debt or obligation is incurred or the contract is made or takes effect, or
on the date the shares are acquired.
Section 200.211 authorizes the trust managers to split the shares of a
class of the real estate investment trust without increasing the stated
capital of the trust.
Subchapter F. Shareholder Meetings; Voting and Quorum
Subchapter F contains provisions governing a shareholder meeting, voting
by shareholders and the quorum required for a meeting.
Section 200.251 requires an annual meeting of shareholders to be held at
the time stated in or set in accordance with the bylaws of the trust. If
the meeting is not held, a shareholder may request an officer or trust
manager that the meeting be held within a reasonable time, and if it is
not called within 60 days, any shareholder may bring suit to compel the
meeting to be held. The failure to hold a meeting does not effect a
winding up or termination of the real estate investment trust. Each
shareholder has an interest sufficient to institute a legal proceeding to
compel a meeting.
Section 200.252 authorizes a trust manager, an officer or any other
person authorized by the certificate of formation or bylaws and the
holders of at least 10% of all the shares entitled to vote at the meeting
to call a special meeting of shareholders. The 10% shareholder
requirement may be increased or decreased by the certificate of formation
but may not exceed 50% of the shares entitled to vote.
Section 200.253 requires a written notice be given to shareholders
entitled to vote at the meeting not later than 10 days and not earlier
than 60 days before the date of the meeting. The notice must be given in
person or by mail or at the direction of the person calling the meeting.
The notice of a special meeting must state the purpose of the meeting.
Section 200.254 requires the share transfer records to be closed in
accordance with Section 6.101 at least 10 days immediately preceding the
date of a meeting.
Section 200.255 requires the record date for the meeting to be not more
than 10 days after the date on which the trust managers adopt the
resolution setting the record date.
Section 200.256 states that the record date must be at least 10 days
before the date on which the particular action requiring the determination
of shareholders is to be taken.
Section 200.257 specifies that a quorum for a shareholders meeting is the
majority of the shares entitled to vote at a meeting. The certificate of
formation may provide for a different quorum of shareholders although the
quorum may not be less than one-third of the shares entitled to vote. The
shareholders present at a meeting may conduct business until the meeting
is adjourned, and a subsequent withdrawal of a shareholder does not negate
the quorum. The shareholders at a meeting where a quorum is not present
may adjourn the meeting until a later time.
Section 200.258 specifies that unless the certificate of formation or
bylaws require otherwise, trust managers must be elected by two-thirds of
the votes cast by the holders of shares entitled to vote in the election
of trust managers at a meeting at which a quorum is present. The
certificate or bylaws may provide for the vote of a different portion of
the shares so long as it is not less than a majority of the shares. Votes
for trust managers are based on the number of shares owned by a
shareholder unless cumulative voting is authorized in accordance with
Section 200.259.
Section 200.259 authorizes cumulative voting for trust managers through a
provision in the certificate of formation of a real estate investment
trust. A shareholder who intends to cumulate votes must give prior
written notice of that intention to the trust managers.
Section 200.260 provides that generally a matter other than the election
of trust managers or for which a specified portion of the shares is
required by this code must be approved by the affirmative vote of the
holders of a majority of the shares entitled to vote and voting for,
against or expressly abstaining on the matter at a shareholders meeting at
which a quorum is present. The bylaws or certificate of formation of a
real estate investment trust may provide that a matter other than the
election of trust managers or for which a specified vote is required by
this code may provide that the approval by shareholders is a specified
portion but not less than a majority of the shares entitled to vote on the
matter.
Section 200.261 defines a "fundamental action" to mean an amendment of a
certificate of formation, a voluntary winding up, a revocation of a
voluntary winding up, a cancellation of an event requiring winding up or a
reinstatement. Approval by the shareholders of a fundamental action
requires the affirmative vote of the holders of two-thirds of the
outstanding shares entitled to vote on the fundamental action. In
addition, the affirmative vote of the holders of two-thirds of the
outstanding shares of each class or series entitled to vote as a class or
series on the action is required. Subsection (d) specifies what
amendments to the certificate of formation require separate voting by a
class or series of shares. Subsections (e) and (f) specify certain
circumstances in which a separate vote of the holders of a series is not
required.
Section 200.262 permits the certificate of formation to require the
affirmative vote of the holders of a specified portion, but not less than
a majority of the shares entitled to vote on a matter for which a
specified vote is required by this title or Title 1. This result also
applies to separate votes by class. These provisions may not be amended
without the affirmative vote of the same specified portion of the holders
of the outstanding shares entitled to vote.
Section 200.263 states that each share has one vote unless otherwise
provided by the certificate of formation or this Code.
Section 200.264 permits a shareholder to vote by written proxy. A
telegram, telex, cablegram, or other form of electronic transmission,
including telephonic transmission, or a photographic, photostatic,
facsimile or similar reproduction of a writing is considered an execution
in writing for this purpose. An electronic transmission must contain or
be accompanied by information from which it can be determined that the
transmission was authorized.
Section 200.265 specifies that a proxy is not valid after 11 months after
execution unless otherwise provided by the proxy.
Section 200.266 provides that proxies are revocable unless the proxy
conspicuously states that it is irrevocable and is a proxy coupled with an
interest.
Section 200.267 states that an irrevocable proxy is specifically
enforceable against successors or transferees of the holder if the proxy
is noted conspicuously on the share certificate or the proxy is contained
in the notice sent to the holder of uncertificated shares under Section
3.205. Otherwise, the proxy is ineffective against a transfer for value
without actual knowledge of the proxy's existence at the time of transfer
or against a subsequent transferee, regardless of whether the transfer is
for value. The proxy is specifically enforceable against a person who is
not a transferee for value from the time the person acquires actual
knowledge of the existence of the irrevocable proxy.
