Overall, it was a remarkable legislative session that included school finance reform and limits on property tax increases by Texas cities. While not headline- grabbing, the Legislature also made several tweaks to the Texas Business Organizations Code and other codes affecting the operation of businesses and litigation between business owners and business entities. What follows are some of the changes that may affect and, in some instances, simplify the lives of Texas business owners. While not all of the changes below had been signed by the governor as of the writing of this article, all are expected to be signed or become law due to inaction by the governor.
Since I am writing this article on a computer and you are likely reading it on the internet, it may surprise you to know business entities in Texas have been required to maintain a physical set of books and records; or, more specifically, they were not specifically authorized to maintain their books and records in electronic form. House Bill 3608 amends the Business Organizations Code to authorize the books, records, minutes, and ownership or membership records of any domestic filing entity to be maintained electronically so long as they can be converted into written paper form within a reasonable time. The bill also clarifies that the term "electronic data system" includes a distributed electronic network or database, including blockchain technology. To my knowledge, this is the first direct mention of blockchain in the Business Organizations Code.
Continuing with the convenience theme, Texas was one of the few states that had a dual filing requirement at the state and local level for assumed name certificate filings for business entities. Because assumed name certificates filed at the state level with the Secretary of State's office are available to the public online, local level filing requirements were redundant. H.B. 3609 removed the local filing requirements for business entities that register with the Secretary of State, such as limited partnerships, limited liability companies, and corporations.
In Texas, documents filed in the real property records must be acknowledged. Acknowledgement is a fancy way of saying the person signing has sworn they are who they say they are (which a notary verifies) and that they signed the document to accomplish the purposes stated in the document. For example, that Randy Smith is, in fact, Randy Smith and did sign the deed to convey the land identified in the deed. Apparently, some folks were worried about acknowledgements for limited liability companies being too long and complicated. So, the Legislature amended the Civil Practice and Remedies Code to establish a short form for certificates of acknowledgment for a limited liability company.
More substantively and importantly, the Legislature also amended the Property Code to authorize an applicable domestic entity or foreign entity to execute and record an affidavit identifying one or more individuals with authority to transfer real property on behalf of the entity. Given the proclivity of lawyers to at times create layers of entities, the filing of this affidavit will simplify for lenders and parties dealing with limited liability companies the process of verifying that the person signing the deed or note has authority to bind the limited liability company.
The Legislature also passed bills that allow shareholder voting and voting rights agreements to be separate from the company agreement or by-laws. These changes require that, to enforce these separate voting rights agreements, a shareholder has to have signed the agreement or been provided a copy before becoming a shareholder.
Moving from transactional business matters to litigation, the Legislature also attempted to make uniform the rules for bringing derivative lawsuits among the different forms of business entities in Texas. Derivative lawsuits are suits brought by owners on behalf of the entity they own but do not control. For example, a general partner of a limited partnership would ordinarily be the person under the partnership agreement with authority to bring a lawsuit on behalf of the limited partnership. A limited partner would not have that authority. Derivative suits are a vehicle to allow a limited partner to bring suit on behalf of the limited partnership when the general partner will not. Because historically the statutes creating and controlling different types of business entities were enacted at different times and came from different source materials, the provisions related to derivative proceedings were different for each type of business entity. Mostly, there is no reason for the procedure to differ between, for example, a limited liability company and a limited partnership for bringing a derivative proceeding. Thus, the changes were made.
In the case of entities with less than 35 owners, the changes make it easier for owners to file derivative proceedings. For example, the Legislature eliminated the demand futility requirement, which required limited partners to prove that a demand on the general partner to bring the lawsuit they plan to bring as a derivate proceeding would have been futile. The changes also allow assignees of members and assignees of limited partners to file derivative actions. Likely the most important change to derivative proceedings involving small entities were changes to limit the actions for which a member or shareholder can file a derivative proceeding on behalf of the LLC or corporation. The changes limit derivative proceedings to claims against managers, members, directors, officers or other owners of the entity. Essentially, if there is a likely conflict of interest that would prevent those controlling the entity from bringing the claim, a derivative claim will be allowed; if not, the claim must be brought by the entity directly on the authority of those with a controlling interest in the entity.
Other important changes effecting business litigation include the Legislature’s attempt to reign in Anti-SLAPP laws passed two sessions ago. Anti-SLAPP laws were passed in several states for the express purpose of preventing those with the financial ability to do so from muffling free speech by filing defamation and libel lawsuits. In the opinion of this author, due to some very in-artful wording, in Texas the Anti-SLAPP laws, which allow for early dismissal of lawsuits “affecting” free speech, have metastasized and been applied in business litigation where they were never intended to apply. To narrow the scope of the Texas Anti-SLAPP statute, the Legislature revised the definition of "matter of public concern." The phrase now means “a statement or activity regarding a public official, public figure, or other person who has drawn substantial public attention due to the person's official acts, fame, notoriety, or celebrity; a matter of political, social, or other interest to the community; or a subject of concern to the public.” The revised definition removed language regarding "health or safety," "environmental, economic, or community well-being," "the government," "a public official or public figure," and "a good, product, or service in the marketplace." This is good news for businesses because it is hard to have a lawsuit involving a business that does not involve "a good, product, or service in the marketplace."
Lastly, since companies are people under the law, the Legislature deemed it appropriate to make sure all forms of business entities could be held criminally responsible for their actions. Because criminal laws must be specific and limited liability companies and other forms of business entities in Texas are relatively new to the law, most criminal statutes did not include limited liability companies and some other forms of business entities in their definitions of a “person” who could commit a crime. H.B. 2361 addresses these issues by including a limited liability company and certain other business entities among the entities that may be prosecuted as a “person.”
Those are the highlights. While you never can tell the effect of a law until it has been on the books for a while, here’s hoping that in the next few years your kids are better educated, your property taxes won’t go up as much, and your business runs a little more smoothly.