DRAFTING IMPLICATIONS OF THE BUSINESS ORGANIZATIONS CODE IMPACT ON DRAFTING OF AGREEMENTS

Transcription

1 DRAFTING IMPLICATIONS OF THE BUSINESS ORGANIZATIONS CODE IMPACT ON DRAFTING OF AGREEMENTS Presented By: GEORGE W. COLEMAN Jenkens & Gilchrist, P.C Ross Avenue, Suite 3700 Dallas, TX (214) ; (214) Fax Copyright 2005 George W. Coleman. All rights reserved. State Bar of Texas 16 TH ANNUAL ADVANCED DRAFTING: ESTATE PLANNING & PROBATE COURSE October 27-28, 2005 Austin CHAPTER 14

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3 GEORGE W. COLEMAN Jenkens & Gilchrist, P.C Ross Avenue, Suite 3200 Dallas, TX BACKGROUND, EDUCATION AND PRACTICE GEORGE COLEMAN is of counsel to the law firm of Jenkens & Gilchrist, P.C., Dallas, Texas, where he focuses his practice on corporate, securities, partnerships, limited liability companies and finance. Mr. Coleman received a B.S. in Petroleum Engineering from the University of Oklahoma in 1961 and an L.L.B. from Southern Methodist University in Mr. Coleman was admitted to the State Bar of Texas in Mr. Coleman s professional affiliations and activities include: American Bar Association: Business Law, Section Co-Chair Ad Hoc Committee on Entity Rationalization ( Present); Section Committee on Partnerships and Unincorporated Business Organizations Chairman , Chairman Limited Partnership Committee ( ). State Bar of Texas: Section on Business Law, Chairman of Section (1986); Council Member ( ); Partnership Law Committee, Chairman ( ); Limited Liability Company Committee, Chair ( ); Member (1974 to present); Texas Business Law Foundation: Member of Board of Directors (1988 to present). Mr. Coleman has authored articles on various corporate topics, including the following recent articles: Drafting Limited Partnership Agreements, Prepared by George W. Coleman, Presented at Travis County Bar Association, Nov Comparison of Investment Vehicles Organized Under Texas Law: Problems, Prepared by George W. Coleman, Presented at the Southern Methodist University MBA Program, 1999, 2000 and Fiduciary Duty and Related Principles, Prepared by George W. Coleman, Jan Current Issues Affecting Partnerships, Limited Partnerships and Limited Liability Companies. Top Ten Gotchas, Prepared by George W. Coleman, Presented at the University of Texas School of Law, 13 & 14 July Comparison of Investment Vehicles Organized Under Texas Law, Prepared by George W. Coleman, Presented at Southern Methodist University, Aug Drafting the Partnership Agreement, Prepared by George W. Coleman, Presented at the CLE International Choice of Entity Conference, 3 May, Corporate Governance Issues In The Post Enron Era: The Impact of Enron On Responsibilities Of Officers And Directors, Presented by George W. Coleman, April Fiduciary Duty And Related Principles For Partnerships And Limited Partnerships, Prepared by George W. Coleman, July Partnership Business Combinations: Successor Liability and Other Issues: Current Issues Affecting Partnerships, Limited Partnerships and Limited Liability Companies. Prepared by Byron F. Egan, George W. Coleman, William H. Hornberger and Michael K. Pierce, Presented in San Antonio, 19 July Legal and Ethical Duties of Lawyers When Faced with Corporate Misconduct. Prepared by George W. Coleman, Presented at Widener University School of Law Corporate Law Symposium, 11 Apr Mr. Coleman is the co-editor, along with William P. Bowers, of Texas Limited Liability Company, Forms and Practice Manual, Published by Data Trace Publishing Company, Towson, Maryland. DALLAS v