Section 200.268 allows a real estate investment trust to establish
procedures in its bylaws for determining the validity of proxies and
whether shares held of record by nominees are represented at a meeting.
Subchapter G. Trust Managers
Subchapter G contains provisions regarding the trust managers.
Section 200.301 vests in the trust managers the powers necessary or
appropriate to effectuate the real estate investment trusts' purposes and
to manage the trust estate.
Section 200.302 requires the certificate of formation of the real estate
investment trust to contain the name of each trust manager. The selection
of a successor trust manager is considered to be an amendment to the
certificate of formation.
Section 200.303 requires a trust manager to be an individual but need not
be a resident of this state or a shareholder. The certificate of
formation or bylaws may prescribe other qualifications for trust managers.
Section 200.304 requires the certificate of formation to set the number
constituting the initial trust managers. Thereafter, the certificate of
formation or bylaws must set either the number of trust managers or
provide for the manner in which the number is determined. Provisions
regarding increases or decreases in the number may be contained in the
certificate of formation or bylaws.
Section 200.305 entitles trust managers or officers to receive
compensation set by or in the manner provided in the certificate of
formation or bylaws or as determined by the trust managers, in the absence
of such provision.
Section 200.306 states that a trust manager serves until the trust
manager's successor is elected and may succeed himself or herself in
office.
Section 200.307 allows the board of trust managers to be divided into two
or three classes of the same or similar number of trust managers in each
class. The terms of office of the trust managers in each class are
staggered at successive annual meetings. Other requirements regarding the
staggered classes of trust managers are set forth in this section.
Section 200.308 authorizes the remaining trust managers, even if less
than a quorum, to fill a vacancy occurring in the office of a trust
manager. The certificate of formation or bylaws may provide other
procedures for filling vacancies.
Section 200.309 permits regular meetings to be held with our without
notice but requires notices for special meetings of trust managers. The
notice need not specify the business purpose of the meeting unless
required by the bylaws.
Section 200.310 requires the majority of the number of trust managers to
constitute a quorum unless the certificate of formation or bylaws requires
a greater number.
Section 200.311 authorizes the certificate of formation and bylaws to
permit trust managers to establish committees of trust managers. The
committees have the authority provided by the resolution designating the
committee or the certificate of formation and bylaws. The committee may
not have certain powers of the trust managers, although the committee may
authorize a distribution or the issuance of shares if authorized in the
resolution designating the committee, the certificate of formation or the
bylaws.
Section 200.312 makes a trust manager jointly and severally liable to the
real estate investment trust for the value of distributed assets which are
distributed during the liquidation of the real estate investment trust
without payment and discharge or the making of adequate provisions for the
payment of all debts and other obligations of the trust. Trust managers
who vote for or assent to the making of a loan to another trust manager or
officer of the trust or the making of a loan secured by shares of the
trust is jointly and severally liable to the trust for the loan amount
until the loan is repaid. Trust managers acting in good faith and with
ordinary care are excused from liability for distributed assets if they
relied on certain information and considered the assets of the trust to be
valued at least at book value.
Section 200.313 prohibits actions brought under Section 200.312 against
trust managers after the second anniversary of the date of the alleged act
giving rise to the liability.
Section 200.314 specifies that a trust manager may not be held liable to
the trust for an act, omission, loss, damage or expense arising from the
trust manager's duties except for willful misfeasance, willful malfeasance
or gross negligence.
Section 200.315 entitles a trust manager to receive contribution from
each of the other trust managers who are liable with respect to the claim.
Section 200.316 authorizes an officer to exercise all of the powers of a
trust manager unless action by a trust manager is specified by this Code
or another applicable law. Delegation of authority to an officer does not
relieve a trust manager of responsibility imposed by law.
Section 200.317 provides that contracts or transactions between a real
estate investment trust and an interested manager or officer are valid
notwithstanding the trust manager's vote or participation in the meeting
at which the contract is authorized if one of several approvals is
obtained. The language has been revised to mirror the counterpart
language in the for-profit corporation provisions of Title 2. The
language also parallels revisions to TBCA Article 2.35-1 effected by the
1997 Texas Legislature to clarify certain ambiguities that had arisen out
of recent Delaware case law. These ambiguities are similarly resolved in
the revised language of Code Section 200.351.
Subchapter H. Investments
Subchapter H contains provisions relating to investments of the trust
estate by trust managers or officers.
Section 200.351 gives the trust managers and officers complete discretion
with respect to the investment of the trust estate unless the investment
is contrary to this subchapter, the Internal Revenue Code or regulations
under the Internal Revenue Code relating to or governing real estate
investment trusts.
Subchapter I. Fundamental Business Transactions
Subchapter I contains provisions governing mergers, conversions, share
exchanges and sales of all or substantially all of the real estate
investment trust's assets.
Section 200.401 contains definitions of the terms shares, voting shares,
participating shares and sale of all or substantially all of the assets.
Section 200.402 contains the procedures for approval of a plan of merger
by the trust managers and shareholders of the real estate investment
trust. Except as provided by this subchapter or Chapter 10, the plan of
merger must be submitted to the shareholders for approval.
Section 200.403 specifies the procedures for approval of a plan of
conversion by the trust managers and shareholders. The shareholders must
approve a plan of conversion.
Section 200.404 specifies the procedures for approval of an interest
exchange by the trust managers and shareholders. The plan of exchange
must be submitted to shareholders for approval.
