Transitioning to the New Law Governing Texas Business Organizations by Scott E. Stewart
Monday, May 11, 2009
Copyright 2009 by Scott Stewart
Each of the different types of Texas business organizations (including corporations, limited liability companies, and limited partnerships) has been governed by a separate, uncodified statute. Some of those statutes were enacted decades ago and have become out-of-date in relation to how modern business is conducted and the more current laws of other states. Therefore, the Texas legislature has completely replaced the old business organization statutes with a single, new codified statute called the “Texas Business Organizations Code” and the old statutes will be repealed on January 1, 2010.
The Code is divided into eight titles that consist of a total of thirty chapters. The Code was organized with the provisions common to all business organizations gathered in a single title, like a hub, and provisions that are unique to a specific entity type in separate titles radiating out of the hub like spokes. The eight titles are entitled (1) General Provisions, (2) Corporations, (3) Limited Liability Companies, (4) Partnerships, (5) Real Estate Investment Trusts, (6) Associations, (7) Professional Entities, and (8) Miscellaneous and Transition Provisions. Title 1, General Provisions, the hub, is divided into twelve chapters, which are entitled (1) Definitions & Other General Provisions, (2) Purposes & Powers of Domestic Entity, (3) Formation & Governance, (4) Filings, (5) Names of Entities; Registered Agents & Registered Offices, (6) Meetings & Voting for Domestic Entities, (7) Liability, (8) Indemnification & Insurance, (9) Foreign Entities, (10) Mergers, Interest Exchanges, Conversions & Sales of Assets, (11) Winding Up of Domestic Entity, and (12) Administrative Powers.
The Code already is applicable to Texas business organizations created on or after January 1, 2006. Also, mergers and conversions in which the successor organization is governed by the Code may cause business organizations created prior to that date to become subject to the Code. Additionally, business organizations created prior to January 1, 2006 may elect to become subject to the Code prior to the mandatory application date of January 1, 2010, by filing an early-adoption statement along with a $15 filing fee with the Texas Secretary of State and updating their governing documents (e.g., articles of incorporation, bylaws, certificates of limited partnership, and partnership agreements) to comply with the Code. The Code will become applicable to all Texas business organizations on its January 1, 2010 mandatory application date.
If a business organization governed by the Code has not complied with the Code, the business organization does not cease to exist and its owners (e.g., shareholders, members, and limited partners) and management (e.g., officers, directors, and managers) should not lose, without further negative facts and circumstances, the limited liability protection that is provided to them by the business organization. Further, Code Section 402.005(a)(3) provides that the business organization would not be required to conform its certificate of formation to the requirements of the Code until it files an amendment to the certificate with the Texas Secretary of State. Nevertheless, there are many reasons that you should consider updating the governing documents of your business organization for the Code and otherwise bringing your business into compliance with the Code.
First, Code Sections 402.008 and 402.009 provide that, after the January 1, 2010 mandatory application date, the Code applies to all of the actions taken by a Texas business organization’s owners and management, including meetings, votes, and written consents. Code Section 402.007 provides that the Code will govern any indemnification by a Texas business organization after the January 1, 2010 mandatory application date, whether the events on which the indemnification is based occurred before or after that date. Therefore, business organizations for which governance issues are important (e.g., those with multiple stakeholders) should consider updating their governing documents.
Second, Code Section 402.006 provides that all acts, contracts, and other transactions by a Texas business organization after the January 1, 2010 mandatory application date are governed by the Code. Further, Code Sections 402.010 and 402.011 provide that, after the January 1, 2010 mandatory application date, the sale of the assets of a Texas business organization, its termination, or any merger, reorganization, or conversion engaged in by it must comply with the Code. Therefore, business organizations that will be governed by the Code should consider how any transactions that they engage in will be affected by the Code.
A third reason to comply with the Code is that clever plaintiffs’ attorneys sometimes bring claims against a business organization’s individual owners and managers and argue that the court should disregard the limited liability protection offered by the business organization. The governing documents of a business organization not complying with current law might be used by those attorneys as a factor in favor of disregarding the business organization as an entity that is separate from its owners and managers. Therefore, having governing documents that do not comply with the Code may increase the exposure of those owners and managers to the liabilities and obligations of the business.
Fourth, there are several substantive improvements in the Code that were not in the prior business organization statutes. For example, the Code contains detailed provisions for notices via electronic transmission, such as email and facsimile, and voting via electronic means, such as email and teleconferencing. It is impractical to discuss in this article how all of the Code improvements may be helpful to the particular situation of a business organization. You should consider analyzing the Code for new provisions that may be beneficial for your business organization, updating the governing documents of your business organization, and otherwise bringing your business organization into compliance with the Code.
Scott E. Stewart is a partner practicing corporate law with Shannon, Gracey, Ratliff & Miller, L.L.P. in its Fort Worth office and may be contacted at 817-882-7686 or sstewart@shannongracey.com.
Reprinted with permission from Texas Lawyer. (c) 2009 Incisive Media US Properties, LLC. All rights reserved. Further duplication without permission is prohibited.
