For-Profit Corporation vs. Nonprofit Corporation vs. Social Purpose Corporation vs. Public Benefit Corporation

If you are interested in forming a corporate vehicle for “doing good,” you may have considered forming a for-profit corporation, a nonprofit corporation, a public benefit corporation, or a social purpose corporation.  But which corporate vehicle is right for you and your cause(s) in Texas? I’m going to compare and contrast these corporate forms for you.

For-Profit Corporation:

A for-profit corporation is exactly what it sounds like – it’s in business to make a profit for its shareholders. Thanks to the magic of the "invisible hand” of capitalism, virtually every successful for-profit corporation will end up doing a lot of good things for its customers, vendors, employees, and other stakeholders. But ultimately the board of directors of a for-profit corporations owes fiduciary duties to seek to maximize profits for its shareholders. That’s true even if the board faces a choice that may be right for its shareholders, but may not be in the best interests of the community, the world, or other stakeholders of the corporation.

So if you want to earn a profit for yourself and impact the world in a positive way by providing great products or services, but with no obligation (or opportunity) to consider stakeholders other than the corporation’s shareholders when making business decisions, the for-profit corporation is probably right for you.

For-profit corporations are governed by Chapter 22 of the Texas Business Organizations Code (TBOC).

Nonprofit Corporation:

Being a “nonprofit” corporation does not mean that the corporation may not earn a profit - it just means that all profits earned by the corporation must ultimately flow to a “good cause” and not flow to the benefit of any individual or for-profit corporation.

Nonprofit corporations are governed by Chapter 22 of the TBOC. Section 22.01(5) of the TBOC defines a nonprofit corporation as “a corporation no part of the income of which is distributable to a member, director, or officer of the corporation, except as provided in Section 22.054.”  Section 22.054 of the TBOC permits non-profit corporations to (1) pay reasonable compensation for services provided, (2) confer benefits to its members in conformity with the corporation’s purpose, (3) make distributions to its members upon winding up and termination as otherwise permitted by Chapter 22 of the TBOC, and (4) make distributions of its income to 501(c)(3) organizations under certain circumstances.

So if you just want to “do good” and don’t care about earning any profits for yourself, a nonprofit corporation might be a great option for you.  But if you want to personally share in any of the profits of the corporation as its founder and owner while helping society or the public at the same time, then you might want to consider another type of corporation.

Also, because non-profit corporations may not distribute profits to its members, they often have a more difficult time raising capital – what venture capitalist wants to invest in a corporation with a 0% chance of earning a profit?!  So if you want to attractive investors (not just donations) to your project, the non-profit corporation will not work for you.

Social Purpose Corporation:

In 2013, the Texas legislature adopted the concept of the social purpose corporation in the TBOC. The social purpose corporation sought to bridge the historical divide between for-profit corporations seeking only financial gain for its shareholder or non-profit corporations seeking only to further a social purpose or cause. Why couldn’t a corporation do both? According to the author of the bill that created the social purpose corporation in Texas, the social purpose corporation was adopted in response to a national movement of social entrepreneurship – “a person or entity who uses entrepreneurial principles to affect change in a particular social purpose or cause.”

A new Section 3.007(d) was added to the TBOC, which permits a for-profit corporation to elect to have a social purpose in addition to its for-profit purpose. That Section also permits a for-profit corporation to include a provision in its certificate of formation requiring the corporation’s board of directors and its officers to consider any social purpose of the corporation in discharging their duties.

A new Section 1.002(82-a) was added to the TBOC to define social purposes as “one or more purposes of a for-profit corporation that are specified in the corporation's certificate of formation and consist of promoting one or more positive impacts on society or the environment or of minimizing one or more adverse impacts of the corporation's activities on society or the environment.  Those impacts may include: (A) providing low-income or underserved individuals or communities with beneficial products or services; (B) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (C) preserving the environment; (D) improving human health; (E) promoting the arts, sciences, or advancement of knowledge; (F) increasing the flow of capital to entities with a social purpose; and (G) conferring any particular benefit on society or the environment.”

And new Sections 21.401(c) and (d) were added to the TBOC to explicitly grant the directors and officers of a social purpose corporation the right to consider any social purposes specified in the corporation’s certificate of formation in discharging their duties to the corporation.

As you can see, the social purpose corporation grants the for-profit corporation and its management the right, but not necessarily the obligation, to pursue social purposes while also pursuing a profit for the corporation’s shareholders.  

Public Benefit Corporation:

In 2017, the Texas legislature adopted the concept of the public benefit corporation, which is kind of a social purpose corporation on steroids. Pubic benefit corporations are governed by a newly created Subchapter S of Chapter 21 (For-Profit Corporations) of the TBOC.

The certificate of formation of a public benefit corporation must (1) identify one or more public benefits to be promoted by the corporation, and (2) include a statement that the for-profit corporation has elected to be a public benefit corporation. Section 21.952 of the TBOC defines public benefit as “a positive effect, or a reduction of a negative effect, on one or more categories of persons, entities, communities, or interests, other than shareholders in their capacities as shareholders of the corporation, including effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature.”    

The name of a public benefit corporation may include the words “public benefit corporation,” “P.B.C.,” or “PBC." Otherwise, the corporation must notify any potential shareholder of its public benefit corporation status before issuing any shares of stock.

The public benefit corporation provisions of the TBOC also include many provisions that corporation’s might view as onerous. For example, two-thirds of the corporation’s shareholders must approve (1) a merger with a corporation that is not a public benefit corporation, or (2) an amendment to the corporation’s certificate of formation to remove its status as a public benefit corporation. Also, at least every other year, the public benefit corporation must provide its shareholders a statement which must include (A) the corporation’s objectives in promoting the public benefit, (B) standards to measure the corporation’s progress toward such public benefit, (C) objective factual information based on such standards, and (D) an assessment of the corporation’s success in meeting its objectives.

