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A BILL TO BE ENTITLED
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AN ACT
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relating to derivative proceedings on behalf of for-profit |
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corporations, limited liability companies, and limited |
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partnerships. |
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BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS: |
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SECTION 1. Section 21.551(2), Business Organizations Code, |
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is amended to read as follows: |
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(2) "Shareholder" means a shareholder as defined by |
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Section 1.002 or [includes] a beneficial owner whose shares are |
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held in a voting trust or by a nominee on the beneficial owner's |
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behalf. |
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SECTION 2. Section 21.552, Business Organizations Code, is |
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amended to read as follows: |
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Sec. 21.552. STANDING TO BRING PROCEEDING. (a) Subject |
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to Subsection (b), a [A] shareholder may not institute or maintain a |
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derivative proceeding unless: |
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(1) the shareholder: |
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(A) was a shareholder of the corporation at the |
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time of the act or omission complained of; or |
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(B) became a shareholder by operation of law |
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originating from a person that was a shareholder at the time of the |
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act or omission complained of; and |
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(2) the shareholder fairly and adequately represents |
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the interests of the corporation in enforcing the right of the |
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corporation. |
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(b) If the converted entity in a conversion is a |
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corporation, a shareholder of that corporation may not institute or |
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maintain a derivative proceeding based on an act or omission that |
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occurred with respect to the converting entity before the date of |
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the conversion unless: |
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(1) the shareholder was an equity owner of the |
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converting entity at the time of the act or omission; and |
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(2) the shareholder fairly and adequately represents |
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the interests of the corporation in enforcing the right of the |
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corporation. |
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SECTION 3. Section 21.553(b), Business Organizations Code, |
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is amended to read as follows: |
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(b) The waiting period required by Subsection (a) before a |
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derivative proceeding may be instituted is not required or, if |
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applicable, shall terminate if: |
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(1) the shareholder has been [previously] notified |
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that the demand has been rejected by the corporation; |
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(2) the corporation is suffering irreparable injury; |
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or |
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(3) irreparable injury to the corporation would result |
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by waiting for the expiration of the 90-day period. |
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SECTION 4. Section 21.554, Business Organizations Code, is |
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amended to read as follows: |
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Sec. 21.554. DETERMINATION BY DIRECTORS OR INDEPENDENT |
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PERSONS. (a) A determination of how to proceed on allegations made |
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in a demand or petition relating to a derivative proceeding must be |
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made by an affirmative vote of the majority of: |
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(1) all [the] independent and disinterested directors |
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of the corporation, regardless of whether [present at a meeting of
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the board of directors of the corporation at which interested
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directors are not present at the time of the vote if] the |
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independent and disinterested directors constitute a quorum of the |
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board of directors; |
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(2) a committee consisting of one [two] or more |
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independent and disinterested directors appointed by an |
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affirmative vote of the majority of one or more independent and |
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disinterested directors [present at a meeting of the board of
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directors], regardless of whether the independent and |
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disinterested directors constitute a quorum of the board of |
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directors; or |
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(3) a panel of one or more independent and |
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disinterested individuals [persons] appointed by the court on a |
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motion by the corporation listing the names of the individuals |
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[persons] to be appointed and stating that, to the best of the |
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corporation's knowledge, the individuals [persons] to be appointed |
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are disinterested and qualified to make the determinations |
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contemplated by Section 21.558. |
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(b) The court shall appoint a panel under Subsection (a)(3) |
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if the court finds that the individuals [persons] recommended by |
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the corporation are independent and disinterested and are otherwise |
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qualified with respect to expertise, experience, independent |
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judgment, and other factors considered appropriate by the court |
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under the circumstances to make the determinations. An individual |
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[A person] appointed by the court to a panel under this section may |
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not be held liable to the corporation or the corporation's |
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shareholders for an action taken or omission made by the individual |
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[person] in that capacity, except for an act or omission |
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constituting fraud or wilful misconduct. |
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SECTION 5. Section 21.555, Business Organizations Code, is |
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amended to read as follows: |
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Sec. 21.555. STAY OF PROCEEDING. (a) If the [domestic or
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foreign] corporation that is the subject of a derivative proceeding |
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commences an inquiry into the allegations made in a demand or |
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petition and the person or group of persons described by Section |
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21.554 is conducting an active review of the allegations in good |