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5 TexasBar CLE CONTINUING LEGAL EDUCATION Drafting Implications of The Business Organizations Code Impact on Drafting of Agreements Presented By: George W. Coleman Jenkens & Gilchrist, P.C Ross Avenue, Suite 3700 Dallas, TX (214) ; (214) Fax Presented at the 16 th Annual Advanced Drafting: Estate Planning and Probate Course Copyright 2005 George W. Coleman. All rights reserved. 1 Authorship and Acknowledgements This paper is prepared by George W. Coleman and Daryl B. Robertson, both of the firm of Jenkens & Gilchrist, P.C. (the Dallas, Texas office). In addition, the drafting examples are based on forms prepared by John C. Ale, of the firm of Skadden, Arps, Slate, Meagher & Flom LLP (the Houston, Texas office), and such examples are used with permission. 2 Changes Caused by TBOC The changes imposed by the TBOC on existing entities are few. The impact on drafting limited partnerships and LLC Agreements are few. The changes caused by the TBOC while numerous are primarily of six types. 3 1

6 Changes Caused by TBOC (cont.) The types of changes are: The codification of statutes. Ten entity statutes are rolled into one. The vocabulary of the TBOC. The layout of the TBOC all provisions for most entities are arranged in a logical pattern, normally involving both the spoke provisions and the hub provisions. 4 Changes Caused by TBOC (cont.) The Transition provisions contained in Chapter 402 and the filing fees provided for in Chapter 4, Subchapter D, Sec et seq. Filing Fees. Opt-in provisions. 5 Statutes Codified The Ten Entity Statutes Codified are: Corporate TBCA TNPCA TMCLA Partnership TRLPA TRPA Miscellaneous TUNNAA CAA LLC TLLCA REIT TREITA Professional TPCA TPAA 6 2

7 Effective Dates Effective Date January 1, 2006 TBOC is applicable to: Domestic entities formed after 1/1/2006 Foreign filing entities filing for first time All foreign non-filing entities Filing fees listed in TBOC are applicable to all filings after January 1, 2006 applies to codified statutes LLP annual renewal registrations New LLP registrations made by existing partnerships and limited partnerships 7 Structure of TBOC Getting into the Code how is it arranged? The Table of Contents is the Key. Note that the TBOC is divided into 8 titles and each title is divided into chapters. 8 BUSINESS ORGANIZATIONS CODE STRUCTURE Title 1 - All Entities Title 2 - Corporations Title 3 - Limited Liability Companies Title 4 - Partnerships Title 5 - Real Estate Investment Trusts Title 6 - Associations General Partnerships Limited Partnerships Cooperative Associations Unincorporated Nonprofit Associations For-profit Corporations Nonprofit Corporations Title 7 - Professional Entities Professional Corporations Professional Associations Professional LLC s 9 3

8 Structure of TBOC (cont.) Title 1 contains the HUB provisions and is divided into 12 chapters: Chapter 1. Definitions. Chapter 2. Purposes and Power of Domestic Entity. Chapter 3. Formation and Governance. Chapter 4. Filings. Chapter 5. Names of Entities; Registered Agents and Registered Offices. 10 Structure of TBOC (cont.) Chapter 6. Meetings and Voting. Chapter 7. Liability. Chapter 8. Indemnifications and Insurance. Chapter 9. Foreign Entities. Chapter 10. Mergers, Interest Exchanges, Conversions and Sales of Assets. Chapter 11. Winding Up and Termination of Domestic Entity. Chapter 12. Administrative Powers. 11 Structure of TBOC (cont.) Title 2 contains the provisions relating to corporations and is divided into 4 chapters: Chapter 20. General Corp provisions. Chapter 21. For-Profit Corporations provisions. Chapter 22. Nonprofit Corporations. Chapter 23. Special Purpose Corporations. 12 4

9 Structure of TBOC (cont.) Title 3 contains the provisions relating to limited liability companies and is made up of a single chapter. Chapter 101 contains all provisions relating to Limited Liability Companies. Title 4 contains the provisions relating to partnerships and is divided into 3 chapters. Chapter 151. General Provisions. Chapter 152. General Partnerships. Chapter 153. Limited Partnerships. 13 Structure of TBOC (cont.) Title 5 contains the provisions relating to real estate investment trusts and is composed of a single chapter. Chapter 200. Real Estate Investment Trusts. Title 6 contains the provisions relating to associations and is divided into 2 chapters. Chapter 251. Cooperative Associations. Chapter 252. Unincorporated Nonprofit Associations. 14 Structure of TBOC (cont.) Title 7 contains the provisions relating to professional entities and is divided into 4 chapters: Chapter 301. Provisions Relating to Professional Entities. Chapter 302. Provisions Relating to Professional Associations. Chapter 303. Provisions Relating to Professional Corporations. Chapter 304. Provisions Relating to Professional Limited Liability Companies. 15 5