Section 200.405 specifies that the sale of all or substantially all of
the assets of real estate investment trusts requires the approval of the
shareholders. Procedures for approval by the shareholders and trust
managers of a sale of all or substantially all the assets of the real
estate investment trusts are contained in this section.
Section 200.406 specifies the requirements for a notice to the
shareholders of the meeting at which a fundamental business transaction is
to be considered. A "fundamental business transaction" is defined in the
Code to be a merger, interest exchange, conversion or sale of all or
substantially all of the assets of the entity.
Section 200.407 generally requires the vote of the holders of at least
two-thirds of the outstanding shares entitled to vote for approval of a
fundamental business transaction. The certificate of formation or bylaws
may specify a different portion of the shares in accordance with Section
200.261. The affirmative vote of at least two-thirds of the outstanding
shares of each class or series of shares entitled to vote on the
fundamental business transaction as a class or series is also required.
Section 200.408 states when a separate vote by a class or series of
shares is required for approval of a plan of merger, plan of conversion or
plan of exchange or sale of all or substantially all of the shares of a
real estate investment trust.
Section 200.409 specifies that approval by the shareholders of a real
estate investment trust is not required if certain conditions are met,
including the number of shares issued by the trust pursuant to the merger
does not exceed 20% of the total number outstanding prior to the merger.
Mergers effected under Section 10.005 or 10.006 do not require the
approval of the shareholders.
Section 200.410 specifies that a shareholder of a domestic real estate
investment trust has the rights of dissent and appraisal under Subchapter
H, Chapter 10, with respect to a fundamental business transaction.
Subchapter J. Supplemental Winding Up and Termination Provisions
Subchapter J contains supplemental provisions relating to the winding up
and termination of a real estate investment trust. The Code omits the
unnecessary provision requiring withdrawal of an assumed name certificate
found in existing law because the assumed name statute in the Texas
Business & Commerce Code would require the same result.
Section 200.451 specifies that a real estate investment trust must
approve a voluntary winding up by the affirmative vote of shareholders set
forth in Section 200.262.
Section 200.452 specifies that a real estate investment trust may
reinstate its existence, cancel an event requiring winding up or revoke a
voluntary decision to wind up by the affirmative vote of the shareholders
in accordance with Section 200.262.
Section 200.453 provides that the trust managers must manage the winding
up of the business or affairs of the real estate investment trust.
Subchapter K. Miscellaneous Provisions
Subchapter K contains miscellaneous provisions relating to real estate
investment trusts.
Section 200.501 specifies that a shareholder of record for at least six
months or a shareholder of at least 5% of the outstanding shares may
examine and copy the books and records of the real estate investment
trust. A court may also order production for examination by the
shareholder of such books and records.
Section 200.502 provides that shareholders need not join in any sale,
lease, mortgage or other disposition of the assets of the real estate
investment trust.
Section 200.503 provides that the provisions of this chapter are subject
to the provisions of the Internal Revenue Code and the regulations
promulgated thereunder with respect to real estate investment trusts who
are attempting to qualify as real estate investment trusts under the
Internal Revenue Code.
TITLE 6. ASSOCIATIONS
CHAPTER 251. COOPERATIVE ASSOCIATIONS
Subchapter A. General Provisions
Subchapter A contains general provisions relating to definitions, the
applicability of nonprofit corporation provisions, and exemptions from
this Title. Chapter 251 omits the requirement of existing law that a
cooperative association be formed only by specified groups or persons.
This requirement in CAA Article 50.01 Section 4 has become outmoded.
Section 251.001 contains definitions for cooperative basis, invested
capital, investment dividend, membership capital, net savings, patronage
dividend, and savings returns.
Section 251.002 provides that various provisions governing nonprofit
corporations apply to cooperative associations.
Section 251.003 exempts various corporations and associations from the
provisions of this chapter. This Section clarifies that Chapter 251 does
not apply to a corporation or association organized on a cooperative basis
under another statute.
Subchapter B. Formation
Subchapter B contains provisions relating to the formation of a
cooperative association including holding the organizational meeting,
amending the certification of formation, and adopting bylaws.
Section 251.051 requires that a cooperative association hold an
organizational meeting after a certificate of formation is filed.
Section 251.052 provides the manner by which the certificate of formation
may be amended. This Section omits for cooperative associations the
outmoded requirement that the adoption of the amendment must be verified
by the officers currently required by the CAA.
Section 251.053 states that the bylaws may be adopted, amended or
repealed by majority of the cooperative association's members voting
unless the certificate of formation requires a greater majority. This
section also sets out the various types of information that the bylaws may
contain.
Subchapter C. Management
Subchapter C contains general provisions relating to directors, officers,
and referendums.
Section 251.101 states that a cooperative association is generally
managed by a board of directors in accordance with Chapter 22. However,
the board must contain at least 5 directors who cannot serve for more than
3 years. Additionally, the bylaws may apportion the number of directors
among the units and provide for the election of the directors by
respective units to which the directors are apportioned.
Section 251.102 provides that the directors must annually elect a
president, one or more vice presidents, a secretary and treasurer or a
secretary/treasurer.
Section 251.103 states that the certificate of formation and bylaws can
set forth the process of officer or director removal. If silent, a
director or officer may be removed for cause by a majority vote of the
members voting. Vacancies on the board of directors caused by removal are
filled in the manner that the bylaws establish for the election of
directors. This Section differs from existing law by authorizing
provisions in governing documents permitting the removal of directors.