The public benefit corporation really goes all in on the concept of benefiting the public. Section 21.953 of the TBOC requires the public benefit corporation’s board of directors to manage the corporation “in a manner that balances: (1) the shareholders’ pecuniary interests; (2) the best interests of those persons materially affected by the corporation’ s conduct; and (3) the public benefit or benefits specified in the corporation’s certificate of formation.” That’s quite a balancing act for any board.

Conclusion:

While any of these types of corporations may be right for you or your particular situation, I would note that a social purpose corporation (i.e., a for-profit corporation with a social purpose) would seem to give the corporation the maximum amount of freedom achieve both profit and social purposes without many of the requirements and restrictions applicable to the public benefit corporation.

Blowing the Whistle on Confidentiality Agreements that Restrict Whistleblowers

Recent changes to federal whistleblower protection law have made it necessary to revisit the form of confidentiality agreements (sometimes called non-disclosure agreements or NDAs) used by companies to protect their trade secrets and other confidential information.

Whistleblowers are parties who become aware of illegal or unethical conduct within a company and seek to report such conduct to the proper governmental authorities. In the wake of the collapse of Enron, the Bernie Madoff Ponzi scheme, and other financial and accounting scandals, the government has sought to make it easier for company insiders to report illegal or unethical conduct within a company without fear of retribution from the company. As you might expect, there is often a tension between the company’s desire to protect legitimate trade secrets, often through the use of confidentiality agreements, and the law’s desire to protect and encourage whistleblowers.  

Defend Trade Secrets Act. One example of this recent trend is the federal Defend Trade Secrets Act (DTSA), which was adopted in 2016. Under the DTSA, an individual cannot be held criminally or civilly liable for “blowing the whistle” and confidentially reporting a suspected violation of law to the government or to an attorney. The DTSA also protects a whistleblower who confidentially discloses trade secrets to an attorney or to a court in connection with a lawsuit alleging that an employer retaliated against the whistleblower.

The DTSA requires that any company that enters into a confidentiality agreement with an employee, consultant or independent contractor must include a notice in the confidentiality agreement of the DTSA whistleblower protections described in the previous paragraph. If the company fails to provide the DTSA notice, the company cannot sue the employee, consultant or independent contractor under the DTSA for exemplary damages or for attorneys’ fees as otherwise permitted to be recovered under the DTSA for willful, malicious or bad faith theft of trade secrets.

SEC Rule 21F-17. The Dodd-Frank Wall Street Reform and Consumer Protection Act added a new Section 21F to the Securities and Exchange Act of 1934 (the Exchange Act) which, among other things, prohibits companies from retaliating against whistleblowers who have reported concerns about securities law violations to the Securities and Exchange Commission (SEC) or who have assisted the SEC in any investigation or judicial or administrative action. To further clarify a company’s obligations under Section 21F of the Exchange Act, the SEC adopted Rule 21F-17, which provides that “no person may take any action to impede an individual from communicating directly with the [SEC] staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”

The SEC has taken administrative action against several companies that have entered into agreements with employees that contain confidentiality provisions that the SEC has alleged to violate SEC Rule 21F-17 by potentially “stifling” whistleblowers. The challenged agreements have included confidentiality agreements, severance agreements, and separation agreements, but any agreement that requires confidentiality obligations for the employee without providing an exception for whistleblowing reports to the SEC would arguably run afoul SEC Rule 21F-17.  In connection with an SEC cease and desist order, the SEC has indicated that including the following language in an agreement with a confidentiality provision would cause the agreement to comply with SEC Rule 21F-17:

“Nothing in this Confidentiality [Agreement] prohibits [the employee] from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation.  [The employee does] not need the prior authorization of the [the company] to make any such reports or disclosures and [the employee is] not required to notify the company that [the employee has] made such reports or disclosures.”     

Takeaways. Any company entering into a confidentiality agreement or other agreement with an employee, consultant or independent contractor that includes a confidentiality provision should consider including the DTSA notice described above to ensure that the company will enjoy the full benefit of the trade secret protection and remedies afforded by the DTSA. And companies (especially publicly traded companies) should consider including carve-outs for whistleblowers in their confidentiality agreements, such as the SEC-blessed disclosure described above, to ensure that those confidentiality agreements comply with SEC Rule 21F-17.  

Special thanks to CityBizList-Dallas for publishing this article here. 

What's in a Name (of a Texas company)?

"What's in a name? That which we call a rose
By any other name would smell as sweet."

- Spoken by Juliet in Romeo and Juliet (Act II, Scene II), by William Shakespeare

Sometimes, it seems the hardest part of forming a new company can be picking its name - as if all of the good names have already been taken! And historically, Texas law has done company organizers no favors by preventing companies from using names which are the same as, or "deceptively similar" to, names of existing companies doing business in Texas. At times, the Texas Secretary of State has taken a broad view of names which it considered deceptively similar - further narrowing the field of available names. But thanks to the 85th Texas legislature, picking a name for a Texas company is about to get a little easier.

House Bill 2856, which becomes effective June 1, 2018, will amend the Texas Business Organization Code (TBOC) to permit new filing entities (such as corporations, limited liability companies, limited partnership, etc.) and foreign entities registering to do business in Texas to use any name which is "distinguishable" from the names of all other companies formed, registered, or reserved for use in Texas.

In short, Texas companies will soon be able to have "deceptively similar" names, so long as the names are "distinguishable" from one another.

