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Remaining or Going Private: Traditional and New Rationales
The going private transaction has been popular in the past and will likely continue in popularity, given the number of startup “exits.” In the alternative, companies could continue to remain private, as venture capital funding and mega-rounds give companies a way to operate privately and their founders to retain control. Traditional rationales were centered around public speculation and filing or disclosure requirements. I suggest that new rationales include control by founder/CEOs, although it is hard to be sure. In the future, there could be new trends, less founder-centric companies, and more rationales for remaining, or going, private.
Fiduciary Duties of Governing Persons in Texas Business Entities
This set of slides describes the relationship and duties of the Board of Directors to corporation and how that affects corporate governance.
Model Company Agreements for Closely Held LLCs
Records maintained by the Texas Secretary of State indicate that the limited liability company has become the entity of choice among Texas organizations. The office of the Texas Secretary of State reports that of the 374,301 certificates of formation filed for domestic for-profit entities in 2024, 348,753 (or approximately 93%) were limited liability companies, and of the 391,934 certificates of formation filed for domestic for-profit entities in 2023, 365,417 (or approximately 93%) were limited liability companies. It is often stated that one of the benefits of organizing an entity as a limited liability company is that this form of entity offers the owners and governing authority of the entity the flexibility to agree to provisions for the economic terms and governance that are more flexible than available with respect to a corporation. This is true, and indeed limited liability companies are sometimes used to create highly complex structures with multiple classes of ownership interests and highly customized provisions regarding management and governance of the entity, including complicated provisions for voting and management succession. However, given the large number of entities now being created as limited liability companies in Texas and other states, it is likely that many of these new entities are not entities with complex structures with multiple classes of ownership and complex bureaucracies for governance. Statistics compiled by the Internal Revenue Service show that for the tax year 2021 (the most recent year for which statistics are currently available), approximately 68% of the S corporation returns are for single-shareholder S corporations and approximately 24% have only two shareholders. The Internal Revenue Service does not publish similar statistics for limited liability companies, and single-member limited liability companies are typically disregarded entities that do not file tax returns. But if one assumes that most limited liability companies are closely held entities, then by analogy, it is likely that a large portion of limited liability companies have one or two owners. Therefore, it is much more likely that practitioners will find themselves needing to draft simple limited liability company agreements suitable for entities with one or two or a very few owners, rather than more complex documents. The purpose of this paper is to present and discuss models for governing agreements for limited liability companies when a simple structure is needed.
The Corporate Transparency Act: What You Need to Know Now
This is the slide deck for the presentation
Shareholder Agreements as Mechanisms for Dealing with Shareholder Oppression
It is important to evaluate the nature and role of shareholder agreements as mechanisms to protect against shareholder oppression.
The Walking Dead: Forfeitures and Involuntary Terminations of Filing Entities
Do either of these sound familiar? 1) Your client tells you she wants to terminate her entity and she has heard that if she just ignores the notices from the Comptroller’s officer to file the franchise tax report the state will terminate her company for her. Your client called the Secretary of State’s office, and they told her she needs to file documents with the Comptroller and Secretary of State. The client asks why she should go to all that trouble when the state will terminate the entity for her if she does nothing? or 2) The client’s existence was forfeited for failure to pay franchise taxes in 2011, but the company has continued to operate and has a substantial amount of real and personal property, including intangible property such as receivables. This situation comes to your attention when you filed suit for the company to collect on a promissory note executed in favor of the company in 2010 that became due in 2016. The maker of the note is arguing that the company cannot sue on the note and that the claim is barred because it was not brought within three years after the company’s existence was forfeited. Now that the company’s “forfeited existence” has come to your attention, you and the client have many questions. Can the company collect on the note? Where does the company stand with respect to its assets, rights, and liabilities?Does anyone in the company have any personal liability for liabilities incurred in the business? Can the company reinstate even though it is beyond the three-year post-termination survival period? What effect will a reinstatement have?
Drafting Sensitive Issues in Company Agreements
NOTE: Limited Liability Company Agreements are highly customizable offering its Members great flexibility to agree to provisions for the economic terms and governance. This Example of a Company Agreement should not be considered a form. When drafting a Company Agreement, the drafter should draft provisions which are appropriate for the particular transaction. NOTE: Limited Liability Company Agreements often include provisions which address particular issues under the Federal tax laws and State tax laws. This Example of a Company Agreement does not include provisions designed to address Federal or State tax issues. When drafting a Company Agreement, please consult or have your client consult with appropriate tax advisors for the purpose of addressing any Federal or State tax issues that may arise from the investment or may impact the drafting of the Company Agreement.