Section 251.104 provides that the certificate of formation or the bylaws
may provide for a referendum on any action requested by at least 10% of
the members or by at least a majority of the directors. If a referendum
is authorized, the proposition being voted on must be submitted to the
members within a specified time. Referendums cannot adversely affect the
rights of third parties that have already vested.
Subchapter D. Membership
Subchapter D contains general provisions relating to the eligibility,
admission, expulsion, and liability of members.
Section 251.151 states that a person must meet the qualifications for
eligibility stated in the certificate of formation or the bylaws prior to
becoming a member.
Section 251.152 enables a member to be expelled by the vote of a majority
of the members voting at a meeting. The member in question must be given
notice of the charges and is entitled to be heard at the meeting. Upon
expulsion, the directors must purchase the member's holdings at par value
if the purchase does not jeopardize the cooperative association's
solvency.
Section 251.153 states that a person is a subscriber of the cooperative
association if he is eligible for membership and legally obligated to
purchase a share or membership. The certificate of formation or the bylaws
may establish conditions under which voting rights or other membership
rights are granted.
Section 251.154 limits a member or subscriber's liability for a debt of
the cooperative association. However, a subscriber is liable for any
unpaid amount on his membership certificate, and a subscriber who assigns
his interests is liable with the assignee until the certificates are fully
paid.
Subchapter E. Shares
Subchapter E contains general provisions relating to share and membership
certificates.
Section 251.201 prevents a cooperative association from issuing
certificates until any par value has been paid in full. Additionally, the
certificates for membership capital must contain various statements
relating to the restrictions on transferability.
Section 251.202 requires a member who withdraws to offer his certificates
to the board of directors. The directors have 90 days to purchase the
certificates. An investor owning investor's certificates must conform
with the guidelines in the association's bylaws governing the conveyance
of such certificates. If an investor fails to comply with the bylaws, the
cooperative association must repurchase the certificate by paying the
investor the par value of the certificates plus all accrued investment
dividends.
Section 251.203 enables the bylaws to authorize the board of directors to
recall membership certificates of a member who fails to patronize the
cooperative association and to reissue or cancel the certificates.
Section 251.204 exempts the minimum amount necessary for membership from
attachment, execution, or garnishment for the debts of a member. If a
member's holdings are subject to attachment, execution or garnishment, the
directors may admit the purchaser to membership or purchase the holdings
at par value.
Subchapter F. Meetings and Voting
Subchapter F contains general provisions relating to meetings and
voting.
Section 251.251 requires that regular meetings of the members be held at
least once a year. Special meetings may be requested by a majority of
directors or by at least 1/10th of the membership.
Section 251.252 requires that the notice for special meetings include the
purpose of the meeting.
Section 251.253 permits the certificate of formation or bylaws to provide
for meetings by units of the membership and for a method of transmitting
the votes cast at unit meeting to the central meeting, for the method of
representation of the membership by the election of delegates to the
central meeting, or for a combination of both methods. Unless the bylaws
state otherwise, meetings by a unit are called and held in the same manner
as regular meetings. This Section clarifies that a meeting by a unit of
the membership must be called and held in the same manner as a regular
meeting of the members unless the governing documents provide otherwise.
Section 251.254 states that a member of a cooperative association has one
vote unless the cooperative association includes another cooperative
association or a group that is organized on a cooperative basis. Any
voting agreement that evades the onemember-one-vote rule is not
enforceable.
Section 251.255 prevents members from voting by proxy.
Section 251.256 enables the certificate of formation or bylaws to provide
for voting by mail.
Section 251.257 states that provisions applying to votes cast by members
also applies to votes cast by mail or delegates. However, this section
prohibits a delegate from voting by mail.
Subchapter G. Capital and Net Savings.
Subchapter G contains general provisions relating to a cooperative
association's net savings.
Section 251.301 provides that an investment dividend of a cooperative
association cannot be cumulative and cannot exceed 8% of investment
capital unless bylaws state otherwise. Additionally, total investment
dividends distributed for a fiscal year cannot exceed 50% of the net
savings for that year.
Section 251.302 states that the directors must apportion the net savings
in the following order: (1) investment dividends may be paid on investment
capital; (2) a portion of the remainder may be allocated to an educational
fund, then to the general welfare of the members, and then to retained
earnings; and (3) the remainder must be allocated in proportion to
individual patronage. The amount of savings returns for subscriber
patrons may be distributed to the subscriber or accredited to the
subscriber's account until the amount of capital subscribed for has been
fully paid.
Subchapter H. Reports and Records.
Subchapter H contains general provisions relating to recordkeeping and
reports.
Section 251.351 states that a cooperative association must keep books and
records relating to its operations in accordance with standard accounting
practices.
Section 251.352 requires that a cooperative association submit a written
report to its members at the annual meeting and specifies the information
that must be contained in the annual report. Additionally, the directors
must appoint a committee composed of members who are not principal
bookkeepers, accountants or employees of the association to review the
report of the cooperative association.
Section 251.353 requires that cooperative associations with at least a
hundred members or $20,000 in annual business must no later than, 20 days
after the close of business each year, file a report of the association's
financial condition stating specific information. This report must
include a balance sheet and income and expense statement of the
cooperative association. Cooperative associations with at least 300,000
members or $750,000 in annual business must file a copy of this report
with the secretary of state. Persons who verify a report that contains
materially false information commit an offense that is punishable by a
fine and/or a confinement.
Section 251.354 states that the secretary of state must send written
notice within 60 days after the report becomes due to a cooperative
association that failed to file. If the cooperative association was
required to file at its registered office, the members of the cooperative
association may send written notice of the requirement to the cooperative
association. If the cooperative association still does not file within 60
days after receiving notice, a member of the cooperative association or
the attorney general may seek to compel the filing of the report.