The change will make Texas law more uniform with the requirements established in other states, including the State of Delaware (see Section 102(a)(ii) of the Delaware General Corporation Law). It is hoped that this change will facilitate the formation of new business entities and expedite the registration of out-of-state business entities to transact business in Texas.

Perhaps all those newly formed or registered Texas companies will soon be humming a Jim Croce tune:

"Like the pine trees lining the winding road
I got a name, I got a name."

Then again, maybe not.

Regardless, I view this change as a positive one for Texas corporate law.

Surprising Quirks of Texas Nonprofit Corporation Governing Documents

How do the governing documents (certificate of formation and bylaws) of a Texas nonprofit corporation differ from those of a Texas for-profit corporation?

Quite a bit, actually. Below is a non-exclusive list of ways in which the certificate of formation and bylaws of a Texas non-profit corporation often differ from those of a Texas for-profit corporation. Some of these differences may be surprising to those who more frequently deal with for-profit corporations.

1.  Fewer restrictions on the name of a nonprofit corporation.  Section 5.054 of the Texas Business Organizations Code (TBOC) requires that the name of a Texas for-profit corporation include the word “company, corporation, incorporated, or limited” or an abbreviation of one of those words, such as “Inc.” or “Co.” There is no such requirement for a Texas nonprofit corporation.

2.  More restrictions on the purpose of a nonprofit corporation. Section 2.001 of the TBOC provides that a Texas for-profit corporation is generally permitted to have any lawful purpose. Section 2.003 of the TBOC restricts any Texas corporation (whether nonprofit or for-profit) from engaging in certain prohibited purposes, such as unlawful activities or operating as a bank, trust company, savings association, insurance company, cemetery association (with certain exceptions), or abstract or title company. Section 2.002 of the TBOC limits a nonprofit corporation to only one or more of the following purposes:

               a.  Serving charitable, benevolent, religious, eleemosynary, patriotic, civic, missionary,                              educational, scientific, social, fraternal, athletic, aesthetic, agricultural, or purposes;

               b.  Operating or managing a professional, commercial, or trade association or labor union;

               c.  Providing animal husbandry; or 

               d.  Operating on a nonprofit cooperative basis for the benefit of its members.

      Section 2.010 of the TBOC also restricts the permissible activities of a nonprofit corporation.

     Moreover, a nonprofit corporation desiring status as an organization exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code (the Code) must comply with Section 501(c)(3) of the Code, which requires nonprofit corporations to be “organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals.”

     In its Instructions to Form 1023 (Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code), the Internal Revenue Service (IRS) suggests including the following language as the nonprofit corporation’s purpose to ensure compliance with the purpose requirement in Section 501(c)(3) of the Code: “The organization is organized exclusively for charitable, religious, educational, and scientific purposes under Section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code.”

    3.  May have no members or no board of directors. Every for-profit corporation has at least one shareholder and at least one director, but under Section 22.151(a) of the TBOC, a nonprofit corporation need not have any members – it may be managed exclusively by the nonprofit corporation’s board of directors. Alternatively, Section 22.202 of the TBOC provides that a nonprofit corporation may have no board and may instead be managed exclusively by its members. If the nonprofit corporation elects to have no members or no board of directors, Section 3.009(1) of the TBOC requires a statement to that effect in the nonprofit corporation’s certificate of formation. 

4.  Must have at least three directors.  If a Texas nonprofit corporation elects to have a board of directors, it must name at least three people to serve as directors of the corporation under Section 22.204 of the TBOC. For-profit corporations are only required to have at least one director under Section 21.403 of the TBOC.

5.  Action by written consent of less than all directors.  Sections 6.201 and 21.415(b) of the TBOC permit the board of directors of a Texas for-profit corporation to take action by unanimous written consent in lieu of holding a formal meeting of the board, but only if the written consent is signed by all of the directors. On the other hand, Section 22.220 of the TBOC permits the board of a nonprofit corporation to take action by written consent signed by the number of directors necessary to take the action at a meeting in which all of the corporation’s directors are present (typically, a majority), if non-unanimous written consents are authorized in the nonprofit corporation’s certificate of formation or bylaws.

6.  Board committees generally must have at least two members and only a majority of the committee need be directors.  The board of a Texas for-profit corporation may establish a board committee composed of one or more directors under Section 21.416(a) of the TBOC. If a Texas nonprofit corporation wishes to establish a board committee, it must comply with Section 22.218(b) of the TBOC, which requires that the board committee consist of at least two persons. That Section permits persons who are not otherwise directors be named to the committee so long as at least a majority of the committee members are directors of the nonprofit corporation. A nonprofit corporation which is a religious institution may establish committees composed entirely of non-directors.

7.  President and Secretary cannot be the same person. A Texas for-profit corporation is required to have a President and a Secretary under Sections 21.417 of the TBOC, but such offices may be held by the same person under Section 3.103(c) of the TBOC. Conversely, Section 22.231(a) of the TBOC requires that the offices of President and Secretary of a Texas nonprofit corporation be held by different persons.

8.  Directors may vote by proxy.  Section 22.215 of the TBOC permits a director of a Texas nonprofit corporation to permit someone else to vote on the director’s behalf by granting a proxy to the other person, if proxy voting is permitted by the nonprofit corporation’s certificate of formation or bylaws. There is no analogous provision applicable to Texas for-profit corporations.  Directors of a for-profit corporation must vote for themselves - either in person, by written consent, or via electronic means, such as attending a meeting via teleconference.