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faith, the court shall stay a derivative proceeding for not more |
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than 60 days until the review is completed and a determination is |
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made by the person or group regarding what further action, if any, |
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should be taken. |
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(b) To obtain a stay, the [domestic or foreign] corporation |
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must [shall] provide the court with a written statement agreeing to |
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advise the court and the shareholder making the demand of the |
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determination promptly on the completion of the review of the |
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matter. |
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(c) A stay, on motion [application], may be reviewed every |
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60 days for continuation [the continued necessity] of the stay if |
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the corporation provides the court and the shareholder with a |
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written statement of the status of the review and the reasons why an |
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extension for a period not to exceed 60 additional days is |
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appropriate. An extension shall be granted for a period not to |
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exceed 60 days if the court determines that the continuation is |
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appropriate in the interests of the corporation. |
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[(c)
If the review and determination made by the person or
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group is not completed before the 61st day after the stay is ordered
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by the court, the stay may be renewed for one or more additional
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60-day periods if the domestic or foreign corporation provides the
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court and the shareholder with a written statement of the status of
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the review and the reasons why a continued extension of the stay is
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necessary.] |
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SECTION 6. Section 21.556, Business Organizations Code, is |
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amended to read as follows: |
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Sec. 21.556. DISCOVERY. (a) If a [domestic or foreign] |
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corporation proposes to dismiss a derivative proceeding under |
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Section 21.558, discovery by a shareholder after the filing of the |
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derivative proceeding in accordance with this subchapter shall be |
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limited to: |
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(1) facts relating to whether the person or [group of] |
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persons described by Section 21.554 are [21.558 is] independent and |
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disinterested; |
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(2) the good faith of the inquiry and review by the |
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person or group; and |
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(3) the reasonableness of the procedures followed by |
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the person or group in conducting the review. |
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(b) Discovery described by Subsection (a) may not be |
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expanded to include a fact or substantive matter regarding the act, |
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omission, or other matter that is the subject matter of the |
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derivative proceeding but the scope of discovery shall not be so |
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limited [. The scope of discovery may be expanded] if the court |
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determines after notice and hearing that a good faith review of the |
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allegations [for purposes of Section 21.558] has not been made by an |
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independent and disinterested person or group in accordance with |
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Sections 21.554 and 21.558 [that section]. |
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SECTION 7. Section 21.557, Business Organizations Code, is |
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amended to read as follows: |
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Sec. 21.557. TOLLING OF STATUTE OF LIMITATIONS. A written |
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demand filed with the corporation under Section 21.553 tolls the |
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statute of limitations on the claim on which demand is made until |
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the later [earlier] of: |
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(1) the 31st [91st] day after the expiration of any |
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waiting period under Section 21.553 [date of the demand]; or |
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(2) the 31st day after the expiration of any stay |
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granted under Section 21.555, including all continuations of the |
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stay [date the corporation advises the shareholder that the demand
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has been rejected or the review has been completed]. |
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SECTION 8. Section 21.558, Business Organizations Code, is |
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amended to read as follows: |
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Sec. 21.558. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A |
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court, sitting in equity as the finder of fact, shall dismiss a |
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derivative proceeding on a motion by the corporation if the person |
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or group of persons described by Section 21.554 determines in good |
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faith, after conducting a reasonable inquiry and based on factors |
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the person or group considers appropriate under the circumstances, |
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that continuation of the derivative proceeding is not in the best |
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interests of the corporation. |
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(b) In determining whether the requirements of Subsection |
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(a) have been met, the burden of proof shall be on: |
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(1) the plaintiff shareholder if: |
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(A) the majority of the board of directors |
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consists of independent and disinterested directors at the time the |
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determination is made; |
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(B) the determination is made by a panel of one or |
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more independent and disinterested persons appointed under Section |
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21.554(a)(3); or |
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(C) the corporation presents prima facie |
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evidence that demonstrates that the applicable person or persons |
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making the determination [directors appointed] under Section |
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21.554(a) [21.554(a)(2)] are independent and disinterested; or |
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(2) the corporation in any other circumstance. |
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SECTION 9. Section 21.559, Business Organizations Code, is |
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amended to read as follows: |
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Sec. 21.559. ALLEGATIONS [PROCEEDING INSTITUTED] AFTER |
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DEMAND REJECTED. If a derivative proceeding is instituted after a |
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demand is rejected, the petition must allege with particularity |
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facts that establish that the rejection was not made in accordance |