Subchapter I. Winding up and Termination.
Subchapter I contains general provisions relating to the winding up and
liquidation of a cooperative association.
Section 251.401 provides that a cooperative association may wind up and
liquidate its affairs in accordance with Chapter 11 and Section 22.301.
Upon being directed to wind up and liquidate, three members of the
cooperative association will be designated as trustees to act on the
behalf of the cooperative association to pay debts, liquidate assets, and
distribute assets.
Section 251.402 requires that an officer or one of the designated
liquidating trustees execute a certificate of termination. This Section
clarifies existing law by permitting a person designated as a liquidating
trustee to execute the certificate of termination.
Section 251.403 establishes the order in which the cooperative
association's assets must be distributed.
Section 251.404 provides for the involuntary termination of a cooperative
association in the manner provided by Section 11.251 and states that the
assets must be distributed in the same manner established for voluntary
termination.
Subchapter J. Miscellaneous Provisions.
Subchapter J contains general provisions relating to exemption from taxes
and the use of the name "cooperative."
Section 251.451 exempts a cooperative association from franchise tax and
license fees. However, a cooperative association is exempt from the
franchise tax imposed by Chapter 171, Tax Code, only if the cooperative
association is exempt under that chapter.
Section 251.452 states that only cooperative associations organized under
this title, a group organized on a cooperative basis under another law, or
a foreign corporation operating under a cooperative basis and authorized
to do business in Texas may use the term "cooperative" or any abbreviation
of that term. The misuse of this term is a misdemeanor that is punishable
by a fine and/or confinement. The attorney general may enjoin one who
violates this section. If a court determines that a person who used the
term "cooperative" before September 1, 1975, is not organized on a
cooperative basis but is authorized to continue to use the term, the
business must place after its name the words "does not comply with the
cooperative association law of Texas." This section carves out an
exception for The University Cooperative Society associated with the
University of Texas.
CHAPTER 252. UNINCORPORATED NONPROFIT ASSOCIATIONS
Section 252.001 defines "member" and "nonprofit association."
Section 252.002 states that principals of law and equity supplement this
chapter unless specifically displaced.
Section 252.003 enables a nonprofit association to acquire, hold,
encumber, and transfer real and personal property.
Section 252.004 enables a nonprofit association to acquire, hold,
encumber, or transfer an estate or interest in real or personal property.
Additionally, a nonprofit association may be a beneficiary of a trust,
contract, or will.
Section 252.005 enables a nonprofit association to execute and record a
statement of authority to transfer an estate or interest in real property.
The statement of authority must include the name of the nonprofit
association, its address, and the name or title of the person authorized
to transfer an estate or interest in real property held in the name of the
nonprofit association. It must be executed in the same manner as a deed
by a person who is not the person authorized to transfer the estate or
interest. Any amendment of the statement of authority must meet the
requirements for execution and recording of the original statement.
Section 252.006 establishes that a nonprofit association is a separate
legal entity and a person is not liable for a nonprofit association's
breach of contract or a tortious act or omission merely because the person
is a member or is authorized to participate in the management of the
nonprofit association. Tortious acts or omissions of members are not
imputed to a person merely because that person is a member or is
authorized to participate in the management of the nonprofit association.
Members can, however, assert a claim against a nonprofit association and a
nonprofit association may assert a claim against members.
Section 252.007 enables a nonprofit association to participate in a
judicial, administrative or other governmental proceeding and/or an
arbitration, mediation or any other form of alternative dispute
resolution. Additionally, a nonprofit association may assert a claim in
its own name on behalf of its members if one or more of the members has
standing to assert the claim in his own right, the interests that the
nonprofit association seeks to protect are germane to its purposes, and
neither the claim asserted nor the relief requested requires the
participation of a member.
Section 252.008 states that a judgment against the nonprofit association
is not a judgment against a member.
Section 252.009 grants a person in custody of property of a nonprofit
association that has been inactive for at least three years the power to
transfer the property to an individual specified in a document of the
nonprofit association. If no person is specified, the property should be
transferred to a nonprofit association pursuing broadly similar purposes,
or to a government or governmental subdivision, agency or instrumentality.
If, however, the nonprofit association is operating for a charitable,
religious or educational purpose, then any distribution must be made to
another nonprofit association or nonprofit corporation with similar
purposes.
Section 252.010 requires a nonprofit association to keep books and
records and to make them available to the members and the attorney
general.
Section 252.011 enables a nonprofit association to file with the
secretary of state a statement appointing an agent authorized to receive
serve of process. The statement and any amendments must be signed by an
authorized person of the nonprofit association and by the person appointed
as agent. A statement appointing an agent may be canceled by filing
written notice of the cancellation containing specific information set
forth in this section.
Section 252.012 prevents a claim for relief against a nonprofit
association from being abated based on a change of membership or person
authorized to manage the affairs of the nonprofit association.
Section 252.013 requires that any summons and complaint be served on an
authorized agent, an officer, managing or general agent, or a person
authorized to participate in the management of the affairs of a nonprofit
association. The attorney general may request the names, current
addresses, and telephone numbers of these individuals.
Section 252.014 states that this chapter must be applied and construed to
make this law uniform with respect to the subject of this chapter among
the states enacting it.
Section 252.015 states that if, before September 1, 1995, an interest in
real or personal property was purportedly transferred to a nonprofit
association, but under the law the interest was vested in a fiduciary, the
fiduciary may transfer the interest to the nonprofit association in its
name or the nonprofit association may require that the interest be
transferred to it in its name.
