Thursday, September 27, 2012

Non-Waivable Provisions of Texas LLC Law

Is there a business law topic that doesn't benefit from the input of a quote from a 1980's movie starring Chevy Chase?  I sure hope not!

This blog post will explore the ability of a Texas limited liability company to waive the default provisions under the Texas Limited Liability Company Law (TLLCL) (Title 3 and Title 1, as applicable, of the Texas Business Organizations Code (TBOC)).  So we now turn to Fletch on the importance of waivers:    

Fletch: Aren't you gonna read me my rights?
Cop: You have the right to remain silent. You have the right to have your face kicked in by me. You have the right to have your balls stomped on by him.
Fletch: I think I'll waive my rights.

Generally, the members of a Texas limited liability company are free to agree to virtually any arrangement regarding the management and operation of their limited liability company.  For example, the members may have the same or different management rights, economic (profit and loss) rights, voting rights, information rights, etc.  This flexible nature of the limited liability company structure is part of the reason why the LLC has become the most popular choice of entity in Texas.  But if the members fail to reach an agreement on any of these issues, or if the company agreement of the limited liability company is silent on them, the TLCL provides default provisions which will govern the LLC and its members.  For example, absent an agreement to the contrary, a member of an LLC has no right to withdraw from the company and the other members have no right to expel him (Section 101.107 of the TBOC).  Another default provision under the TLLCL provides that absent an agreement to the contrary, profits and losses of the LLC are allocated among the members in proportion to the agreed value of the members' respective contributions to the company (Section 101.201 of the TBOC).

Fortunately, virtually every default provision of the TLLCL can be modified by agreement of the LLC's members (Section 101.052(c) of the TBOC).  The exceptions to that general rule (i.e., the non-waivable provisions of the TLLCL) are the following matters identified in Section 101.054 of the TBOC:


(1)  Section 101.054 of the TBOC itself may not be waived or modified (obviously!);
(2)  The LLC must have at least one member (Section 101.101 of the TBOC);
(3)  A promise to contribute to the LLC must be in writing and signed to be enforceable (Section 101.151 of the TBOC);
(4)  The LLC may not make distributions if it would cause the LLC's liabilities to exceed the value of its assets.  Similarly, a Series LLC may not make a distribution with respect to any series if its liabilities would exceed its assets. (Sections 101.206 and 101.613 of the TBOC);
(5)  The LLC has an obligation to maintain a list of its members and their respective ownership percentages and other books and records (Section 101.501 of the TBOC);
(6)  If the company is a Series LLC, it must respect the integrity of each series of membership (Section 101.602(b) of the TBOC);
(7)  Words and phrases interpreted or defined in Chapter 1 of the TBOC (Definitions and other General Provisions) may not be waived or modified to the extent such words or phrases are used to interpret a provision or define a word or phrase contained in one of the Sections listed above or below;
(8)  Chapter 2 of the TBOC (Purposes and Powers) may not be waived or modified, except that the following Sections of Chapter 2 may be waived or modified in the company agreement:

  • Section 2.104(c)(2)(permitting a member to challenge a guaranty by the company as not benefiting the   company);
  • Section 2.104(c)(3)(permitting the company or its legal representative to challenge a guaranty as not benefiting the company); or 
  • Section 2.113 (limiting the company's purposes and powers);

(9)  Chapter 3 of the TBOC (Formation and Governance), may not be waived or modified, except that Subchapter C (Governing Persons and Officers) and Subchapter E (Certificates Representing Ownership Interest) may be waived or modified in the company agreement; and
(10)  Chapter 4 of the TBOC (Filings) may not be waived or modified;
(11)  Chapter 5 of the TBOC (Names of Entities, Registered Agents & Registered Offices) may not be waived or modified;
(12)  Chapter 7 of the TBOC (Liability) may not be waived or modified;
(13)  Chapter 10 of the TBOC (Mergers, Interest Exchanges, Conversions & Sales of Assets) may not be waived or modified;
(14)  Chapter 11 of the TBOC (Winding Up & Termination) may not be waived or modified, except that Section 11.056 (requiring a winding up of the company upon the company no longer having members with certain exceptions) may be waived or modified; and
(15)  Chapter 12 of the TBOC (Administrative Powers) may not be waived or modified.

Of course, any provision listed above may be waived or modified in the company agreement if (1) the provision itself authorizes the limited liability company to waive or modify the provision in the company's governing documents, or (2) if the provision itself specifies: (A) the person or group of persons entitled to approve a modification; or (B) the vote or other method by which a modification is required to be approved.

A provision of the TLLCL that grants a right to a person, other than a member, manager, officer, or assignee of a membership interest in a limited liability company, may be waived or modified in the company agreement of the company only if the person consents to the waiver or modification.

Finally, Section 101.054 of the TBOC notes that the company agreement may not unreasonably restrict a person's right of access to records and information under Section 101.502 of the TBOC.

68 comments:

  1. I was wondering if you could expand on 101.054(b)-(c). They seem counter-intuitive to the entirety of section 101.054. If one of the provisions authorizes in the governing documents that it can be waived and/or modified, doesn't that render this subsection of the TBOC obsolete? Any clarification and/or examples would be greatly appreciated!

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