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with the requirements and standards under [of] Sections 21.554 and |
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21.558. |
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SECTION 10. Section 21.561, Business Organizations Code, is |
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amended to read as follows: |
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Sec. 21.561. PAYMENT OF EXPENSES. (a) In this section, |
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"expenses" means reasonable expenses incurred by a party in a |
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derivative proceeding, including: |
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(1) attorney's fees; |
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(2) costs in pursuing an investigation of the matter |
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that was the subject of the derivative proceeding; or |
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(3) expenses for which the [domestic or foreign] |
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corporation [or a corporate defendant] may be required to indemnify |
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another person. |
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(b) On termination of a derivative proceeding, the court may |
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order: |
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(1) the [domestic or foreign] corporation to pay [the] |
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expenses the plaintiff incurred in the proceeding if the court |
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finds the proceeding has resulted in a substantial benefit to the |
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[domestic or foreign] corporation; |
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(2) the plaintiff to pay [the] expenses the [domestic
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or foreign] corporation or other defendant incurred in |
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investigating and defending the proceeding if the court finds the |
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proceeding has been instituted or maintained without reasonable |
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cause or for an improper purpose; or |
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(3) a party to pay [the] expenses incurred by another |
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party relating to the filing of a pleading, motion, or other paper |
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if the court finds the pleading, motion, or other paper: |
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(A) was not well grounded in fact after |
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reasonable inquiry; |
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(B) was not warranted by existing law or a good |
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faith argument for the application, extension, modification, or |
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reversal of existing law; or |
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(C) was interposed for an improper purpose, such |
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as to harass, cause unnecessary delay, or cause a needless increase |
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in the cost of litigation. |
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SECTION 11. Section 21.562, Business Organizations Code, is |
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amended to read as follows: |
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Sec. 21.562. APPLICATION TO FOREIGN CORPORATIONS. (a) In a |
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derivative proceeding brought in the right of a foreign |
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corporation, the matters covered by this subchapter are governed by |
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the laws of the jurisdiction of formation [incorporation] of the |
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foreign corporation, except for Sections 21.555, 21.560, and |
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21.561, which are procedural provisions and do not relate to the |
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internal affairs of the foreign corporation, unless applying the |
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laws of the jurisdiction of formation of the foreign corporation |
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requires otherwise with respect to Section 21.555. |
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(b) In the case of matters relating to a foreign corporation |
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under Section 21.555 [21.554], a reference to a person or group of |
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persons described by Section 21.554 [that section] refers to a |
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person or group entitled under the laws of the jurisdiction of |
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formation [incorporation] of the foreign corporation to make the |
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determination described by Section 21.554(a) [review and dispose of
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a derivative proceeding]. The standard of review of a |
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determination [decision] made by the person or group [to dismiss
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the derivative proceeding] shall be governed by the laws of the |
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jurisdiction of formation [incorporation] of the foreign |
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corporation. |
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SECTION 12. Section 21.563, Business Organizations Code, is |
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amended to read as follows: |
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Sec. 21.563. CLOSELY HELD CORPORATION. (a) In this |
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section, "closely held corporation" means a corporation that has: |
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(1) fewer than 35 shareholders; and |
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(2) no shares listed on a national securities exchange |
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or regularly quoted in an over-the-counter market by one or more |
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members of a national securities association. |
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(b) Sections 21.552-21.560 [21.552-21.559] do not apply to |
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a claim or a derivative proceeding by a shareholder of a closely |
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held corporation against a director, officer, or shareholder of the |
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corporation. In the event the claim or derivative proceeding is |
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also made against a person who is not that director, officer, or |
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shareholder, this subsection applies only to the claim or |
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derivative proceeding against the director, officer, or |
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shareholder. |
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(c) If Sections 21.552-21.560 do not apply because of |
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Subsection (b) and if justice requires: |
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(1) a derivative proceeding brought by a shareholder |
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of a closely held corporation may be treated by a court as a direct |
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action brought by the shareholder for the shareholder's own |
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benefit; and |
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(2) a recovery in a direct or derivative proceeding by |
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a shareholder may be paid directly to the plaintiff or to the |
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corporation if necessary to protect the interests of creditors or |
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other shareholders of the corporation. |
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(d) Other provisions of state law govern whether a |
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shareholder has a direct cause of action or right to sue a director, |
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officer, or shareholder, and this section may not be construed to |
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create that direct cause of action or right to sue. |
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SECTION 13. Section 101.451, Business Organizations Code, |
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is amended by amending Subdivision (2) and adding Subdivision (3) |
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to read as follows: |