Section 252.016 states that this chapter replaces existing law with
respect to matters covered by this chapter but does not affect other law
covering unincorporated nonprofit associations.
Section 252.017 states that other portions of the Code do not apply to a
nonprofit association, except that Chapters 1 and 4 and, if an agent for
service of process is designated, Subchapter E of Chapter 5 do apply.
TITLE 7. PROFESSIONAL ENTITIES
CHAPTER 301. PROVISIONS RELATING TO PROFESSIONAL ENTITIES
Section 301.001 provides that Title 7 applies only to professional
entities and foreign professional entities, other than partnerships.
Additionally, it specifies that the title does not affect the professional
or confidential relationship between the professional and the
professional's client. Nor does the title affect the legal remedies
afforded a client against a professional for errors, omissions,
negligence, incompetence or malfeasance. These provisions are not clear in
the TPAA.
Section 301.002 indicates that Title 7 prevails over conflicting
provisions in Title 1, 2 or 3.
Section 301.003 sets forth the definitions of terms used in this title.
The definitions of professional association and professional corporation
have been included in order to more easily distinguish the types of
professionals to which those entities apply. A new definition of "licensed
mental health professional" is added to more clearly describe those
professions that are considered mental health professionals for purposes
of Title 7. This Section clarifies that a professional association is
limited to practice of certain types of professional services consistent
with current legal interpretations and legislative updates.
Section 301.004 sets forth the definition of an "authorized person" for
this Title.
Section 301.005 requires a foreign professional entity to register to
transact business in Texas by filing an application for registration when
required by Chapter 9. Further, the section provides that the secretary of
state may only accept an application if the name and the purpose of the
entity comply with Title 7 and the chapters of Title 1 applicable to names
and purposes. Additionally, the application must state that the
jurisdiction of formation of the foreign professional entity permits
reciprocal admission of a Texas entity formed under this Code. Under
existing law, a foreign professional association and a foreign
professional corporation, other than a professional legal corporation,
cannot obtain a certificate of authority from the secretary of state to
transact business in Texas. In contrast, the provisions of the TLLCA
provide a qualification process for a foreign professional limited
liability company. Section 301.005 makes Chapter 9 (relating to the
registration of foreign entities) applicable to foreign professional
entities, thus providing a qualification process otherwise unavailable
under existing law to foreign professional corporations and foreign
professional associations.
Section 301.006 mandates that a professional association may only provide
professional services in Texas through individuals who are licensed to
perform the professional service provided by the association. Other
professional entities may provide services through authorized persons who
render the same professional service as the professional entity. An
employee may not provide a professional service unless the individual is
licensed to provide the professional service; however, employees who do
not, according to general custom or practice, ordinarily provide a
professional service do not have to be licensed.
Section 301.007 allows an authorized person to be an owner of a
professional entity or governing person of a professional limited
liability company and requires that a professional individual be an
officer or governing person of a professional association or corporation.
Presently, a professional legal corporation may be owned by professional
individuals and by professional legal corporations. Ownership in a
professional corporation, other than a professional legal corporation, is
limited to professional individuals. In contrast, the provisions relating
to professional limited liability companies permit ownership by
professional entities, as well as professional individuals. Section
301.007, and the definition of "authorized person" found in Section
301.004, in effect open up ownership of professional corporations to
professional organizations. Ownership in professional associations,
however, remains limited to professional individuals.
Section 301.008 requires that a managerial official who ceases to be
licensed, as required by Section 301.007, must resign the person's
position of employment; and an owner who ceases to be licensed must
relinquish any ownership interests. Additionally, the section provides
that a person who succeeds to an ownership interest must relinquish any
financial interest in the entity if the person may not be an owner under
Section 301.007. Further, the section requires the professional entity to
purchase or cause to be purchased, at a price provided in the governing
documents or any applicable agreement, the interest of any person who is
required to relinquish the person's financial interest. Section 301.008
also allows a person who is required to relinquish the person's financial
interest but who owns all of the outstanding shares to act as a managerial
official for the entity for the purpose of winding up the affairs of the
entity.
Section 301.009 restricts transfers of ownership interests in a
professional entity to an owner, the entity, or an authorized person, and
provides for further restrictions to be included in the governing
documents.
Section 301.010 provides for joint and several liability of a
professional entity and a person or professional organization that commits
an error, omission, negligent or incompetent act, or malfeasance when the
person or professional organization is an owner, managerial official,
employee, or agent of the professional entity and while providing a
professional service for the entity during the course of the person's
employment.
Section 301.011 exempts the sale, issuance, or offer to sell an ownership
interest in a professional entity from state securities laws.
Section 301.012 indicates that persons licensed as doctors of medicine,
doctors of osteopathy, or doctors of podiatry may engage in and own a
joint practice through a single professional entity. In addition,
professionals, other than physicians, engaged in related mental health
fields may engage in and own a joint practice through a single
professional entity. These are exceptions to existing law that requires a
professional entity be formed for the purpose of providing a single
professional service. This section does not except the members from the
requirement to be licensed to practice the professional service for which
the entity is formed and is not intended to allow a member to control the
conduct of another member who provides a different type of professional
service. State regulatory agencies may continue to regulate these
professionals. This Section gives effect to the Texas Medical Practices
Act, Tex. Rev. Civ. Stat. Art. 4495(b) Section 5.12 and the Texas
Optometry Act, Tex. Rev. Civ. Stat. Art. 4552-5.22, in the joint formation
of professional entities by certain professionals.
CHAPTER 302. PROVISIONS RELATING TO PROFESSIONAL ASSOCIATIONS
Section 302.001 makes the provisions of Chapter 20 and 21 governing
for-profit corporations applicable to professional associations.