The Walking Dead: Forfeitures and Involuntary Terminations of Filing Entities
Do either of these sound familiar? Your client tells you she wants to terminate her entity and she has heard that if she just ignores the notices from the Comptroller’s officer to file the franchise tax report the state will terminate her company for her. Your client called the Secretary of State’s office, and they told her she needs to file documents with the Comptroller and Secretary of State. The client asks why she should go to all that trouble when the state will terminate the entity for her if she does nothing? The client’s existence was forfeited for failure to pay franchise taxes in 2010, but the company has continued to operate and has a substantial amount of real and personal property, including intangible property such as receivables. This situation comes to your attention when you filed suit for the company to collect on a promissory note executed in favor of the company in 2009 that became due in 2015. The maker of the note is arguing that the company cannot sue on the note and that the claim is barred because it was not brought within three years after the company’s existence was forfeited. Now that the company’s “forfeited existence” has come to your attention, you and the client have many questions. Can the company collect on the note? Where does the company stand with respect to its assets, rights, and liabilities? Does anyone in the company have any personal liability for liabilities incurred in the business? Can the company reinstate even though it is beyond the three-year post- termination survival period? What effect will a reinstatement have?
Management Responsibilities of Governing Persons of Corporations and Limited Liability Companies
Although this paper will focus primarily on LLCs, it is worthwhile to consider the duties typically imposed on corporate directors, as the same duties show up in cases involving LLCs. Directors have a duty to discharge their responsibilities in accordance with the duty of care, the duty of loyalty, and the duty of obedience. The duty of care mandates that a director discharge his or her responsibilities with the care that an ordinarily prudent person would exercise in similar circumstances. Corporate statutes based on the Model Business Corporation Act use the phrase “an ordinarily prudent person in a like position would exercise under similar circumstances.”1 This statutory language allows a court to look to a particular organization rather than a hypothetical entity. Applying this standard, a court may consider the background, qualifications, and experience of a director and the role the director plays in the corporation when measuring the director’s conduct. The ordinarily prudent person standard is associated with tort-law and simple negligence, but in the corporate world, it has been incorporated into the duty of care and case law applies a gross negligence standard. Directors also usually enjoy the benefits of the business judgment rule. The duty of loyalty requires a director to act in good faith in what the director reasonably believes to be the best interests of the corporation and to not derive a personal profit or advantage at the expense of the corporation. The duty of loyalty comes into play if a director or officer wants to compete with the corporation or take an opportunity of the corporation for the director’s own benefit. The duty of obedience dictates that a director obey the law and the corporation’s organizational documents. Corporate statutes commonly provide a procedure for approval of a director’s conflicting interest transaction. Most corporate statutes now permit the corporation’s formation document to relieve directors from monetary liability for breaches of the duty of care. The provisions of the TBOC governing for-profit corporations (like the predecessor Texas Business Corporation Act) do not explicitly set forth or define the fiduciary duties of corporate directors; however, case law generally recognizes that directors owe a duty of obedience, a duty of care, and a duty of loyalty.
Differences in Drafting for Majority, Minority and 50/50 Owners in an LLC
Drafting the organizational documents for a business entity with multiple owners with differing interests is rarely “simple and straightforward”. Careful consideration needs to be given to the specific nature of the business arrangement, the ownership level of each owner, and what talents and resources each owner is bringing to the table in order to put together organizational documents that protect the key areas of concern for a client.
Reorganizing A Failing Business
Reorganizing a failing business is generally a time consuming affair that requires an even higher level of dedication than simply running a business. Among other things, unsatisfied creditors must be kept at bay, new sources of funding sought out (a task which tends to be much more difficult for a business operating in the red than for one that is generating profit), employee fears assuaged, and so on. While most of this paper will focus on debtor/creditor issues that arise when a business reaches general insolvency (with a heavy focus on bankruptcy considerations), the key to successful reorganization begins long before a bankruptcy is filed (hopefully before a bankruptcy is even on the horizon).