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(2) "Managing entity" means an entity that is either: |
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(A) a manager of a limited liability company that |
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is managed by managers; or |
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(B) a member of a limited liability company that |
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is managed by members who are entitled to manage the company. |
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(3) "Member" means [includes] a person who is a member |
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or is an assignee of a membership interest or a person who |
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beneficially owns a membership interest through a voting trust or a |
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nominee on the person's behalf. |
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SECTION 14. Section 101.452, Business Organizations Code, |
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is amended to read as follows: |
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Sec. 101.452. STANDING TO BRING PROCEEDING. (a) Subject |
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to Subsection (b), a [A] member may not institute or maintain a |
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derivative proceeding unless: |
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(1) the member: |
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(A) was a member of the limited liability company |
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at the time of the act or omission complained of; or |
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(B) became a member by operation of law |
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originating from a person that was a member at the time of the act or |
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omission complained of; and |
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(2) the member fairly and adequately represents the |
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interests of the limited liability company in enforcing the right |
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of the limited liability company. |
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(b) If the converted entity in a conversion is a limited |
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liability company, a member of that limited liability company may |
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not institute or maintain a derivative proceeding based on an act or |
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omission that occurred with respect to the converting entity before |
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the date of the conversion unless: |
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(1) the member was an equity owner of the converting |
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entity at the time of the act or omission; and |
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(2) the member fairly and adequately represents the |
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interests of the limited liability company in enforcing the right |
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of the limited liability company. |
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SECTION 15. Section 101.453(b), Business Organizations |
|
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Code, is amended to read as follows: |
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(b) The waiting period required by Subsection (a) before a |
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derivative proceeding may be instituted is not required or, if |
|
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applicable, shall terminate if: |
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(1) the member has been [previously] notified that the |
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demand has been rejected by the limited liability company; |
|
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(2) the limited liability company is suffering |
|
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irreparable injury; or |
|
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(3) irreparable injury to the limited liability |
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company would result by waiting for the expiration of the 90-day |
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period. |
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SECTION 16. Section 101.454, Business Organizations Code, |
|
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is amended to read as follows: |
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Sec. 101.454. DETERMINATION BY GOVERNING OR INDEPENDENT |
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PERSONS. (a) The determination of how to proceed on allegations |
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made in a demand or petition relating to a derivative proceeding |
|
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must be made by an affirmative vote of the majority of: |
|
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(1) the independent and disinterested governing |
|
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persons of the limited liability company, whether one or more, even |
|
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if the independent and disinterested governing persons are not a |
|
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majority of the governing persons of the limited liability company |
|
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[present at a meeting of the governing authority at which
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interested governing persons are not present at the time of the vote
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if the independent and disinterested governing persons constitute a
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quorum of the governing authority]; |
|
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(2) a committee consisting of one [two] or more |
|
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independent and disinterested governing persons appointed by the |
|
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majority of one or more independent and disinterested governing |
|
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persons of the limited liability company, even if the appointing |
|
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independent and disinterested governing persons are not a majority |
|
|
of the governing persons of the limited liability company [present
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at a meeting of the governing authority, regardless of whether the
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independent and disinterested governing persons constitute a
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quorum of the governing authority]; or |
|
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(3) a panel of one or more independent and |
|
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disinterested individuals [persons] appointed by the court on a |
|
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motion by the limited liability company listing the names of the |
|
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individuals [persons] to be appointed and stating that, to the best |
|
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of the limited liability company's knowledge, the individuals |
|
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[persons] to be appointed are disinterested and qualified to make |
|
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the determinations contemplated by Section 101.458. |
|
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(b) An entity to which this subsection applies is |
|
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independent and disinterested under this section only if its |
|
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decision with respect to the limited liability company's derivative |
|
|
proceeding is made by a majority of its governing persons who are |
|
|
independent and disinterested with respect to that derivative |
|
|
proceeding, even if those governing persons are not a majority of |
|
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its governing persons. This subsection applies to an entity that |
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is: |
|
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(1) a managing entity of the limited liability |
|
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company; or |
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(2) directly, or indirectly through one or more other |
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entities, a governing person of that managing entity. |
|
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(c) The court shall appoint a panel under Subsection (a)(3) |
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if the court finds that the individuals [persons] recommended by |
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the limited liability company are independent and disinterested and |
|
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are otherwise qualified with respect to expertise, experience, |