Section 302.002 confirms that a professional association is a separate
entity apart from its members and continues until the expiration of the
period of duration stated in its certificate of formation or its winding
up and termination upon a two-thirds vote of its members or in accordance
with its certificate of formation. This existence continues despite
specific events occurring with respect to a member, admission of a new
member, transfer of an ownership interest or an event requiring a winding
up of a partnership.
Section 302.003 allows a professional association to amend its
certificate of formation by following the procedures for amendment in
Chapter 3 and the procedures in the certificate of formation. Further,
the section provides that amendment is not necessary to reflect a change
in associates or membership interests.
Section 302.004 permits the members to adopt bylaws for the association
or to delegate the adoption to a governing authority.
Section 302.005 provides that a professional association shall be
governed by a board of directors or executive committee, who are elected
by its members.
Section 302.006 specifies that each member shall have the voting rights
specified in the certificate of formation.
Section 302.007 requires a professional association to elect officers.
Section 302.008 restricts eligibility of officers and governing persons
to members of the professional association, but does not require an
officer to be a governing person.
Section 302.009 allows the officers of a professional association to
employ agents or employees as desirable.
Section 302.010 specifies that a member of a professional association
does not, merely by virtue of being a member, have the authority to bind
the association.
Section 302.011 provides that the profits of the association shall be
divided as provided in the governing documents.
Section 302.012 requires a professional association to file an annual
report with the Secretary of State and specifies the contents of the
statement.
Section 302.013 outlines the circumstances under which a professional
association shall wind up and terminate, and specifies the persons who may
execute the certificate of termination.
CHAPTER 303. PROVISIONS RELATING TO PROFESSIONAL CORPORATIONS
Section 303.001 makes the provisions of Chapter 20 and 21 governing
for-profit corporations applicable to professional corporations.
Section 303.002 clarifies that a shareholder of a corporation is not
required to supervise the performance of duties by an officer or employee
of the corporation, and is subject to no greater liability than a
shareholder of a for-profit corporation.
Section 303.003 imposes a requirement that any restriction on transfer of
shares of a professional corporation be noted on each share certificate
and incorporated by reference as provided by Chapter 21.
Section 303.004 gives a professional corporation the power to redeem the
shares of a shareholder at the price agreed upon or specified in the
governing documents or an applicable agreement.
Section 303.005 specifies that the existence of a professional
corporation continues in spite of the death, incompetence, resignation,
withdrawal, retirement or expulsion of any shareholder; the transfer of
shares to a new shareholder; or the occurrence of an event requiring the
winding up of a partnership. Such existence continues until winding up
and termination is concluded.
Section 303.006 specifies that a shareholder may not wind up the affairs
and terminate the corporation independently of the other shareholders of
the professional corporation.
CHAPTER 304. PROVISIONS RELATING TO PROFESSIONAL
LIMITED LIABILITY COMPANIES
Section 304.001 makes the provisions of Title 3 applicable to
professional limited liability companies.
TITLE 8. MISCELLANEOUS AND TRANSITION PROVISIONS
CHAPTER 401. GENERAL PROVISIONS
Section 401.001 sets forth definitions of "mandatory application date"
and "prior law." "Mandatory application date" means for an entity subject
to the Code under section 402.001, the date of formation or registration
of the entity, for an entity subject to the Code under section 402.003 or
402.004, the date of filing of documentation necessary to adopt the Code,
and for any other entity, January 1, 2010. The term "prior law" means the
applicable law in effect before January 1, 2006.
CHAPTER 402. MISCELLANEOUS AND TRANSITION PROVISIONS
Section 402.001 provides that the Code applies to a domestic entity
formed on or after the effective date of the Code, and a foreign filing
entity that is transacting business in this state and is not registered
before the effective date of the Code. Any entity may elect, as provided
by Section 402.003 or 402.004, to be governed by the Code. Additionally,
on or after the effective date of the Code, the fees required by Chapter 4
apply to all filings made with the Secretary of State, including
comparable filings under prior law, regardless whether the entity has
adopted the Code.
Section 402.003 provides that a domestic entity formed before the
effective date of the Code may voluntarily elect to adopt and become
subject to the Code by complying with the procedures to amend its
governing documents, amending the governing documents and, if the domestic
entity is a filing entity, filing with the Secretary of State in
accordance with Chapter 4 a certificate of amendment to its formation or
restated certificate of formation that specifically states that the filing
entity is electing to adopt the Code and would cause its certificate of
formation or restated certificate of formation to comply with the Code.
If the amendment to the governing documents of the domestic entity that
are necessary to conform the governing documents to the Code would not
require, or the prior law, the vote or consent of the owners or members of
the entity, this code and any required amendment to the governing
documents may be adopted by the governing authority only in the manner
provided for an amendment of the particular governing document.
Section 402.004 sets forth the rule with respect to foreign entities
registered with the Secretary of State who may voluntarily elect to adopt
and become subject to the Code by filing with the Secretary of State an
amendment to its application for registration with respect to the adoption
by the foreign entity of the Code.
Section 402.005 provides that on January 1, 2010, if a domestic entity
formed before the effective date of this Code (or a foreign filing entity
registered with the Secretary of State to transact business before the
effective date of the Code) has not taken the action specified by Sections
402.003 or 402.004 to elect to adopt the Code, then the new law applies on
or after the mandatory application date to such entities and the entity is
not considered to have failed to comply with the Code if the entity's
certificate of formation does not comply with the Code.