9.  Liquidating distributions for charitable purposes. A Texas for-profit corporation exists for the financial benefit of its shareholders, and after all of its creditors have been paid or reserved for, liquidating distributions from a for-profit corporation are to be made to the corporation’s shareholders under Section 11.053(c) of the TBOC. On the other hand, nonprofit corporations exist only for one or more of the non-profit purposes described above. Upon liquidation of a nonprofit corporation, Section 22.304(a)(2) of the TBOC generally requires that any assets of the nonprofit corporation remaining after all creditors have been paid must be paid to one or more 501(c)(3) organizations. For the nonprofit corporation itself to qualify as a 501(c)(3) organization, the nonprofit corporation must include a provision in its certificate of formation requiring that liquidating distributions will be made for charitable purposes. 

The IRS’s Instructions to Form 1023 suggest the following language to meet the dissolution clause requirement in Section 501(c)(3) of the Code: “Upon the dissolution of this organization, assets shall be distributed for one or more exempt purposes within the meaning of Section 501(c)(3) of the Internal Revenue Code, or corresponding section of any future federal tax code, or shall be distributed to the federal government, or to a state or local government, for a public purpose.”

Texas Secretary of State’s Form of Certificate of Formation

“Mother, should I trust the government?” – Pink Floyd

That question answers itself, does it not?

I’m pretty sure Pink Floyd did not have form documents promulgated by the Texas Secretary of State’s office in mind when those lyrics were written. Nonetheless, it’s a helpful reminder that you often get what you pay for when it comes to free legal forms. Or perhaps the economic maxim of TANSTAAFL (“There ain't no such thing as a free lunch”) would be a more suitable reference.

 

Regardless, for those looking to incorporate a Texas for-profit corporation, I do not recommend using the Texas Secretary of State’s form of Certificate of Formation (Form 201), which is available on the Secretary of State’s website here.   

What’s so bad about Form 201?  Well, nothing is horrible about it – you could certainly file it (and pay the related filing fee) and have yourself a functioning Texas for-profit corporation. But an experienced Texas corporate lawyer is likely to suggest a using a form of Certificate of Formation that includes other helpful provisions in addition to the minimum required provisions dictated by the Texas Business Organizations Code (TBOC).

For example, Form 201 does not include any of the following provisions which are common for Texas for-profit corporations:

Director Exculpation.  As a rule, directors do not like to be subject to potential personal liability in connection with their service as a director of a corporation. So Texas corporations often elect to take advantage of Section 7.001 of the TBOC, which permits a Texas corporation to exculpate (relieve from liability) its directors from liability to the corporation or its shareholders. They may achieve director exculpation by adopting a director exculpation provision as part of the corporation’s Certificate of Formation. The basic Form 201 does not include a director exculpation provision, though one could elect to supplement the basic Form 201 by adding such a provision (or any of the other provisions discussed below). Our clients typically elect to include a director exculpation provision in their Certificate of Formation when forming a new Texas corporation.

Mandatory Indemnification of Directors and Advancement of Expenses. Likewise, directors typically think it’s a good idea to have corporations on which they serve indemnify (cover the costs of) directors from potential liability arising from their service as a director. While exculpation relieves directors of liability to the corporation and its shareholders, indemnification protects directors from claims made by third parties. Section 8.101(a) of the TBOC permits Texas corporations to indemnify its directors who gets sued by a third party because of their service as a director so long as the director (1) acted in good faith, (2) reasonably believed that his or her actions taken in an official capacity were in the corporation’s best interest, (3) reasonably believed that his or her actions in all other cases were not opposed to the corporation’s best interests, and (4) in the case of criminal proceedings, did not have reasonable cause to believe his or her conduct was unlawful.

Section 8.103(c) of the TBOC permits a Texas corporation to adopt a provision as part of its Certificate of Formation which makes permissive indemnification mandatory.  That means that once it has been determined that a director has met the 4-part standard described in the previous paragraph for a corporation to be permitted to indemnify a director, then the corporation would be required to provide such indemnification for the benefit of the director.

Of course, sometimes it is unclear at the outset of a suit against a director whether or not the director has met the standard for permissive indemnification. Meanwhile, the director may be incurring substantial expenses in defending himself or herself against third party claims. In cases where it has not yet been determined if the director has met the standard for permissive indemnification, Section 8.104(a) of the TBOC permits Texas corporations to advance expenses to directors in connection with their defense of a claim, so long as the director provides a written statement confirming that (1) the director believes he or she has met the standard for permissive indemnification, and (2) the director will repay any expenses advanced if it is ultimately determined that he or she has failed to meet the standard for permissive indemnification.    

Section 8.104(b) of the TBOC permits corporation to adopt a provision in part as part of its Certificate of Formation requiring the corporation to advance expenses to directors who have provided the written confirmation described in the previous paragraph. As one might expect, directors of Texas corporations typically think it is a good idea to include such an advancement of expenses provision in the corporation’s Certificate of Formation.

Action by Written Consent of less than all Shareholders.   Let’s say you want to amend the corporation’s Certificate of Formation to change the name of the corporation. As with any other amendment to the Certificate of Formation, that change requires the approval of the corporation’s shareholders. If all shareholders are willing and able to sign a written consent approving the name change, then shareholder approval is fairly simple. But let’s further assume that all shareholders fully support the name change, but one of the shareholders, holding only 1% of the corporation’s outstanding shares of stock, is on vacation and is unable to sign a written consent approving the name change. What then? Well, if the name change is important and the corporation does not have a provision in its Certificate of Formation authorizing shareholder action by less than unanimous consent, the only way the corporation may change its name is to call a meeting of the shareholders to approve the name change. Such a meeting must be done in compliance with applicable notice, quorum, proxy, and other provisions of the corporation’s bylaws and relevant provisions of the TBOC. Finding a time and place convenient for an adequate number of shareholders to attend in person or by proxy may be difficult.  On the other hand, a corporation with a Certificate of Formation that includes a provision permitting shareholder action by less than unanimous written consent of its shareholders (as permitted by Section 6.202 of the TBOC) can very easily circulate a written consent to its shareholders requesting approval of the name change.  Once signed by a sufficient number of shareholders, the name change may proceed. 