A Look at Board Duties and Conflicts for Corporations and LLCs
The world of corporate governance is experiencing a paradigm shift in recent years—with the movement away from a passive governing board and a rise in shareholder activism and shareholder democracy. This shift is marked by some inherent conflict-of-interest issues including (1) an increase in the number of constituent representatives on the board; (2) the rise of the influence of private equity; and (3) equity-interest owners demanding a right to nominate directors and managers.
Overview of Fiduciary Duties, Exculpation, and Indemnification in Texas Business Organizations
Statutory developments beginning in the 1990s have impacted the analysis of fiduciary duties in the business organizations context. The duties of general partners are now defined by statutory provisions that delineate the duties without referring to them as “fiduciary” duties and specifically provide that partners shall not be held to the standard of a trustee. Whether limited partners in a limited partnership have fiduciary duties is not wellsettled, but the Business Organizations Code (BOC) clarifies that a limited partner does not owe the duties of a general partner solely by reason of being a limited partner. While the fiduciary duties of directors are still principally defined by common law, various provisions of the corporate statutes are relevant to the application of fiduciary-duty concepts in the corporate context. Because limited liability companies (LLCs) are a relatively recent phenomenon and the Texas LLC statutes do not specify duties of managers and members, there is some uncertainty with regard to the duties in this area, but the LLC statutes allude to or imply the existence of duties, and managers in a manager-managed LLC and members in a member-managed LLC should expect to be held to fiduciary duties similar to the duties of corporate directors or general partners. In each type of entity, the governing documents may vary (at least to some extent) the duties and liabilities of managerial or governing persons. The power to define duties, eliminate liability, and provide for indemnification is addressed somewhat differently in the statutes governing the various forms of business entities.
Update On Fiduciary Duty For Privately Held Corporations and LLCs
These are the presentation slides.
How To Effectively Deal With Minority Shareholders: Some Practice Pointers And Recent Developments
Minority shareholders, or shareholders who own less than 50% of the outstanding voting interests of a company, are typically shareholders of companies backed by venture capital and are often a key source of venture capital funding, particularly in the early stages of venture capital transactions. Although venture capital funding has generally declined in the United States during 2016, with approximately $39 billion invested during the first three quarters of 2016 as compared to approximately $48 billion invested during the relative period in 2015, the U.S. venture capital market is expected to rebound at the end of 2016 or in early 2017. When seeking out minority shareholders to invest in VC-backed companies, majority shareholders should carefully consider a number of important protections and exit strategies commonly associated with minority investments.
Drafting Considerations for Exculpation of Duties (Including Fiduciary) in LLC Agreements
This paper will discuss and set out suggested provisions for Texas LLC Agreements for exculpation of “Governing Persons” under the TBOC and in the LLC contractual provisions. This process has several component parts, including statutory provisions, common law directives and influences from Delaware law, as well as contractual “glosses” that have developed in practice for specific activities. In drafting an LLC Agreement, the practitioner must be cognizant of the actual statutory provisions governing the duties of Governing Persons, the case law that is developing about LLCs, as well as the statutorily permitted management structures unique to the LLC. The statutory provisions for LLCs on exculpation of Governing Persons are not the same as those in effect for either corporations or partnerships, so traditional exculpatory provisions cannot be directly copied. In addition to statutory formulations, and the growing body of case law on limited liability companies, common law on agency must be considered. Further, the management of the LLC as an entity can be accomplished by at least three separate groups, the members, the managers and the officers, depending on how one determines to organize the entity. Management contracts by affiliated entities add another level of complexity. The multiplicity of choices for daily management requires a translation of traditional corporate and partnership formulations. This paper will raise the questions and suggest possible responses in this ever fertile field of legal controversies.