Section 402.006 provides, in Subsection (a), that except as otherwise
expressly provided by Title 8, all of the provisions of the Code govern
acts, contracts, or other transactions by an entity subject to the Code or
its governing authority, officers, owners or members that occur on or
after the mandatory application date. Prior law governs acts, contracts
or transactions that occur before the mandatory application date.
Subsection (b) grandfathers existing ownership interest certificates of
partnerships under existing law but requires all new ownership interest
certificates of partnerships to satisfy the requirements of the Code.
Section 402.007 provides that Chapter 8 governs any proposed
indemnification by a domestic entity after the mandatory application date,
regardless of whether the events on which the indemnification is based
occurred before or after the mandatory application date.
Section 402.008 provides that Chapter 6 and any other applicable
provision of this Code should apply to meetings of owners or members held
on or after the mandatory application date or action undertaken by owners
or members under a written consent that takes effect on or after the
mandatory application date. Prior law applies to a meeting of owners or
members and to any vote cast at a meeting if the meeting was initially
called for a date before the mandatory application date and notice of the
meeting was given to owners or member entitled to vote at the meeting.
Section 402.009 provides that Chapter 6 and other applicable provisions
of the Code apply to a meeting of the governing authority or a committee
of the governing authority held on or after the mandatory application date
and action undertaken by the governing authority or committee thereof
under written consent that takes effect on or after the mandatory
application date. Prior law applies to meetings of the governing
authority or committee thereof and any vote cast at a meeting if the
meeting was initially called for a date before the mandatory application
date and notice of the meeting was given to governing persons entitled to
vote at the meeting.
Section 402.010 provides that Chapter 10 and other applicable provisions
of the Code apply to a transaction consummated after the mandatory
application date, except that if a required approval of the outstanding
ownership interest has been given before the mandatory application date or
has been given after the mandatory application date at a meeting of owners
or members initially called for a date before the mandatory application
date, the transaction will be governed by the prior law.
Section 402.011 provides that Chapter 11 applies to actions for
involuntary or judicial winding up and termination of an entity commenced
after the mandatory application date or voluntary winding up and
termination proceeding initiated in respect of an entity governed by the
Code. The prior law governs an action for involuntary or judicial winding
that is pending on the mandatory application date or a proceeding for
voluntary winding up and termination initiated before the mandatory
application date.
Section 402.012 provides that a foreign entity that has transacted
intrastate business in Texas before the mandatory application date and
that is required by Chapter 9 to register to transact business is not
subject to a direct or indirect penalty as a result or failure to register
under Chapter 9 if the application for registration is filed not later
than the 30th day after the mandatory application date.
Section 402.013 provides that if the rights, privileges and powers of a
domestic filing entity had been suspended, and are still suspended
immediately before the mandatory application date under prior law, the
Code applies to the entity on the mandatory application date. If the
rights, privileges and powers of a domestic filing entity have been
suspended and are still suspended under the Tax Code immediately before
the mandatory application date, the suspension continues to apply to the
corporation or other entity until the rights, privileges and powers are
restored under the Secretary of State under the Tax Code.
Section 402.014 states that except as expressly provided by Title 8, the
Code does not apply to an action or proceeding commenced before the
mandatory application date. Prior law applies to the action or proceeding.
Section 2. Conforming amendment to Part Eleven, Texas Business
Corporation Act, by adding Article 11.02 relating to the applicability of
the Code and the expiration of the TBCA.
Section 3. Conforming amendment to Part Seven, Texas Miscellaneous
Corporation Laws Act relating to the applicability of the Code and the
expiration of the TMCLA.
Section 4. Conforming amendment to the Texas Non-Profit Corporation Act
adding Article 11.02 that relates to the applicability of the Code and
expiration of the TNPCA.
Section 5. Conforming amendment to the Cooperative Association Act
adding Section 47 relating to the applicability of the Code and expiration
of the CAA.
Section 6. Confirming amendment to the Texas Uniform Unincorporated
Nonprofit Association Act, adding Section 19 relating to the applicability
of the Code and expiration of the TUUNAA.
Section 7. Conforming amendment to the Texas Professional Corporation
Act adding Section 21 relating to the applicability of the Code and
expiration of the TPCA.
Section 8. Conforming amendment to the Texas Professional Association
Act adding Section 27 relating to the applicability of the Code and
expiration of the TPAA.
Section 9. Conforming amendment to Part Eight, Texas Limited Liability
Company Act adding Article 8.13 relating to the applicability of the Code
and expiration of the TLLCA.
Section 10. Conforming amendment to Article Thirteen, Texas Revised
Limited Partnership Act adding Section 13.10 relating to the applicability
of the Code and expiration of the TRLPA.
Section 11. Conforming amendment to Article XI, Texas Revised
Partnership Act adding Section 11.05 relating to the applicability of the
Code and expiration of the TRPA.
Section 12. Conforming amendment to the Texas Real Estate Investment
Trust Act adding Section 29.10 relating to the applicability of the Code
and expiration of the TREITA.
Section 13. Conforming amendment to Article 1399, Revised Statutes,
relating to the applicability of Articles 1399-1407, Revised Statutes to a
grand body to which this Code applies.
Section 14. Conforming amendment to Article 1407a, Revised Statutes
adding new Section 9 relating to the applicability of Article 1407a to a
church benefits board to which this Code applies.
Section 15. Conforming amendment to Article 1528g, Revised Statutes,
relating to the applicability of Article 1528g to a business development
corporation to which this Code applies.
Section 16. Repeals outdated or ineffective statutes or statutes that
are replaced by the Code.
Section 17. States that the effective date of the Code is January 1,
2006.