|
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independent judgment, and other factors considered appropriate by |
|
|
the court under the circumstances to make the determinations. An |
|
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individual [A person] appointed by the court to a panel under this |
|
|
section may not be held liable to the limited liability company or |
|
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the limited liability company's members for an action taken or |
|
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omission made by the individual [person] in that capacity, except |
|
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for acts or omissions constituting fraud or wilful misconduct. |
|
|
SECTION 17. Section 101.455, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 101.455. STAY OF PROCEEDING. (a) If the [domestic or
|
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|
foreign] limited liability company that is the subject of a |
|
|
derivative proceeding commences an inquiry into the allegations |
|
|
made in a demand or petition and the person or group of persons |
|
|
described by Section 101.454 is conducting an active review of the |
|
|
allegations in good faith, the court shall stay a derivative |
|
|
proceeding for not more than 60 days until the review is completed |
|
|
and a determination is made by the person or group regarding what |
|
|
further action, if any, should be taken. |
|
|
(b) To obtain a stay, the [domestic or foreign] limited |
|
|
liability company must [shall] provide the court with a written |
|
|
statement agreeing to advise the court and the member making the |
|
|
demand of the determination promptly on the completion of the |
|
|
review of the matter. |
|
|
(c) A stay, on motion, may be reviewed every 60 days for |
|
|
continuation [the continued necessity] of the stay if the limited |
|
|
liability company provides the court and the member with a written |
|
|
statement of the status of the review and the reasons why an |
|
|
extension for a period not to exceed 60 additional days is |
|
|
appropriate. An extension shall be granted for a period not to |
|
|
exceed 60 days if the court determines that the continuation is |
|
|
appropriate in the interests of the limited liability company. |
|
|
[(c)
If the review and determination made by the person or
|
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|
group is not completed before the 61st day after the date on which
|
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|
the court orders the stay, the stay may be renewed for one or more
|
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|
additional 60-day periods if the domestic or foreign limited
|
|
|
liability company provides the court and the member with a written
|
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|
statement of the status of the review and the reasons why a
|
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|
continued extension of the stay is necessary.] |
|
|
SECTION 18. Section 101.456, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 101.456. DISCOVERY. (a) If a [domestic or foreign] |
|
|
limited liability company proposes to dismiss a derivative |
|
|
proceeding under Section 101.458, discovery by a member after the |
|
|
filing of the derivative proceeding in accordance with this |
|
|
subchapter shall be limited to: |
|
|
(1) facts relating to whether the person or [group of] |
|
|
persons described by Section 101.454 are [101.458 is] independent |
|
|
and disinterested; |
|
|
(2) the good faith of the inquiry and review by the |
|
|
person or group; and |
|
|
(3) the reasonableness of the procedures followed by |
|
|
the person or group in conducting the review. |
|
|
(b) Discovery described by Subsection (a) may not be |
|
|
expanded to include a fact or substantive matter regarding the act, |
|
|
omission, or other matter that is the subject matter of the |
|
|
derivative proceeding but the scope of discovery shall not be so |
|
|
limited [. The scope of discovery may be expanded] if the court |
|
|
determines after notice and hearing that a good faith review of the |
|
|
allegations [for purposes of Section 101.458] has not been made by |
|
|
an independent and disinterested person or group in accordance with |
|
|
Sections 101.454 and 101.458 [that section]. |
|
|
SECTION 19. Section 101.457, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 101.457. TOLLING OF STATUTE OF LIMITATIONS. A written |
|
|
demand filed with the limited liability company under Section |
|
|
101.453 tolls the statute of limitations on the claim on which |
|
|
demand is made until the later [earlier] of: |
|
|
(1) the 31st [91st] day after the expiration of any |
|
|
waiting period under Section 153.403 [date of the demand]; or |
|
|
(2) the 31st day after the expiration of any stay |
|
|
granted under Section 153.405, including all continuations of the |
|
|
stay [date the limited liability company advises the member that
|
|
|
the demand has been rejected or the review has been completed]. |
|
|
SECTION 20. Section 101.458, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 101.458. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A |
|
|
court, sitting in equity as the finder of fact, shall dismiss a |
|
|
derivative proceeding on a motion by the limited liability company |
|
|
if the person or group of persons described by Section 101.454 |
|
|
determines in good faith, after conducting a reasonable inquiry and |
|
|
based on factors the person or group considers appropriate under |
|
|
the circumstances, that continuation of the derivative proceeding |
|
|
is not in the best interests of the limited liability company. |
|
|
(b) In determining whether the requirements of Subsection |
|
|
(a) have been met, the burden of proof shall be on: |
|
|
(1) the plaintiff member if: |
|
|
(A) the applicable person or persons making the |
|
|
determination under Section 101.454(a)(1) or (2) are [majority of
|
|
|
the governing authority consists of] independent and disinterested |
|
|
[persons] at the time the determination is made; |
|
|
(B) the determination is made by a panel of one or |
|
|
more independent and disinterested persons appointed under Section |
|
|
101.454(a)(3); or |
|
|
(C) the limited liability company presents prima |
|
|
facie evidence that demonstrates that the applicable person or |
|
|
persons making the determination [appointed] under Section |
|
|
101.454(a) [101.454(a)(2)] are independent and disinterested; or |
|
|
(2) the limited liability company in any other |
|
|
circumstance. |
|
|
SECTION 21. Section 101.459, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 101.459. ALLEGATIONS AFTER [IF] DEMAND REJECTED. 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 and |
|
|
standards under [of] Sections 101.454 and 101.458. |
|
|
SECTION 22. Section 101.461, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 101.461. PAYMENT OF EXPENSES. (a) In this section, |
|
|
"expenses" means reasonable expenses incurred by a party in a |
|
|
derivative proceeding, including: |
|
|
(1) attorney's fees; |
|
|
(2) costs in [of] pursuing an investigation of the |
|
|
matter that was the subject of the derivative proceeding; or |
|
|
(3) expenses for which the [domestic or foreign] |
|
|
limited liability company may be required to indemnify another |
|
|
person. |
|
|
(b) On termination of a derivative proceeding, the court may |
|
|
order: |
|
|
(1) the [domestic or foreign] limited liability |
|
|
company to pay [the] expenses the plaintiff incurred in the |
|
|
proceeding if the court finds the proceeding has resulted in a |
|
|
substantial benefit to the [domestic or foreign] limited liability |
|
|
company; |
|
|
(2) the plaintiff to pay [the] expenses the [domestic
|
|
|
or foreign] limited liability company or other defendant incurred |
|
|
in investigating and defending the proceeding if the court finds |
|
|
the proceeding has been instituted or maintained without reasonable |
|
|
cause or for an improper purpose; or |
|
|
(3) a party to pay [the] expenses incurred by another |
|
|
party relating to the filing of a pleading, motion, or other paper |
|
|
if the court finds the pleading, motion, or other paper: |
|
|
(A) was not well grounded in fact after |
|
|
reasonable inquiry; |
|
|
(B) was not warranted by existing law or a good |
|
|
faith argument for the application, extension, modification, or |
|
|
reversal of existing law; or |
|
|
(C) was interposed for an improper purpose, such |
|
|
as to harass, cause unnecessary delay, or cause a needless increase |
|
|
in the cost of litigation. |
|
|
SECTION 23. Section 101.462, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 101.462. APPLICATION TO FOREIGN LIMITED LIABILITY |
|
|
COMPANIES. (a) In a derivative proceeding brought in the right of |
|
|
a foreign limited liability company, the matters covered by this |
|
|
subchapter are governed by the laws of the jurisdiction of |
|
|
formation [organization] of the foreign limited liability company, |
|
|
except for Sections 101.455, 101.460, and 101.461, which are |
|
|
procedural provisions and do not relate to the internal affairs of |
|
|
the foreign limited liability company, unless applying the laws of |
|
|
the jurisdiction of formation of the foreign limited liability |
|
|
company requires otherwise with respect to Section 101.455. |
|
|
(b) In the case of matters relating to a foreign limited |
|
|
liability company under Section 101.455 [101.454], a reference to a |
|
|