Section 6.204 of the TBOC provides that a corporation need not provide advance notice to shareholders of shareholder action taken by written consent, so depending upon the advance notice of a shareholder meeting required in the corporation’s bylaws, the right of shareholders to take action by written consent can be important when timing is critical for a matter requiring shareholder approval.

Of course, that’s just of few of the possible Certificate of Formation provisions ignored by the Secretary of State’s Form 201. A Texas corporation might elect to include all sorts of other provisions in its Certificate of Formation, including provisions authorizing preferred stock, providing for preemptive rights, providing for cumulative voting rights, electing status as a “close corporation,” or adopting other provisions which may be appropriate for some Texas corporations.

Bottom line, careful consideration should be given to the options available to a new corporation before just grabbing Form 201 and filing away.

J.R. Ewing -Types Continue to Vex Courts and Corporate Law

Since the dawn of our legal system, courts have had to deal with the problem of the sneaky contracting party (think: J.R. Ewing from tv's "Dallas" - or to cite a more recent example, Rumpelstiltskin from tv's "Once Upon a Time").  You know the type - someone who tricks another party into signing a contract - only after signing the contract does the other party learn further information which, had it been disclosed at the time, the other party never would have agreed to the deal terms in the contract.

On the one hand, courts like to uphold contracts freely entered into by parties which are otherwise legally enforceable.

On the other hand, courts hate to permit contracting parties to get away with fraud or otherwise sneaky behavior.

I've blogged about this issue before here when the Texas Supreme Court tackled the case of the stinky restaurant. In that case, the court came out on the side of the duped tenant whose landlord failed to disclose that the space they were renting smelled like sewer gas.

Two recent corporate law cases decided in Delaware Chancery Court highlight this ongoing tension.

In Prairie Capital III, L.P. v. Double E Holding Corp., the court considered a case in which a company was sold based in large part upon falsified monthly sales information created by the seller. Unfortunately for the buyer, the stock purchase agreement included two key provisions: (1) one in which the buyer confirmed that it was relying exclusively on its own due diligence and the seller's representations and warranties in the agreement itself, and (2) a standard integration provision in which the parties agreed that the stock purchase agreement was the entire agreement of the parties (i.e., there were no oral agreements, side deals, etc.). Fortunately for the buyer, the seller also breached some expressed representations and warranties in the agreement itself, so the buyer's case was able to proceed against the seller on other legal theories.  Nonetheless, the court concluded that so-called extra-contractual misrepresentations by the seller could not be the basis of a fraud claim by the buyer. In the court's view, the buyer had adequately disclaimed reliance on any such extra-contractual statements, even though the buyer did not use any particular "magic words" to do so.

In FdG Logistics LLC, v. A&R Logistics Holdings, Inc. the court considered a case with almost identical facts as the Prairie Capital case but reached the opposite result - the buyer was permitted to pursue fraud claims against the seller. In that case, the seller was alleged to have made extra-contractual misrepresentations (i.e., misrepresentations other than those explicitly set forth in the representations and warranties section of the purchase agreement) in documents provided to the buyer during the due diligence period before the merger agreement was signed. Even though the merger agreement in question included a statement from the seller that it was not making any representations or warranties other than those explicitly set forth in the agreement itself and there was a standard integration (entire agreement) provision, the court ruled that there was not a clear disclaimer of reliance by the buyer in the merger agreement. Without such a clear disclaimer of reliance by the buyer, the buyer's fraud claims could proceed. The court admitted that it was splitting hairs, noting that statement by the seller that it is exclusively making certain representations and a statement by the buyer that it is exclusively relying on such representations seem "like two sides of the same coin." Nonetheless, because courts hate to permit parties to get away with fraud, it will only find an adequate disclaimer of reliance by a victim when such disclaimer is crystal clear.

It is easy to see the tension at work in these types of case. Courts want to allow sophisticated and well represented parties to set the terms of their own deals - and tailor the scope of the relevant representations and warranties upon which the parties relied. That sort of flexibility keeps parties from endlessly claiming to have relied upon all sorts of statements made outside of the contract itself. On the other hand, courts don't like the idea of rewarding those who commit fraud for their dishonesty and underhanded tactics, such as failing to disclose material facts that fall outside the scope of the representations and warranties in the agreement itself but are nonetheless important to the other party.    
                
Takeaways:

The takeaways here are fairly obvious:

• If you are a buyer and you relied upon a particular piece of information received from the seller in making a decision to enter into a transaction, you'll want to have the agreement say so explicitly in the seller's representations and warranties in the agreement itself. Then, you won't have to worry about whether or not the court will tolerate extra-contractual misrepresentation or fraud by the other party in your particular case.
• If you are a seller, and wish to minimize your exposure for alleged extra-contractual misrepresentations, you'll want to include an explicit disclaimer from the buyer of reliance on any other statements from the seller other than those in the agreement itself. And after FdG Logistics, we now know that such disclaimer should be written such that it reads as a statement from the buyer's perspective disclaiming reliance, not just a statement from the seller that it is not making any other representations or warranties.  And even though courts often claim they aren't looking for any particular "magic words," sellers should seek to include the magic words "disclaim reliance" on other statements of the seller or seller's representatives. PUTTING THE DISCLAIMER OF RELIANCE IN BOLD AND ALL CAPS IS ALSO A GOOD IDEA. 