The Demise of the Shareholder Oppression Doctrine in Texas: Pursuit of Claims By Minority Shareholders (And LLC Members) After Ritchie V. Rupe
Until 2014, courts of appeals in Texas had recognized the availability of various equitable remedies, including a court-ordered buyout, where a minority shareholder established that the majority shareholder engaged in “oppressive” conduct. “Oppressive” conduct was defined by the courts as: (1) majority shareholders’ conduct that substantially defeats the minority’s expectations that, objectively viewed, were both reasonable under the circumstances and central to the minority shareholder’s decision to invest; or (2) burdensome, harsh, or wrongful conduct; a lack of probity and fair dealing in the company’s affairs to the prejudice of some members; or a visible departure from the standards of fair dealing and a violation of fair play on which each shareholder is entitled to rely. Davis v. Sheerin, 754 S.W.2d 375, 381-82 (Tex. App.—Houston [1st Dist.] 1988, writ denied) (awarding minority shareholder an equitable buyout at fair value as determined by the jury based upon the majority’s refusal to recognize the minority’s ownership in the corporation). The seminal case in this area was Davis v. Sheerin. In the years after the Davis case, oppression cases in Texas appeared with increasing frequency. Some courts also applied the shareholder oppression doctrine in the context of limited liability companies. In a landmark 6-3 opinion in 2014, the Texas Supreme Court disapproved of the manner in which courts of appeals had been applying the oppression doctrine and significantly limited the reach of the oppression doctrine. In Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014), the court: (1) rejected the “reasonable expectations” and “fair dealing” tests for oppression that courts of appeals had been applying in Texas since 1988 and adopted a definition requiring abuse of authority by management with intent to harm an owner in disregard of management’s honest business judgment; (2) held that a rehabilitative receivership is the only remedy for oppression under Section 11.404 of the Business Organizations Code; and (3) declined to recognize a common-law cause of action for oppression.
Overview of Fiduciary Duties, Exculpation, and Indemnification in Texas Business Organizations
Statutory developments beginning in the 1990s have impacted the analysis of fiduciary duties in the business organizations context. The duties of general partners are now defined by statutory provisions that delineate the duties without referring to them as “fiduciary” duties and specifically provide that partners shall not be held to the standard of a trustee. Whether limited partners in a limited partnership have fiduciary duties is not well- settled, but the Business Organizations Code (BOC) clarifies that a limited partner does not owe the duties of a general partner solely by reason of being a limited partner. While the fiduciary duties of directors are still principally defined by common law, various provisions of the corporate statutes are relevant to the application of fiduciary duty concepts in the corporate context. Because limited liability companies (LLCs) are a relatively recent phenomenon and the Texas LLC statutes do not specify duties of managers and members, there is some uncertainty with regard to the duties in this area, but the LLC statutes allude to or imply the existence of duties, and managers in a manager-managed LLC and members in a member-managed LLC should expect to be held to fiduciary duties similar to the duties of corporate directors or general partners. In each type of entity, the governing documents may vary (at least to some extent) the duties and liabilities of managerial or governing persons. The power to define duties, eliminate liability, and provide for indemnification is addressed somewhat differently in the statutes governing the various forms of business entities.
Corporate Compliance in the 21st Century
Dating back to the Civil War and the passage of the False Claims Act (“FCA”), the federal government has relied―and continues to rely―on whistleblowers to aid in the government’s ability to enforce regulatory laws and protect various government programs. The federal government simply lacks the limitless legal and investigative resources needed to do it entirely on its own. To this end, Congress has passed numerous regulatory statutes containing specific incentives that reward and protect whistleblowers for coming forward, including bounty programs and private causes of action to combat employer retaliation. This paper focuses on giving insight to the in-house counsel about those whistleblower statutes and their key provisions.
The Walking Dead: Inadvertent Terminations of Business Entities
Do any of these sound familiar? The client wants to terminate his entity. Upon checking the Secretary of State’s records, you find that the entity is in a "forfeited existence" status. Voluntarily terminating the entity requires an application for reinstatement and payment of additional fees before filing the certificate of termination for a voluntary termination. Is all that really necessary? Are there risks to my client that would outweigh the cost and effort of reinstating in order to voluntarily terminate? The client’s existence was forfeited for failure to pay franchise taxes in 2008, but the company has continued to operate and has a substantial amount of real and personal property, including intangible property such as receivables. This situation comes to your attention when you filed suit for the company to collect on a promissory note executed in favor of the company in 2007 that became due in 2013. The maker of the note is arguing that the company cannot sue on the note and that the claim is barred because it was not brought within three years after the company’s existence was forfeited. Now that the company’s “forfeited existence” has come to your attention, you and the client have many questions. Can the company collect on the note? Where does the company stand with respect to its assets, rights, and liabilities? Does anyone in the company have any personal liability for liabilities incurred in the business? Can the company reinstate even though it is beyond the three-year post- termination survival period? What effect will a reinstatement have? The Secretary of State’s records show that your client, a limited partnership, was involuntary terminated on April 16, 2012, for failure to file a periodic report. It was reinstated on May 9, 2014. Was its reinstatement retroactive? In other words, did the entity legally exist between April 16, 2012, and May 9, 2014? How does this affect events that occurred during the time the entity was involuntarily terminated?
