Transcript Ready, Set, Negotiate - Jackson Walker L.L.P.

THE TEXAS BUSINESS ORGANIZATIONS CODE:
THE REVOLUTION IS HERE
Prepared and Copyright Reserved By:
Sabrina A. McTopy
27th Annual Advanced Real Estate Law Course
San Antonio, Texas
The “WHY”
BACKGROUND OF TEXAS BOC
 Current Entity Statutes Do Not Reflect
Modern Practice (Form over Substance)
– Recognition of increasingly blurred lines between entity types,
driven by commercial desire for increased flexibility
– 1996 IRS retreat from formalistic four-factor test for
corporations/partnerships
 Texas Attempting to Promote Itself As a Leader in Entity
Laws
– Complexity of different entity statutes’ organization and
interplay a disincentive to organize in Texas
CHOOSING THE RIGHT ENTITY
QUOTABLE QUOTES
“The biggest winners will be small businesses that
no longer have to spend a fortune on lawyers’ fees
just to file the right form with the Secretary of
State.”
“Texas businesses want to play by the rules, but it’s
hard to play by the rules when the rules are often
incomprehensible."
-Rep. Helen Giddings,
TBOC Sponsoring Democrat
The Evolution of “Enabling” vs
“Mandatory” Concept of Entities
- Partnerships as contracts
among parties free to
choose their terms.
- Corporations as fictitious
entities required to comply
with mandatory rules and
standards.
The “WHEN”
Entity Law Changes Continuum
Sept. 1, 2003
Sept. 1, 2005
Jan. 1, 2006
Jan. 1, 2010
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– HB 1165 – Amended TBCA
– HB 1163 – Amended TLLCA
TRLPA and TRPA
– HB 1156 – BOC enacted
HB 1507 – Amends TBCA
(technical)
BOC becomes effective
for newly-formed entities
BOC applies to all
entities
HB 1154 – Amends
TLLCA, TRLPA and
TRPA (technical)
- New BOC filing fees
apply to all entities
Pre-Jan. 1, 2006 law
repealed
HB 1319 – Amends BOC
to:
(a) incorporate some
Sept. 1, 2003 changes
(b) correct errors and fill
gaps
The “WHAT”
Substantive codification of Texas
statutes for profit and non-profit entities
Corporations
Partnerships
Texas Business Corporation Act
Texas Non-Profit Corporation Act
Texas Professional Corporation Act
Texas Professional Association Act
Texas Miscellaneous Corporation Laws Act
Texas Limited Liability Company Act
Texas Revised Limited Partnership Act
Texas Revised Partnership Act
Texas Real Estate Investment Trust Act
Texas Uniform Unincorporated Non-Profit
Associations Act
Texas Cooperative Associations Act
BOC STRUCTURE
• “Hub and Spoke”
• Title I is the “hub” - general
provisions common to most forms of
entities
• Remaining Titles are “spoke” provisions specific to entity type
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Title 2 – Corporations
Title 3 – LLCs
Title 4 – Partnerships
Title 5 – REITs
Title 6 – Associations
Title 7 – Professional Entities
Title 8 – Miscellaneous/Transition Rules
TITLE I
GENERAL PROVISIONS
The key to understanding the BOC
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Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 -
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Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 -
 Chapter 11  Chapter 12 -
Definitions
Purposes and Powers of Domestic Entity
Formation and Governance
Filings
Names of Entities: Registered Agents and
Registered Offices
Meetings and Voting
Liability
Indemnification and Insurance
Foreign Entities
Mergers, Exchanges, Conversions and Sales
of Assets
Winding up and Termination of Domestic Entity
Administrative Powers
UNDERSTANDING
THE BOC
•
•
•
Refer FIRST to Title I
THEN refer to the title for the specific
entity type
Title I applies unless there is a
conflicting provision in the entityspecific title
Title I Definitions
Entities have “Owners” or “Members”
Ownership
Interests
For-profit corporations
REITs
Partnerships
Membership
Interests
Non-profit corporations
Unincorporated nonprofit
associations
LLCs
Professional Associations
Title I Definitions (cont’d)
Any instrument or document
required or permitted to be filed
with the Texas SOS

Filing
Instrument
Articles of Incorporation/Articles of
Organization and Certificate of
Limited Partnership”

Certificate of
Formation
Application for Qualification to do
Business

Application for
Registration
Articles of Amendment

Certificate of
Amendment
Certificate of Dissolution

Certificate of
Termination
Title I Definitions (cont’d)
Certificate of Formation and
other agreements that govern
an entity’s operations