But regardless of how carefully contracts are drafted by the parties, society will always have parties seeking to game the system by complying with the letter but not the spirit of agreements, and courts will have to decide whether to let them get away with those games or not.

The Divisive Merger: A Powerful Tool in Texas

What the heck is a divisive merger?

A divisive merger is a merger involving splitting up one company up into two or more new companies.

It's a potentially powerful tool available to Texas companies under the Texas Business Organizations Code (TBOC).  And it's a tool that is not available in most other states, including Delaware.

The concept of the divisive merger is baked into the definition of the word "Merger" in Section 1.002(55)(A) of the TBOC, which defines "Merger" to include, among other transactions, "the division of a domestic entity [such as a Texas LLC or Texas corporation] into two or more new domestic entities or other organizations or into a surviving domestic entity and one or more new domestic or foreign entities or non-code organizations."

So why is a divisive merger so powerful?

Let's say you and another person own Texas Widgets, Inc., a Texas corporation that does business in two Texas cities - Dallas and Fort Worth.  Now say you wish to split the business in half, with one shareholder taking the Fort Worth operations (which will continue in business as Cowtown Widgets, Inc.) and the other partner taking the Dallas operations (which will continue in business as Big D Widgets, Inc.).  You'll just assign half of the company's assets to one shareholder or the other, right? But wait - what if one or more of the company's leases, permits, licenses, contracts or other instruments setting forth the company's legal rights include non-assignment provisions that prohibit the company from conveying rights from Texas Widgets to Cowtown Widgets or Big D Widgets?  Is the split-off transaction doomed without getting the consent of the company's landlord(s) or other parties?  Maybe not.  Depending upon the exact language prohibiting assignment in the contract or other document, the company may be able to enter into a divisive merger to split up the company's assets without triggering the anti-assignment provisions which would otherwise require the company to obtain another party's consent. If a company merges, technically no assignment has taken place - legally, it is as if the surviving company always owed the asset or other legal rights.

Even if your company is not a Texas entity, you might be able to convert or merge your company into a Texas entity, then take advantage of the divisive merger statute to complete a transaction with similar hurdles to overcome.

And there may be other situations where a divisive merger makes sense - perhaps where taking the time, effort, and expense of conveying individual assets might be unduly costly (such as conveying dozens of working interests in oil and gas properties in numerous counties throughout Texas). A merger might be able to immediately vest title to assets to a newly merged company as a short-cut to individually conveying a series of individual assets.    

Although the divisive merger can be a valuable tool, it can also be a sword used against you by savvy operators.  So when drafting anti-assignment provisions in business contracts, you might consider if the other party might be able to use a divisive merger as an end-run to a anti-assignment provision that permits mergers but not assignments by the other party.

Identical or Deceptively Similar Entity Names in Texas - A Change For the Better?

Among the corporate law changes enacted by the 2015 Texas Legislature is a new requirement that consents to use similar entity names must now be notarized prior to filing.

The Texas Business Organizations Code (TBOC) prohibits each Texas entity (and each out-of-state entity registering to do business in Texas) from having a name that is the same as, or deceptively similar to, an existing Texas entity (or an existing out-of-state entity registered to do business in Texas). Texas law has long recognized an exception to that rule if the existing entity consented to the use of a similar name in writing. Under the amended law, a consent to use a similar name must be notarized and filed with the Texas Secretary of State. This change impacted Section 5.053, 5.102 and 5.153 of the TBOC.

According to the bill's author, the purpose of this change was to protect existing Texas companies from new entities who might forge documents claiming that they have the consent of the existing entity to the use of a similar name when in fact no consent has been given.

While I agree that the notarization requirement does make it more difficult for a new entity to forge and file a consent to the use of a similar name, I am skeptical that this change in law was actually necessary or an improvement on existing law.  I have not heard or read about an epidemic of Texas companies who have suffered forged consents to the use of similar names. And existing law already made it a crime for a party to file an instrument known to be materially false with the Texas Secretary of State's office. Section 4.008 of the TBOC makes such a false filing a Class A misdemeanor - unless the offender had the intent to defraud or harm another, in which case the offense is a felony.

The bill's author acknowledged in the Bill Analysis submitted with this bill that a forgery is a crime, but argues that a forgery victim "likely will have a difficult time convincing a law enforcement agency to prosecute the crime."  That may well be the case - our law enforcement officials may choose to employ their limited resources in prosecuting other crimes. But Section 4.007 of the TBOC already grants forgery victims a private right of action against any party who signs or files a forged document in violation of Section 4.008 of the TBOC.

The new notary requirement will add a layer of administrative hassle to both new entities requesting consents and existing entities granting consents.  I can imagine a scenario where an existing entity might be willing to grant its consent, but not at the cost of locating and engaging a notary to witness a consent signing.

Nonetheless, the notary requirement is now law in Texas.

Talking Two-Step Tender Offer Transaction Techniques for Texas Targets

Are we living in the Golden Age of the two step tender offer acquisition technique?  Probably so - last year, the process got a whole lot easier for buyers seeking to acquire publicly traded M&A targets incorporated in Texas.

What is Two Step Tender Offer?

A buyer seeking to acquire all of a public company (a Target) may either:
(1) propose a one-step merger - which generally must be approved by the Target's shareholders; or
(2) propose a tender offer - in which case the buyer offers to buy at least a majority of the Target's shares (STEP 1); followed by a "squeeze-out" merger in which a successful vote of the Target shareholders is already assured (because that was the minimum number of shares purchased in the tender offer) (STEP 2).