10 Structure of TBOC (cont.) Title 8 contains the miscellaneous provisions and the transition provisions and is divided into 2 chapters: Chapter 401. General Provisions. Chapter 402. Miscellaneous and Transition Provisions. Note: A Texas LLP continues to be controlled by the old law until it has to file its annual registration and the registration is controlled by the TBOC as is the TBOC is applicable to the LLP. 16 Opt-In Provisions An Opt-in election is available for domestic entities after January 1, To Opt-in a domestic entity must comply with TBOC Sec by: Adopt the TBOC by using the procedure for amending its governing documents and, if necessary amending its governing documents to comply with the TBOC; If the domestic entity is a filing entity, filing a statement electing to adopt the TBOC; 17 Opt-In Provisions (cont.) If amendments to governing documents to conform to law are not required; If necessary, filing a certificate of amendment to cause the certificate of amendment to be filed; If amendments to governing documents to conform to law are not required; and If necessary, filing a certificate of amendment to cause the certificate of amendment to be filed. 18 6

11 New Vocabulary Types of entities Organization Entity Domestic entity vs. Foreign entity Filing entity vs. Nonfiling entity For-profit entity vs. Non profit entity Nonfiling entity includes LLP s Non-Code Organization Professional entity 19 New Vocabulary (cont.) Filing Instruments Certificate of Formation (formation document for all filing entities) Certificate of Termination (dissolution/winding up document for all filing entities) Application for Registration (for foreign filing entities to do business in Texas) Certificate of Amendment Certificate of Merger (or Exchange of Conversion) 20 New Vocabulary (cont.) Other Governing Documents Company Agreement (for LLC s) Fundamental Business Transaction Fundamental Action Distribution Limit for for-profit corporations Authorized Person for professional entities 21 7

12 New Vocabulary (cont.) Management Governing Authority (new name for Board of Directors/Board of Managers/General Partners) Governing Person (new name for General Partners or members of the Board of Directors and Board of Managers) (includes a member in its capacity as manager) Managerial Official an Officer or a Governing Person 22 New Vocabulary (cont.) Officer an individual elected, appointed or designated as an officer by the governing authority or under the governing documents Owners vs. Members Ownership Interests vs. Membership Interests Certificated Ownership Interest vs. Uncertificated Ownership Interest Interest Exchange Affiliate Jurisdiction of Formation 23 New Vocabulary (cont.) Signature, Writing or Written Domestic Entity Subject to Dissenter s Rights Organizer Event Requiring Winding Up Terminated Equity 24 8

13 Hints: Look for approval procedures and requirements in separate Titles governing entities Look for following supplemental provisions in separate Titles: Winding up and termination Notices, meetings, record date Record-keeping requirements Provisions typically found in separate Titles: Rights of owners/members 25 Hints (cont.): Governing authority Appointment/election Rights and liabilities Powers and restrictions Creation and transfer of ownership interests/membership interests Reports Distributions Special governing documents (e.g., bylaws) 26 Drafting LLC Agreements LLC Company Agreement Change name from Regulations to Company Agreement define as Agreement. This COMPANY AGREEMENT (this Agreement ), as it may be amended from time to time, as provided below, is initially made and entered into as of, by and among the Initial Members (as defined below). 27 9

14 Drafting LLC Agreements (cont.) Formation: Change the reference from articles of organization to certificate of formation compare TBOC and with TLLCA art Formation., LLC was formed as a limited liability company (the Company ) under and pursuant to the TBOC and other relevant laws of the State of Texas by the filing of a certificate of formation with the Secretary of State of Texas on. 28 Drafting LLC Agreements (cont.) Duration: The LLC commences on the filing of the certificate of formation. See TBOC Duration. The Company commenced on the first proper filing of the certificate of formation for the Company as provided in TBOC and shall continue until its business and affairs are wound up as provided in Article VII. 29 Drafting LLC Agreements (cont.) Make corresponding changes throughout document to change Regulations to Agreement. Note change in Law: A filing takes effect when document is accepted into SOS filing system. See TBOC and 3.000(c). The SOS issues a written or electronic acknowledgment of filing See TBOC