Board of Directors, Board of
Managers or General Partner

Governing
Authority
One who serves as the
Governing Authority of an
entity

Governing Person
An officer or Governing
Person

Managerial Official
Governing
Documents
BOC SUMMARY BY TOPIC
Formation
• Provides one form of Certificate of Formation
for all entities
• Specifies basic information that entities must
provide in their certificates of formation, and
through a series of “additional information
required for xxx entity” provisions, specifies
additional information specific to particular
entity types
• All entities have perpetual existence unless
otherwise specified in Governing Documents
BOC SUMMARY BY TOPIC
Formation (cont’d)
• “Limited” may be used in corporation
name
• Permits nonprofit LLCs
• Voting trusts and voting agreements for
LLCs
BOC SUMMARY BY TOPIC
Filings
• Consolidates filing procedures in one
chapter and standardizes rules for filings
• No “certificate of incorporation/formation”
issued; Secretary of State (in the case of a
REIT, the county clerk) instead issues an
acknowledgment of filing (electronic or
written)
• Retains permissibility of electronic filings
and signatures
BOC SUMMARY BY TOPIC
Filings (cont’d)
• Filings are effective when filed, not when
Secretary of State issues a certificate
• Entities may abandon any filed instrument
before effectiveness
• Foreign business trusts and REITs must
register in Texas ($750 + $750 late filing
fee)
BOC SUMMARY BY TOPIC
Filings (cont’d)
• Standardizes filing fees by action taken
• Eliminates need for foreign entity to file
certificate of existence with Application
For Registration to transact business
• Requires amendment to Application for
Registration filed within 90 days if foreign
entity changes its name or business
activity
BOC SUMMARY BY TOPIC
Filings (cont’d)
• Provides civil remedy (recovery of
damages, court costs and reasonable
attorneys’ fees) for all entities for false and
misleading Filing Instrument
• Provides more severe criminal penalty
(state jail felony rather than a Class A
Misdemeanor) for knowingly filing a
materially false Filing Instrument
BOC SUMMARY BY TOPIC
Filings (cont’d)
• Establishes new or revised civil penalties/late
filing fees for foreign entities’ failure to
register when required
• Simplifies filing of Certificate of Merger/
Exchange/Conversion (no need to include
plan of merger or to specify actual voting
results, and no multiple copy requirement)
• Adds to Merger/Conversion Fee a fee for
creation of newly-formed entity
 LLC conversion to LLP = $300 + $750
BOC SUMMARY BY TOPIC
Governance
• Directors, managers or managing
members have right to inspect to books
and records
• Governing Persons may rely on opinions,
reports and statements
• Partnerships may adopt in their
partnership agreements Code provisions
as to meetings and voting
• Managers/officers/directors may be
removed with or without cause
BOC SUMMARY BY TOPIC
Indemnification
• Committee of one rather than two disinterested
Governing Persons may determine that standard
for indemnification has been met
• Owners or members may approve by resolution
indemnification and advancement of expenses of
any officer, employee or agent who is not also a
director (only implied in existing law)
• Increases (from six to 12 months) maximum time
for reporting to limited partners any
indemnification or advancement to a general
partner
BOC SUMMARY BY TOPIC
Mergers
• Plan of merger must contain a description of the
organizational form of each entity a party
created in the merger
• Governing Documents of non-BOC
organizations that survive or are created by the
merger not attached to the plan of merger
• Clarifies LLC disposition of assets is not a
merger, and purchaser not liable for seller
liabilities unless expressly assumed
• All surviving entities are secondarily liable for
payment to dissenting owners
BOC SUMMARY BY TOPIC
Termination
• One form of certificate of termination for all
entities
• Specifies what events require winding up of
a domestic entity, the procedure for winding
up and application of liquidation proceeds
• Secretary of State may involuntarily
terminate entity for failure to pay filing fees
or maintaining a registered office
BOC SUMMARY BY TOPIC
Termination (cont’d)
• Secretary of State may reinstate involuntarily
terminated filing entity at any time, with retroactive
treatment only if reinstated before the 3rd
anniversary of involuntary termination
• In case of a retroactively reinstated involuntarily
terminated LP, personal liability of Governing
Persons is not affected
•
In certain cases, extends ability to reinstate a
voluntarily terminated entity from 120 days to three
years after termination (C corps, REITs, LLCs and
LPs)
Transition
JAN. 1, 2006 – JAN. 1, 2010
• Pre-BOC and BOC Regimes Coexist
 Changes to Entity Statutes Since Sept. 1,
2003 Minimize Substantive Differences
• Existing Entities May Elect BOC Before
Jan. 1, 2010 by Amending Certificate of
Formation and Stating Election to Adopt
Transition Considerations
• Nomenclature, Filing Instrument Forms and
Governing Documents Will Differ
• Forms and Drafting Eventually Uniform, but
Transition Requires Knowing pre-BOC law
and BOC
 Purchase and Sale Agreements
Buyer and Seller Representations
Legal Opinions
 Financings
• TSOS Forms Available Dec. 2005