Changes to the Texas Business Organizations Code
Below is an outline of some of the important amendments and additions to the Texas Business Organizations Code (“TBOC”).
CHANGES DUE TO S.B. No. 1203
On May 15, 2021, the Texas Legislature passed S.B. No. 1203, which amended several statutes relating to business entities.
Improving Flexibility of Management of Texas LLCs
As amended, TBOC § 3.010 now specifies that the original certificate of formation of a limited liability company (“LLC”) must
state whether the limited liability company initially has or does not have managers; and,
if it initially has managers, the name and address of each initial manager; or,
if does not initially have managers, the name and address of each initial member of the limited liability company.
TBOC Sections 101.052(d) and 101.251 are also amended to (i) remove a reference to the certificate of formation of a limited liability company to the effect that the certificate of formation supersedes any inconsistent provision in the company agreement and (ii) specify that the company agreement, instead of the certificate of formation, determines whether a limited liability company is managed by a governing authority composed of one or more managers or the members of the company.
As a result of these changes, an LLC can avoid the filing of an amendment to its certificate of formation and change its management structure through the appropriate provisions within its company agreement.
Restrictions on Indemnification or Advancement of Expenses
As amended, TBOC § 8.003 now permits Texas entities to restrict the circumstances in which such entity “must or may indemnify or may advance expenses” under the TBOC in any of its "governing documents,” as opposed to the previous limitation, which only permitted such restrictions to be made in the certificate of formation.
Virtual Shareholders Meetings
TBOC § 21.3521 was added to the TBOC to clarify the standards for the newly permissible virtual shareholders meeting. This new provision is modeled after the Delaware General Corporation Laws, 8 Del. C. § 211.
Under this section, Texas for-profit corporation’s meetings of shareholders may be conducted via remote communications without having to adopt special provisions in their governing documents that override the communication requirements in TBOC § 6.002(a).
Future Effective Times for Written Consents
TBOC § 6.201(b)(1)-(5) and TBOC §6.202(c)(1)-(4) and (f)) were amended to add language to authorize the unanimous and non-unanimous written consents to action by the governing authority, owners or members of a filing entity to “take effect at a future time.”
Under this amended provision, unanimous written consents may be made effective at a “future time” after the signing by all persons entitled to vote on the action. Non-unanimous consents may be made effective at a future time after the signing by at least the minimum number of owners or members of a filing entity that are required to take an action. These future effective dates must be within 60 days after the signing by all persons entitled to vote on the action.
Choice of Forum Provisions in Governing Documents
TBOC § 2.115 was added to the Code to authorize the governing documents of a domestic entity to require, consistent with applicable state and federal jurisdictional requirements, any internal entity claims to be brought solely and exclusively in any of the courts located in Texas.
This addition is not a departure from what is customarily seen in company agreements or partnership agreements. However, authorizing these provisions in corporate bylaws and certificates of formation is a significant change, as it has been uncertain in the past whether Texas courts would recognize these kinds of choice of forum provisions in a Texas corporation’s governing documents.
Registration of Foreign Entity Serving as Governing Person
TBOC § 9.251 was amended to specify that a foreign entity is not considered to be “transacting business” in Texas solely because it is acting as a governing person of a domestic or foreign entity that is registered to transact business in Texas.
More Flexibility for Restated Certificates of Formation of LLCs and Corporations
TBOC §§ 3.060 and 3.061 were amended to provide that a restated certificate of formation of a for-profit or nonprofit corporation may omit prior statements regarding the number of directors and the names and addresses of the directors.
Similarly, TBOC § 3.0611 was amended to provide that a restated certificate of formation of a limited liability company may omit prior statements regarding whether the company has or does not have managers and the names and addresses of the managers or members.
In both cases, this information is likely to be outdated and the amended provisions allow the flexibility for the corporation or LLC to insert a statement regarding their current management structure.
Clarification of Status of Partner or Member
TBOC § 1.002 was amended to clarify that qualification as a “general partner”, “limited partner” and “member,” as defined by the section, requires that the qualifying person must have “become and not have ceased” to be a general partner, limited partner or member of the respective domestic entity “in accordance with the governing documents of the entity” or the TBOC. This amendment removes the requirement that said qualifying person be “admitted to a limited partnership” under their identified role.
CHANGES DUE TO H.B. No. 3131
On June 16, 2021, the Texas Legislature passed H.B. No. 3131—relating to the information required to be included in the certificate of formation of a filing entity. This bill will be effective January 1, 2022.
Certificate of Formation Requirement for Initial Mailing Address
Effective January 1, 2021, all certificate of formation filings must include an “Initial Mailing Address” in hopes of providing better communication to these newly formed entities as to their franchise tax obligations.
The Secretary of State has addressed a problem many Texas businesses faced when their certificates of formation were forfeited by the Comptroller for failure to file franchise tax returns. Newly formed Texas Businesses were not required to disclose their principal business address during the formation of their entity which caused the initial franchise tax notices to be sent to other addresses causing a lag in receipt or misplacement of such notices. The newly required initial mailing address will bridge the gap and allow the Comptroller to send these franchise tax notices to the designated address placing all the responsibility on the Texas business.
CHANGES DUE TO S.B. No. 1523
On May 15, 2021, the Texas Legislature passed S.B. No. 1523—relating to registered and protected series of domestic limited liability companies, as well as authorizing fees. This bill will be effective June 1, 2022.
Registered and Protected Series of LLCs
Effective June 1, 2022, there will be substantial changes to the TBOC affecting the registration of a newly created “Registered Series” LLC. To learn more about these amendments, click HERE.
Execution of Filings for LLCs
Additionally, an amendment adding TBOC § 101.0515 will require all filing instruments of a limited liability company or a registered series to be signed by an authorized officer, manager, or member of such limited liability company or the registered series. This is a significant change in the current practice, which permits these filings be signed an “authorized person” pursuant to TBOC § 4.001, which could include the attorney filing the certificate. Under the new section, which will become effective June 1, 2022, an attorney will no longer be authorized to sign certificates of formation, certificates of registered series and certificates of amendment unless the attorney is also an officer, manager, or member of the LLC.
If you have any questions or concerns about these regulatory actions or require assistance in implementing any of these objectives, please contact Kennedy Sutherland.