15 Drafting LLC Agreements (cont.) Merger and Conversion: The merger and conversion provisions for all entities under the TBOC have been consolidated in Chapter 10. Under the TBOC the LLC has the authority to merge, if approved by a majority of its members or such other approval, as its governing documents require. Compare TBOC (c) and (c) with TLLCA art (A)(1)(a). 31 Drafting LLC Agreements (cont.) Good Faith Actions: Note, that the TBOC, like the TLLCA, permits the governing documents (company agreement under TBOC, regulations under TLLCA) to expand or restrict the duties and liabilities of members, managers, officers and other persons. Compare TBOC with TLLCA art. 2.20(B). Indemnification: The TBOC, like the TLLCA, permits an LLC to indemnify members, managers and others under whatever rules the governing documents provide. Compare TBOC with TLLCA art. 2.20(A). 32 Drafting LLC Agreements (cont.) Winding Up Formerly Dissolution: Change term Dissolution to Events Requiring Winding Up. Events Requiring Winding Up. The company shall be wound up only on the first to occur of any one or more of the following: (a) written consent of the Required Members; (b) at such time as there is no Member remaining; 33 11

16 Drafting LLC Agreements (cont.) (c) entry of a judicial order to wind up the Company; (d) on notice from any Member to the other Members on or after the 90 th day following the [Managing Member s ceasing to be a Member]/[Manager s ceasing to be the Manager], unless a new [Managing Member/Manager] has been appointed as provided in Section 4.1(f). 34 Drafting LLC Agreements (cont.) The term dissolution has been eliminated as was previously done in the TRPA. The TBOC uses event requiring winding up to refer to an event which forces an entity must wind up its business and affairs. See TBOC (2) and through Drafting LLC Agreements (cont.) Termination: The TBOC requires that a certificate of termination rather than articles of dissolution be filed at the time of termination of the existence of the LLC. This occurs after the entity is fully liquidated. Notwithstanding termination, a filing entity existence for 3 years continues for purpose of defending lawsuits and conveying property continue. See TBOC

17 Drafting LLC Agreements (cont.) Cancellation of Event Requiring Winding Up: The TBOC has moved away from the no dissolution concept found in the TLLCA and TRULPA, i.e., if within a period of time the was a vote to continue the business, TRULPA provided that the entity continued without a dissolution having occurred. 37 Drafting LLC Agreements (cont.) The TBOC provides that a domestic entity may revoke a voluntary decision to wind up before termination and may cancel the event requiring winding up (an event specified in the governing docs or an event specified in the TBOC requiring a winding up). See TBOC and Compare with TLLCA Art Drafting LLC Agreements (cont.) It is not clear and may not make a difference, if an event requiring a winding up occurs and is then cancelled or revoked. If the LLC or partnership goes into a state of winding up, its powers are limited for the period it is winding up. TBOC (b) provides that A domestic entity may continue its business following the revocation of a voluntary decision to wind up under Subsection (a). In addition, TBOC (c) provides that On cancellation of an event 39 13

18 Drafting LLC Agreements (cont.) requiring winding up under this section, the domestic entity may continue its business. Keep in mind that under TBOC (a) when an even requiring a winding up occurs the domestic entity shall (1) cease to carry on its business, except to the extent necessary to wind up its business. The impact is that the decision to cancel or revoke an event should occur more promptly than not. 40 Drafting Partnership Agreements Limited Partnership Agreement Law reference: Change references to TBOC or TLPL (Texas Limited Partnership Law). TBOC continues requirement that partners must enter into partnership agreement and file a certificate. Certificate of Limited Partnership now called Certificate of Formation. TBOC certificate requirements are essentially identical to TRLPA requirements. Compare TBOC and 3.011(c) with TRLPA 2.01(a). 41 Drafting Partnership Agreements (cont.) Name: Name of Limited Partnership must contain limited or limited partnership or an abbreviation but no longer must conclude with that phrase or word. TBOC eliminates prohibition used of name of limited partner in partnership name. Duration: Commences upon proper filing of certificate and continues until its business and affairs are would up