person or group of persons described by Section 101.454 [that
|
|
|
section] refers to a person or group entitled under the laws of the |
|
|
jurisdiction of formation [organization] of the foreign limited |
|
|
liability company to make the determination described by Section |
|
|
101.454(a) [review and dispose of a derivative proceeding]. The |
|
|
standard of review of a determination [decision] made by the person |
|
|
or group [to dismiss the derivative proceeding] shall be governed |
|
|
by the laws of the jurisdiction of formation [organization] of the |
|
|
foreign limited liability company. |
|
|
SECTION 24. Section 101.463, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 101.463. CLOSELY HELD LIMITED LIABILITY COMPANY. (a) |
|
|
In this section, "closely held limited liability company" means a |
|
|
limited liability company that has: |
|
|
(1) fewer than 35 members; and |
|
|
(2) no membership interests listed on a national |
|
|
securities exchange or regularly quoted in an over-the-counter |
|
|
market by one or more members of a national securities association. |
|
|
(b) Sections 101.452-101.460 [101.452-101.459] do not apply |
|
|
to a claim or a derivative proceeding by a member of a closely held |
|
|
limited liability company against a governing person, member, or |
|
|
officer of the limited liability company. In the event the claim or |
|
|
derivative proceeding is also made against a person who is not that |
|
|
governing person, member, or officer, this subsection applies only |
|
|
to the claim or derivative proceeding against the governing person, |
|
|
member, or officer. |
|
|
(c) If Sections 101.452-101.460 do not apply because of |
|
|
Subsection (b) and if justice requires: |
|
|
(1) a derivative proceeding brought by a member of a |
|
|
closely held limited liability company may be treated by a court as |
|
|
a direct action brought by the member for the member's own benefit; |
|
|
and |
|
|
(2) a recovery in a direct or derivative proceeding by |
|
|
a 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. |
|
|
(d) Other provisions of state law govern whether a member |
|
|
has a direct cause of action or right to sue a governing person, |
|
|
member, or officer, and this section may not be construed to create |
|
|
that direct cause of action or right to sue. |
|
|
SECTION 25. Section 153.401, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 153.401. DEFINITIONS [RIGHT TO BRING ACTION]. In this |
|
|
subchapter: |
|
|
(1) "Derivative proceeding" means a civil suit in the |
|
|
right of a domestic limited partnership or, to the extent provided |
|
|
by Section 153.412, in the right of a foreign limited partnership. |
|
|
(2) "Limited partner" means a person who is a limited |
|
|
partner or is an assignee of a partnership interest, including the |
|
|
partnership interest of a general partner [A limited partner may
|
|
|
bring an action in a court on behalf of the limited partnership to
|
|
|
recover a judgment in the limited partnership's favor if:
|
|
|
[(1)
all general partners with authority to bring the
|
|
|
action have refused to bring the action; or
|
|
|
[(2)
an effort to cause those general partners to
|
|
|
bring the action is not likely to succeed]. |
|
|
SECTION 26. Section 153.402, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 153.402. STANDING TO BRING PROCEEDING [PROPER
|
|
|
PLAINTIFF]. (a) Subject to Subsection (b), a limited partner may |
|
|
not institute or maintain a derivative proceeding unless: |
|
|
(1) the limited partner: |
|
|
(A) was a limited partner of the limited |
|
|
partnership at the time of the act or omission complained of; or |
|
|
(B) became a limited partner by operation of law |
|
|
originating from a person that was a limited partner or general |
|
|
partner at the time of the act or omission complained of; and |
|
|
(2) the limited partner fairly and adequately |
|
|
represents the interests of the limited partnership in enforcing |
|
|
the right of the limited partnership. |
|
|
(b) If the converted entity in a conversion is a limited |
|
|
partnership, a limited partner of that limited partnership may not |
|
|
institute or maintain a derivative proceeding based on an act or |
|
|
omission that occurred with respect to the converting entity before |
|
|
the date of the conversion unless: |
|
|
(1) the limited partner was an equity owner of the |
|
|
converting entity at the time of the act or omission; and |
|
|
(2) the limited partner fairly and adequately |
|
|
represents the interests of the limited partnership in enforcing |
|
|
the right of the limited partnership [In a derivative action, the
|
|
|
plaintiff must be a limited partner when the action is brought and:
|
|
|
[(1)
the person must have been a limited partner at the
|
|
|
time of the transaction that is the subject of the action; or
|
|
|
[(2)
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 27. Section 153.403, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 153.403. DEMAND [PLEADING]. (a) A limited partner may |
|
|
not institute a derivative proceeding until the 91st day after the |
|
|
date a written demand is filed with the limited partnership stating |
|
|
with particularity the act, omission, or other matter that is the |
|
|
subject of the claim or challenge and requesting that the limited |
|
|
partnership take suitable action. |
|
|
(b) The waiting period required by Subsection (a) before a |
|
|
derivative proceeding may be instituted is not required or, if |
|
|
applicable, shall terminate if: |
|
|
(1) the limited partner has been notified that the |
|
|
demand has been rejected by the limited partnership; |
|
|
(2) the limited partnership is suffering irreparable |
|
|
injury; or |
|
|
(3) irreparable injury to the limited partnership |
|
|
would result by waiting for the expiration of the 90-day period [In
|
|
|
a derivative action, the complaint must contain with particularity:
|
|
|
[(1)
the effort, if any, of the plaintiff to secure
|
|
|
initiation of the action by a general partner; or
|
|
|
[(2) the reasons for not making the effort]. |
|
|
SECTION 28. Section 153.404, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 153.404. DETERMINATION BY INDEPENDENT PERSONS |
|
|
[SECURITY FOR EXPENSES OF DEFENDANTS]. (a) A determination of how |
|
|
to proceed on allegations made in a demand or petition relating to a |
|
|
derivative proceeding must be made by an affirmative vote of the |
|
|
majority of: |
|
|
(1) the independent and disinterested general |
|
|
partners of the limited partnership, whether one or more, even if |
|
|
the independent and disinterested general partners are not a |
|
|
majority of the general partners of the limited partnership; |
|
|
(2) a committee consisting of one or more independent |
|
|
and disinterested general partners appointed by a majority of one |
|
|
or more independent and disinterested general partners of the |
|
|
limited partnership, even if the appointing independent and |
|
|
disinterested general partners are not a majority of the general |
|
|
partners of the limited partnership; or |
|
|
(3) a panel of one or more independent and |
|
|
disinterested individuals appointed by the court on a motion by the |
|
|
limited partnership listing the names of the individuals to be |
|
|
appointed and stating that, to the best of the limited |
|
|
partnership's knowledge, the individuals to be appointed are |
|
|
disinterested and qualified to make the determinations |
|
|
contemplated by Section 153.408 [In a derivative action, the court
|
|
|
may require the plaintiff to give security for the reasonable
|
|
|
expenses incurred or expected to be incurred by a defendant in the
|
|
|
action, including reasonable attorney's fees]. |
|
|
(b) An entity to which this subsection applies is |
|
|
independent and disinterested under this section only if its |
|
|
decision with respect to the limited partnership's derivative |
|
|
proceeding is made by a majority of its governing persons who are |
|
|
independent and disinterested with respect to that derivative |
|
|
proceeding, even if those governing persons are not a majority of |
|
|
its governing persons. This subsection applies to an entity that |
|
|
is: |
|
|
(1) a general partner of the limited partnership; or |
|
|
(2) directly, or indirectly through one or more other |
|
|
entities, a governing person of that general partner [The court may
|
|
|
increase or decrease at any time the amount of the security on a
|
|
|
showing that the security provided is inadequate or excessive]. |
|
|
(c) The court shall appoint a panel under Subsection (a)(3) |
|
|
if the court finds that the individuals recommended by the limited |
|
|
partnership are independent and disinterested and are otherwise |
|
|
qualified with respect to expertise, experience, independent |
|
|
judgment, and other factors considered appropriate by the court |
|
|
under the circumstances to make the determinations. An individual |
|
|
appointed by the court to a panel under this section may not be held |
|
|
liable to the limited partnership or the limited partnership's |
|
|
partners for an action taken or omission made by the individual in |
|
|
that capacity, except for an act or omission constituting fraud or |
|
|
wilful misconduct [If a plaintiff is unable to give security, the
|
|
|
plaintiff may file an affidavit in accordance with the Texas Rules
|
|
|
of Civil Procedure]. |
|
|
[(d)
Except as provided by Subsection (c), if a plaintiff
|
|
|
fails to give the security within a reasonable time set by the
|
|
|
court, the court shall dismiss the suit without prejudice.