Drafting Shareholders’ Agreements in a Post-Ritchie v. Rupe World
A number of excellent articles have been written since the Texas Supreme Court’s decision in Ritchie v. Rupe, 443 S.W.3d 856 (Tex. 2014) gutted the cause of action for shareholder oppression in the State of Texas. See, e.g., Shareholder and Member Oppression in Texas, Miller, E., State Bar of Texas 37th Annual Advanced Civil Trial Course, Ch. 27 (October 31, 2014); Oppression of Minority Shareholders/ Members, Vela, R. State Bar of Texas 12th Annual Advanced Business Law Course, (November 7, 2014); Minority Shareholder Claims in the Wake of Ritchie v. Rupe, Stahl, E., State Bar of Texas 9th Annual Fiduciary Litigation Course (December 5, 2014); Remedies for Minority Shareholders in the Wake of Ritchie v. Rupe, Hinson, K. State Bar of Texas 7th Annual Damages in Civil Litigation Seminar, February 27, 2015; and The Demise of the Shareholder Oppression Doctrine in Texas: Pursuit of Claims by Minority Shareholders (and LLC Members) after Ritchie v. Rupe, Miller, E., State Bar of Texas, Choice & Acquisition of Entities (May 22, 2015). This article will not re-plow the ground covered there, but instead ask and (hopefully) provide some answers to these two questions: “What practical impact does Ritchie have on the best practices for drafting Shareholders’ Agreements?” and “How will Ritchie change litigation strategies related to Shareholders’ Agreements?”
Drafting Governing Documents
One of the very first steps in the lifecycle of a business is to form the business entity. The first decision will be to determine which type of legal entity will be the best fit for the business. Once the type of entity has been selected, the governing documents for that entity will provide the framework for the ownership, management and corporate governance structures of the business. This article provides an introduction to the types of entities available in Texas, the steps required to form a legal entity, and certain drafting considerations in connection with preparing an operating agreement for the entity.
Governing Persons and Owners in Action: Liability Protection and Piercing the Veil of Texas Business Entities
Sole proprietors and partners in a traditional general partnership enjoy no protection from the debts and liabilities of the business. The various business entities that provide some type of liability protection do so under slightly varying approaches. These variations are discussed in the paper.
Governing Persons in Action: Overview of Fiduciary Duties, Excupation, and Indemnification in Texas Business Organizations Code
Statutory developments beginning in the 1990s have impacted the analysis of fiduciary duties in the business organizations context. The duties of general partners are now defined by statutory provisions that delineate the duties without referring to them as “fiduciary” duties and specifically provide that partners shall not be held to the standard of a trustee. Whether limited partners in a limited partnership have fiduciary duties is not well- settled, but the Business Organizations Code (BOC) clarifies that a limited partner does not owe the duties of a general partner solely by reason of being a limited partner. While the fiduciary duties of directors are still principally defined by common law, various provisions of the corporate statutes are relevant to the application of fiduciary duty concepts in the corporate context. Because limited liability companies (LLCs) are a relatively recent phenomenon and the Texas LLC statutes do not specify duties of managers and members, there is some uncertainty with regard to the duties in this area, but the LLC statutes allude to or imply the existence of duties, and managers in a manager-managed LLC and members in a member-managed LLC should expect to be held to fiduciary duties similar to the duties of corporate directors or general partners. In each type of entity, the governing documents may vary (at least to some extent) the duties and liabilities of managerial or governing persons. The power to define duties, eliminate liability, and provide for indemnification is addressed somewhat differently in the statutes governing the various forms of business entities.
Business “Divorces” in the Downturn
You hear about it in the news every day. Small businesses are struggling to keep their doors open. The economic stress has taken its toll on many businesses and many business owners. Due to the downturn, many business owners simply want to go their separate ways. That’s where you come in. When a client comes to you for legal advice on how to end their business, you need to be prepared to provide advice on the steps that need to be taken to get that done.