19 Drafting Partnership Agreements (cont.) Duration. The Partnership shall commence on the first proper filing of a certificate of formation for the Partnership as provided in TBOC and shall continue until its business and affairs are wound up as provided in Article VII. The General Partner shall file the certificate of formation for the Partnership promptly following the execution of this Agreement. The Partnership shall not conduct any business before the certificate of formation is filed. 43 Drafting Partnership Agreements (cont.) Merger and Conversion: TBOC continued requirement that a limited partnership agreement must provide for merger if limited partnership is to have power to do so. See TBOC (f)-(g) and Governing Law: TBOC Chapters 151 through 154 govern partnerships generally. Chapter 153 governs limited partnerships only. 44 Drafting Partnership Agreements (cont.) Good Faith Actions: The TBOC continues various fiduciary-type duties for partners in general partnerships from the TRPA, along with ability to modify them within certain constraints. Compare TBOC (b)(2)-(4) and with TRPA 1.03(b)(2)-(4) and

20 Drafting Partnership Agreements (cont.) Indemnification: The authority and limitations on indemnification by a limited partnership now appear in TBOC Chapter 8 and are substantially the same rules that have applied to Texas limited partnership and corporations. Note, that the indemnification provisions must be contained in the partnership agreement. Compare TBOC with TLLCA art. 2.20A and TRPA 1.03(a). Winding Up and Termination: Events Requiring Winding Up replaces Dissolution and dissolved is replaced by wound up. 46 Drafting Partnership Agreements (cont. Event of Withdrawal of the General Partner: The events are almost verbatim the same in the TBOC as it was in the TRLPA. Compare TBOC (a) with TRLPA 4.02(a). Under the TRLPA, a limited partnership dissolved and commences winding up if an event of withdrawal of a general partner occurs unless, within 90 days, all remaining partners (or such other partners as provided in the partnership agreement) agree to continue the business and, if no general partner remains appoint a new general partner. 47 Drafting Partnership Agreements (cont.) The result under the TBOC is the same. An event of withdrawal of a general partner is an event requiring a winding up, TBOC (2), but all remaining partners (or such group as provided in the partnership agreement) within one year may agree to revoke the event requiring a winding up and continue the business and, if no general partner remains, appoint a new general partner that continues the business, TBOC This agreement allows a smaller percentage (⅔) to continue the partnership under these terms, but only if they do so within 90 days

21 Drafting Partnership Agreements (cont.) Termination: A certificate of termination must be filed to finally terminate the limited partnership. Events Requiring Winding Up. The Partnership shall be wound up only on the first to occur of any one or more of the following: (a) written consent of the Required Partners; (b) at such time as there is only one Partner remaining; (c) entry of a judicial order to wind up the Partnership; or 49 Drafting Partnership Agreements (cont.) (d) an event of withdrawal of the General Partner under TBOC (a)(3); provided, however, that if, but only if, on or before the 90 th day following that event of withdrawal Limited Partners owning in the aggregate at least twothirds of the Percentages owned by Limited Partners agree in writing to the continuation of the Partnership and to the appointment of a new General Partner that agrees in writing to be bound by the provisions of this Agreement as the General Partner and notifies the other Partners of its address for notices under this 50 Drafting Partnership Agreements (cont.) Agreement, then (the event requiring a winding up shall be revoked and the Partnership shall continue, (ii) effective with the event of withdrawal, the former General Partner shall cease to be a Partner, its Interest shall be converted to that of a Limited Partner, and (iii) the Person so appointed as General Partners shall be admitted to the Partnership as a general partner effective as of the event of withdrawal and shall make such contribution 51 17

22 Drafting Partnership Agreements (cont.) to the Partnership and receive an Interest with such Percentage as the Limited Partners making the appointment may specify; and provided further that an event requiring winding up under TBOC (2) may be revoked under TBOC (b) only as provided in Section 4.1(e) or 6.1 or this Section 7.1(d)