|
|
|
[(e)
The court, on final judgment for a defendant and on a
|
|
|
finding that suit was brought without reasonable cause against the
|
|
|
defendant, may require the plaintiff to pay reasonable expenses,
|
|
|
including reasonable attorney's fees, to the defendant, regardless
|
|
|
of whether security has been required.] |
|
|
SECTION 29. Section 153.405, Business Organizations Code, |
|
|
is amended to read as follows: |
|
|
Sec. 153.405. STAY OF PROCEEDING [EXPENSES OF PLAINTIFF]. |
|
|
(a) If the limited partnership that is the subject of a derivative |
|
|
proceeding commences an inquiry into the allegations made in a |
|
|
demand or petition and the person or group of persons described by |
|
|
Section 153.404 is conducting an active review of the allegations |
|
|
in good faith, the court shall stay a derivative proceeding for not |
|
|
more than 60 days until the review is completed and a determination |
|
|
is made by the person or group regarding what further action, if |
|
|
any, should be taken. |
|
|
(b) To obtain a stay, the limited partnership must provide |
|
|
the court with a written statement agreeing to advise the court and |
|
|
the limited partner making the demand of the determination promptly |
|
|
on the completion of the review of the matter. |
|
|
(c) A stay, on motion, may be reviewed every 60 days for |
|
|
continuation of the stay if the limited partnership provides the |
|
|
court and the limited partner with a written statement of the status |
|
|
of the review and the reasons why an extension for a period not to |
|
|
exceed 60 additional days is appropriate. An extension shall be |
|
|
granted for a period not to exceed 60 days if the court determines |
|
|
that the continuation is appropriate in the interests of the |
|
|
partnership [If a derivative action is successful, wholly or
|
|
|
partly, or if anything is received by the plaintiff because of a
|
|
|
judgment, compromise, or settlement of the action or claim
|
|
|
constituting a part of the action, the court may award the plaintiff
|
|
|
reasonable expenses, including reasonable attorney's fees, and
|
|
|
shall direct the plaintiff to remit to a party identified by the
|
|
|
court the remainder of the proceeds received by the plaintiff]. |
|
|
SECTION 30. Subchapter I, Chapter 153, Business |
|
|
Organizations Code, is amended by adding Sections 153.406, 153.407, |
|
|
153.408, 153.409, 153.410, 153.411, 153.412, and 153.413 to read as |
|
|
follows: |
|
|
Sec. 153.406. DISCOVERY. (a) If a limited partnership |
|
|
proposes to dismiss a derivative proceeding under Section 153.408, |
|
|
discovery by a limited partner after the filing of the derivative |
|
|
proceeding in accordance with this subchapter shall be limited to: |
|
|
(1) facts relating to whether the person or persons |
|
|
described by Section 153.404 are independent and disinterested; |
|
|
(2) the good faith of the inquiry and review by the |
|
|
person or group; and |
|
|
(3) the reasonableness of the procedures followed by |
|
|
the person or group in conducting the review. |
|
|
(b) Discovery described by Subsection (a) may not be |
|
|
expanded to include a fact or substantive matter regarding the act, |
|
|
omission, or other matter that is the subject matter of the |
|
|
derivative proceeding, but the scope of discovery shall not be so |
|
|
limited if the court determines after notice and hearing that a good |
|
|
faith review of the allegations has not been made by an independent |
|
|
and disinterested person or group in accordance with Sections |
|
|
153.404 and 153.408. |
|
|
Sec. 153.407. TOLLING OF STATUTE OF LIMITATIONS. A written |
|
|
demand filed with the limited partnership under Section 153.403 |
|
|
tolls the statute of limitations on the claim on which demand is |
|
|
made until the later of: |
|
|
(1) the 31st day after the expiration of any waiting |
|
|
period under Section 153.403; or |
|
|
(2) the 31st day after the expiration of any stay |
|
|
granted under Section 153.405, including all continuations of the |
|
|
stay. |
|
|
Sec. 153.408. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A |
|
|
court, sitting in equity as the finder of fact, shall dismiss a |
|
|
derivative proceeding on a motion by the limited partnership if the |
|
|
person or group of persons described by Section 153.404 determines |
|
|
in good faith, after conducting a reasonable inquiry and based on |
|
|
factors the person or group considers appropriate under the |
|
|
circumstances, that continuation of the derivative proceeding is |
|
|
not in the best interests of the limited partnership. |
|
|
(b) In determining whether the requirements of Subsection |
|
|
(a) have been met, the burden of proof shall be on: |
|
|
(1) the plaintiff limited partner if: |
|
|
(A) the applicable person or persons making the |
|
|
determination under Section 153.404(a)(1) or (2) are independent |
|
|
and disinterested at the time the determination is made; |
|
|
(B) the determination is made by a panel of one or |
|
|
more independent and disinterested individuals appointed under |
|
|
Section 153.404(a)(3); or |
|
|
(C) the limited partnership presents prima facie |
|
|
evidence that demonstrates that the applicable person or persons |
|
|
making the determination under Section 153.404(a) are independent |
|
|
and disinterested; or |
|
|
(2) the limited partnership in any other circumstance. |
|
|
Sec. 153.409. ALLEGATIONS AFTER DEMAND REJECTED. 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 and |
|
|
standards under Sections 153.404 and 153.408. |
|
|
Sec. 153.410. DISCONTINUANCE OR SETTLEMENT. (a) A |
|
|
derivative proceeding may not be discontinued or settled without |
|
|
court approval. |
|
|
(b) The court shall direct that notice be given to the |
|
|