Historic Second Step Merger Thresholds Requirements

Historically, both the Delaware corporate law (Section 253 of the Delaware General Corporation Law (DGCL)) and Texas corporate law (Section 10.006 of the Texas Business Organizations Code (TBOC)) required that the buyer acquire at lease 90% of the Target shares after the tender offer in order to enter into a short-form merger.  Qualifying for short-from merger treatment was important because the short-form merger did not require a vote of the Target shareholders. It was presumed that such a vote would be meaningless because 90% of the shareholders would doubtlessly vote to approve the merger.

Shareholder merger votes cost time and money because state corporate law and SEC proxy voting rules require the preparation or a detailed disclosure document, an SEC review, and distribution of the disclosure document to the Target's shareholders.  

New Second Step Merger Threshold Requirements

Eventually, Delaware realized that a merger vote by the Target's shareholders would be equally meaningless if the buyer acquired at least a majority of the Target shares (or whatever the minimum number of shares otherwise necessary to approve a long-form merger under the DGCL and the corporation's certificate of incorporation).  So in 2013, Delaware adopted a new subsection (h) to Section 251 of the DGCL which permits the buyer to merge with a publicly traded Target (or a Target with more than 2,000 shareholders) following a tender offer under certain conditions.

Effective September 1, 2015, the State of Texas adopted new sub-sections (c), (d) and (e) to Section 21.459 of the TBOC, thereby granting public companies formed in Texas the right to merge without a shareholder vote following a successful tender offer.  The (relatively) new Texas rule is substantially similar to Section 251(h) of the DGCL.

Why do buyers like Two Step Tender Offers?

Simply put, a two step tender offer is a whole lot faster and cheaper than an acquisition via a traditional one-step merger, especially when the buyer is paying cash (rather than stock) to the Target's shareholders. This is because the SEC review process is generally more limited and more expedited for a tender offer than it is for a one-step merger.

According to a recent a survey conducted by the M&A Market Trends Subcommittee of the Mergers & Acquisitions Committee of the Business Law Section of the American Bar Association (ABA), from the announcement of a public M&A deal until the closing of the deal, the average cash tender offer takes 49 days, the average stock tender offer takes 54 days, the average cash merger takes 129, and the average stock merger takes 199 days.  (Thanks to Richard E. Climan, Joel I. Greenberg, and Claudia K. Simon for providing the survey data in a recent webcast sponsored by the ABA).  

What are the requirements to use the Two Step Tender Offer?

In order for a buyer to take advantage of Section 21.459(c) of the TBOC to obtain a shareholder vote waiver following a tender offer, certain conditions must be met, including the following:

1. The Target's certificate of formation cannot prohibit merger without a shareholder vote;
2. The Target's shares must be listed on a national securities exchange or held of record by at least 2,000 shareholders;
3. The plan of merger must expressly: (A)  permit or require the merger to be effected under Section 21.459(c) of the TBOC; and (B) provide that the merger be effected as soon as practicable following the consummation of the tender offer;
4. The tender offer must be for all of the outstanding voting shares of the corporation on the same terms provided in the plan of merger, except that the offer may exclude shares owned by: (A)  the Target corporation; (B) the buyer; (C) any person who owns, directly or indirectly, all of the ownership interests in the buyer; or (D) any direct or indirect wholly owned subsidiary of any of the foregoing persons;
5. The buyer must acquire in the tender offer (together with shares held prior to the tender offer) a number of shares of the Target equal at least the percentage of the shares that, absent Section 21.459(c), would be required to approve the plan of merger under both: (A) the TBOC (generally, two-thirds (2/3) of the shares); and (B) the certificate of formation of the Target;
6. The buyer must merges with or into the Target pursuant to the plan of merger; and
7. Each outstanding share of the Target not purchased in the tender offer must be converted or exchanged in the merger into the same consideration as those selling in the tender offer.

Kudos to the Texas Legislature for following Delaware's lead in modernizing the two step tender offer rules for Texas Targets.

German Efficiency?

If you have ever wondered why it is necessary to sign so many sheets of paper when buying or selling a house in the United States, just know that entering into a contract could be worse in other parts of the world.

I've been enjoying reading "Working with Contracts - What Law School Doesn't Teach You," by Charles M. Fox.  The book provides a really good summary of what we corporate lawyers do every day.  It also includes some interesting tidbits, such as this nugget on contractual formalities on page 159:

"[M]any German agreements must be read aloud from beginning to end (including schedules) by a notary, and some must be bound by a ribbon which is affixed to both the cover page and the back page with a waxed seal."

Apparently, the efficiency famously exhibited by German engineers is not shared by German lawyers!

Little Known Facts: LLCs and Statutory Attorney's Fees in Texas

Here's a Little Known Fact about an advantage of operating as a limited liability company (LLC) in Texas.

LLC's are not subject to Section 38.001 of the Texas Civil Practice and Remedies Code, which permits statutory recovery of reasonable attorney's fees from individuals and corporations for certain claims, including claims for an oral or written contract.

Section 38.001 of the Texas Civil Practice and Remedies Code provides as follows:

"A person may recover reasonable attorney's fees from an individual or corporation, in addition to the amount of a valid claim and costs, if the claim is for:
(1) rendered services;
(2) performed labor;
(3) furnished material;
(4) freight or express overcharges;
(5) lost or damaged freight or express;
(6) killed or injured stock;
(7) a sworn account;  or
(8) an oral or written contract."

A 2014 case decided by the Houston Court of Appeals (Fleming v. Barton) has confirmed that the statute means what it says - that only individuals and corporations (not LLCs, limited partnerships (LPs), limited liability partnerships (LLPs) and other entities) may be liable under Section 38.001. Relying upon the plain language of the statute, that court denied a claim for legal fees under Section 38.001 against Fleming & Associates, L.L.P. because it was a limited liability partnership.

