THE TEXAS BUSINESS ORGANIZATIONS THE TEXAS BUSINESS ORGANIZATIONS CODE: THE REVOLUTION IS HERECODE: THE REVOLUTION IS HERE

Prepared and Copyright Reserved By:

Sabrina A. McTopy

27th Annual Advanced Real Estate Law CourseSan Antonio, Texas

The “WHY”The “WHY”BACKGROUND OF TEXAS BOCBACKGROUND 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 ENTITYCHOOSING THE RIGHT ENTITY

QUOTABLE QUOTESQUOTABLE 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.”

-Rep. Helen Giddings, TBOC Sponsoring Democrat

“Texas businesses want to play by the rules, but it’s hard to play by the rules when the rules are often incomprehensible."

The Evolution of “Enabling” vs The Evolution of “Enabling” vs “Mandatory” Concept of Entities“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.

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The “WHEN”The “WHEN”Entity Law Changes Entity Law Changes

ContinuumContinuumSept. 1, 2003 Sept. 1, 2005 Jan. 1, 2006

– HB 1165 – Amended TBCA

– HB 1163 – Amended TLLCA TRLPA and TRPA

– HB 1156 – BOC enacted

HB 1507 – Amends TBCA (technical)

HB 1154 – Amends TLLCA, TRLPA and TRPA (technical)

HB 1319 – Amends BOC to: (a) incorporate some Sept. 1, 2003 changes (b) correct errors and fill gaps

BOC becomes effective for newly-formed entities

- New BOC filing fees apply to all entities

BOC applies to all entities

Pre-Jan. 1, 2006 law repealed

Jan. 1, 2010

The “WHAT”The “WHAT”Substantive codification of Texas statutes for profit and non-profit entities

Texas Business Corporation ActTexas Non-Profit Corporation ActTexas Professional Corporation ActTexas Professional Association ActTexas Miscellaneous Corporation Laws ActTexas Limited Liability Company Act

Corporations

Texas Revised Limited Partnership ActTexas Revised Partnership ActTexas Real Estate Investment Trust ActTexas Uniform Unincorporated Non-Profit Associations ActTexas Cooperative Associations Act

Partnerships

BOC STRUCTUREBOC 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

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 ITITLE I GENERAL PROVISIONS GENERAL PROVISIONS

The key to understanding the BOC

Chapter 1 - Definitions Chapter 2 - Purposes and Powers of Domestic Entity Chapter 3 - Formation and Governance Chapter 4 - Filings Chapter 5 - Names of Entities: Registered Agents and

Registered Offices Chapter 6 - Meetings and Voting Chapter 7 - Liability Chapter 8 - Indemnification and Insurance Chapter 9 - Foreign Entities Chapter 10 - Mergers, Exchanges, Conversions and

Sales of Assets

Chapter 11 - Winding up and Termination of Domestic Entity

Chapter 12 - Administrative Powers

UNDERSTANDINGUNDERSTANDINGTHE BOCTHE 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 entity-

specific title

Title I DefinitionsTitle I DefinitionsEntities have “Owners” or “Members”

MembershipInterests

For-profit corporations REITs

Partnerships

Non-profit corporations Unincorporated nonprofit associations

OwnershipInterests

LLCs Professional Associations

Title I Definitions (cont’d)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)Title I Definitions (cont’d)

Certificate of Formation and other agreements that govern an entity’s operations

Governing Documents

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

BOC SUMMARY BY TOPICBOC SUMMARY BY TOPICFormationFormation

• 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 TOPICBOC SUMMARY BY TOPIC Formation (cont’d)Formation (cont’d)

• “Limited” may be used in corporation name

• Permits nonprofit LLCs

• Voting trusts and voting agreements for LLCs

FilingsFilings• 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 (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)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)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)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

BOC SUMMARY BY TOPIC

LLC conversion to LLP = $300 + $750

GovernanceGovernance• 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

IndemnificationIndemnification• 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

MergersMergers• 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

TerminationTermination• 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)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)

BOC SUMMARY BY TOPIC

TransitionTransitionJAN. 1, 2006 – JAN. 1, JAN. 1, 2006 – JAN. 1,

20102010• 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 ConsiderationsTransition 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

• TSOS Forms Available Dec. 2005

Buyer and Seller Representations

Legal OpinionsFinancings