affected partners if the court determines that a proposed |
|
|
discontinuance or settlement may substantially affect the |
|
|
interests of other partners. |
|
|
Sec. 153.411. PAYMENT OF EXPENSES. (a) In this section, |
|
|
"expenses" means reasonable expenses incurred by a party in a |
|
|
derivative proceeding, including: |
|
|
(1) attorney's fees; |
|
|
(2) costs in pursuing an investigation of the matter |
|
|
that was the subject of the derivative proceeding; or |
|
|
(3) expenses for which the limited partnership may be |
|
|
required to indemnify another person. |
|
|
(b) On termination of a derivative proceeding, the court may |
|
|
order: |
|
|
(1) the limited partnership to pay expenses the |
|
|
plaintiff incurred in the proceeding if the court finds the |
|
|
proceeding has resulted in a substantial benefit to the limited |
|
|
partnership; |
|
|
(2) the plaintiff to pay expenses the limited |
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|
partnership or other defendant incurred in investigating and |
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|
defending the proceeding if the court finds the proceeding has been |
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|
instituted or maintained without reasonable cause or for an |
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|
improper purpose; or |
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|
(3) a party to pay expenses incurred by another party |
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|
relating to the filing of a pleading, motion, or other paper if the |
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|
court finds the pleading, motion, or other paper: |
|
|
(A) was not well grounded in fact after |
|
|
reasonable inquiry; |
|
|
(B) was not warranted by existing law or a good |
|
|
faith argument for the application, extension, modification, or |
|
|
reversal of existing law; or |
|
|
(C) was interposed for an improper purpose, such |
|
|
as to harass, cause unnecessary delay, or cause a needless increase |
|
|
in the cost of litigation. |
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|
Sec. 153.412. APPLICATION TO FOREIGN LIMITED |
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|
PARTNERSHIPS. (a) In a derivative proceeding brought in the right |
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|
of a foreign limited partnership, the matters covered by this |
|
|
subchapter are governed by the laws of the jurisdiction of |
|
|
formation of the foreign limited partnership, except for Sections |
|
|
153.405, 153.410, and 153.411, which are procedural provisions and |
|
|
do not relate to the internal affairs of the foreign limited |
|
|
partnership, unless applying the laws of the jurisdiction of |
|
|
formation of the foreign limited partnership requires otherwise |
|
|
with respect to Section 153.405. |
|
|
(b) In the case of matters relating to a foreign limited |
|
|
partnership under Section 153.405, a reference to a person or group |
|
|
of persons described by Section 153.404 refers to a person or group |
|
|
entitled under the laws of the jurisdiction of formation of the |
|
|
foreign limited partnership to make the determination described by |
|
|
Section 153.404(a). The standard of review of a determination made |
|
|
by the person or group shall be governed by the laws of the |
|
|
jurisdiction of formation of the foreign limited partnership. |
|
|
Sec. 153.413. CLOSELY HELD LIMITED PARTNERSHIP. (a) In |
|
|
this section, "closely held limited partnership" means a limited |
|
|
partnership that has: |
|
|
(1) fewer than 35 limited partners; and |
|
|
(2) no partnership interests listed on a national |
|
|
securities exchange or regularly quoted in an over-the-counter |
|
|
market by one or more members of a national securities association. |
|
|
(b) Sections 153.402-153.410 do not apply to a claim or a |
|
|
derivative proceeding by a limited partner of a closely held |
|
|
limited partnership against a general partner, limited partner, or |
|
|
officer of the limited partnership. In the event the claim or |
|
|
derivative proceeding is also made against a person who is not that |
|
|
general partner, limited partner, or officer, this subsection shall |
|
|
apply only to the claim or derivative proceeding against the |
|
|
general partner, limited partner, or officer. |
|
|
(c) If Sections 153.402-153.410 do not apply because of |
|
|
Subsection (b) and if justice requires: |
|
|
(1) a derivative proceeding brought by a limited |
|
|
partner of a closely held limited partnership may be treated by a |
|
|
court as a direct action brought by the limited partner for the |
|
|
limited partner's own benefit; and |
|
|
(2) a recovery in a direct or derivative proceeding by |
|
|
a limited partner may be paid directly to the plaintiff or to the |
|
|
limited partnership if necessary to protect the interests of |
|
|
creditors or other partners of the limited partnership. |
|
|
(d) Other provisions of state law govern whether a limited |
|
|
partner has a direct cause of action or right to sue a general |
|
|
partner, limited partner, or officer, and this section may not be |
|
|
construed to create that direct cause of action or right to sue. |
|
|
SECTION 31. The changes in law made by this Act apply only |
|
|
to a derivative proceeding instituted on or after the effective |
|
|
date of this Act. A derivative proceeding instituted before the |
|
|
effective date of this Act is governed by the law in effect on the |
|
|
date the proceeding was instituted, and the former law is continued |
|
|
in effect for that purpose. |
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|
SECTION 32. This Act takes effect September 1, 2019. |
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* * * * * |