Texas is aiming to be the jurisdiction of choice for new and existing corporations. For example,
- Senate Bill 29 (SB 29), titled “Texas: Open for Business,” significantly overhauled the Texas Business Organizations Code (TBOC), making it more “management friendly,” which was recently approved.
- Senate Bill 1058 – exempts Texas-based stock exchanges from certain franchise tax obligations; and
- House Joint Resolution 4 – proposes a constitutional amendment barring taxation of stock exchange transactions and safeguarding retirement accounts.
SB 29, which is effective immediately, aligned the state statute with others, like Delaware, including: (1) the codification of the “business judgment rule”; (2) added enhanced liability protections for officers and directors for certain types of business entities; (3) included reforms regarding derivative actions; and (4) established mandatory venue and waiving jury trials.
Codification of the Business Judgment Rule
The “business judgment rule” is a common law doctrine providing that directors are not held personally liable for decisions made in good faith, with reasonable care and in the best interests of the corporation, protecting directors from lawsuits for business decisions that later turn out to be “bad.” SB 29 creates a rebuttable presumption that in taking or declining to take certain actions on behalf of the business entity, the directors, officers or managerial officials, as applicable, act: “(1) in good faith; (2) on an informed basis; (3) in furtherance of the interests of the corporation; and (4) in obedience to the law and the corporation’s governing documents.” In order to rebut this presumption, the plaintiff must prove that the officer, director or managerial official breached one of his or her fiduciary duties to the business entity, such as the duty of loyalty, and that such breach involves “fraud, intentional misconduct, an ultra vires act, or a knowing violation of law.”
This new codified business judgment rule applies automatically to corporations, limited liability companies and limited partnerships that are listed on a national stock exchange as well as to certain entities that choose to voluntarily adopt these provisions in their governing documents.
Elimination of Fiduciary Duties for Limited Partnerships
SB 29 also allows a limited partnership to adopt provisions in its partnership agreement that completely eliminate any or all of the duty of loyalty, the duty of care and the obligation of good faith. This change provides substantial protection for partners and officers in Texas limited partnerships.
Protecting Businesses from Certain Derivative Actions
SB 29 further includes certain key reforms aimed at shielding businesses from abusive derivative actions from shareholders. First, corporations listed on a national stock exchange or other corporations that have adopted TBOC Section 21.419 to adopt a minimum ownership threshold in their certificate of formation or bylaws, not to exceed three percent (3%) of their outstanding common stock, before a shareholder is permitted to bring a derivative action.
Second, plaintiff’s attorneys are prohibited from recovering attorney’s fees in a derivative action if the lawsuit results only in “additional or amended disclosures made to [shareholders], regardless of materiality.”
Finally, boards of public companies or other corporations that have adopted TBOC Section 21.419 are authorized to form committees of independent and disinterested directors to review insider transactions. These amendments then allow the corporations to petition the court for an adjudication of the independent and disinterested status of these directors before such status is called into question in a derivative action.
Mandatory Venue Provisions and Waiver of Jury Trials
SB 29 provides that any business entity may require in its governing documents that one or more courts in the state shall have exclusive jurisdiction for any internal disputes (including the new Texas Business Court). This provides businesses with an advantage to select a strategic venue for any internal litigation.
Finally, corporations can include a waiver of jury trial in their governing documents for internal disputes, which must be “knowing and informed.” This new section then codifies certain situations in which such waiver is deemed to be “knowing and informed” by the person bringing the claim.
Conclusion
With the signing of Senate Bill 29, Texas has further positioned itself as a predictable framework for businesses and a viable competitor with Delaware to become the preferred business jurisdiction in the U.S.