But wait a second, why wouldn't a limited liability company, limited liability partnership, or limited partnership who lost a breach of contract lawsuit face the same liability as a natural person or a corporation that was guilty of the exact same breach?

It arises as a quirk of Texas's statutory codification process.  When the Civil Practice and Remedies Code was adopted in 1986, it replaced the existing Article 2226 of the Texas Revised Civil Statutes, which permitted recovery of legal fees against “a person or corporation.”  The then-recently adopted Texas Code Construction Act had defined "person" broadly to include any legal entity, including governmental entities.  So in seeking to avoid substantive changes to Article 2226, the drafters chose the word "individual" instead of "person" to clarify that governmental entities could not be subject to liability under Section 38.001.

This strikes me as a great area of the law for the Texas legislature to step in and clarify that LLCs, LPs, LLPs, and other business entities (perhaps excluding governmental entities) should face the same liability under Section 38.001 as individuals and corporations.

Note that the issue discussed above relates only to statutory attorney's fees provided for by Section 38.001 of the Texas Civil Practice and Remedies Code.  Nothing in that section prevents an LLC or other entity to agreeing to cover another party's attorney's fees pursuant to a contract.

The Endless Shareholder Agreement

Congratulations to the Texas legislature for authorizing the Endless Shareholder Agreement.

Virtually every closely held private corporation should have a shareholder agreement to address, if nothing else, restrictions on transfer of the shares. Otherwise, you may find that one of your fellow shareholders has transferred his shares of the company's stock to the company's biggest competitor, or worse yet, your ex-wife!  Shareholder agreements are especially important for a corporation taxed as an S-corporation, because a transfer of shares to a person who is not eligible to be a shareholder of an S-corp can terminate the company's S-corp status and result in adverse tax consequences for the company's shareholders. Shareholder agreements can also address other issues, such as establishing a procedure for shareholders to buy or sell each other's shares (i.e., a buy-sell agreement), modifying shareholders' statutory voting rights or strengthening shareholders' information rights.

But for shareholder agreements adopted prior to September 1, 2015, there has been a trap for the unwary.  Under Section 21.102 of the Texas Business Organizations Code (TBOC),  shareholder agreements were only effective for ten years unless the agreement provided otherwise. Thanks to recently adopted S.B. No. 860, which amends Section 21.102 of the TBOC, however, the default assumption for shareholder agreements will flip on September 1, 2015.  Shareholder agreements adopted after that date will be effective forever unless the shareholder agreement provides otherwise. Shareholder agreements adopted before that date will continue to be subject to the 10-year limit under the prior law, unless the agreement provides otherwise.

The new law is probably more consistent with shareholders expectations and is therefore a step forward for Texas business law.       

37th Annual UT-CLE Securities Regulation Conference

As longtime readers of this blog will know, I am a big fan of The University of Texas School of Law’s Continuing Legal Education’s Annual Conference on Securities Regulation and Business Law. I am honored to be serving as a Presiding Officer at the next conference (the 37th), which will take place February 12 and 13, 2015, at the Cityplace Conference Center in Dallas.

The conference is one of the state’s premier securities law events, with distinguished faculty, including representatives of the U.S. Securities and Exchange Commission, the Texas State Securities Board and FINRA.  Next year's conference will include presentations on private placements, crowdfunding, M&A brokers, public offerings, private investment funds, proxy contests, minority shareholder oppression, director fiduciary duties, and more.  What could be more fun?!

I strongly encourage corporate and securities lawyers to attend.

Third Party Rights in a Company or Partnership Agreements

Does Texas law permit a third-party who is not a party to a company agreement or partnership agreement of a Texas limited liability company, limited partnership or general partnership to nonetheless claim rights under such agreements?

Yes, effective September 1, 2013, Texas amended Sections 101.052 (regarding LLC agreements) and added a new Section 154.104 (regarding general and limited partnership agreements) of the Texas Business Organizations Code to specifically authorize company agreements and partnership agreements to provide such third-party rights if the members or partners so choose to include them in the company agreement or partnership agreement.

According to the author of S.B. 847, which effected these amendments, "While this principle is already implicit in the law, [the bill] makes it explicit in order to eliminate any confusion and to better protect third parties involved in the agreements."

So what third parties might request rights be reflected directly in company agreements and partnership agreements?  Any party that has an interest in the company or partnership or its operation or management, including banks and other lenders, landlords, and franchisors, among others.

Good Standing Opinion Guidance

Business lawyers are often asked to issue legal opinions in connection with the closing of substantial business transactions.  One opinion frequently requested is that the lawyer's client is in "good standing."

Historically, that was one of the easiest opinions to give because if a company was in good standing (meaning that the company's franchise tax reports had been filed and all franchise taxes owed had been paid) the Texas Comptroller's office would issue a Certificate of Account Status certifying that the company was in good standing.

Things got a lot more complicated in May 5, 2013, when the Comptroller's office ceased issuing Certificates of Account Status.  As I've previously blogged about here, the Comptroller's office now makes available on its website an electronic report labeled "Franchise Tax Account Status."  If the company's Right to Transact Business in Texas is shown as "Active" on that page, the company is in good standing.

All this presented business lawyers a bit of a dilemma - is it appropriate to opine that a company is in good standing if one could not obtain a Certificate of Account Status from the Comptroller? 

Fortunately, the Legal Opinions Committee of the State Bar of Texas has answered this question by issuing Supplement No. 6 to the Report of the Legal Opinions Committee Regarding Legal Opinions in Business Transactions: Statement on the Procedure for Good Standing Certificates issued by the Texas Comptroller of Public Accounts, which is available here.

According to the Supplement, an "Active" report (along with a Certificate of Existence from the Texas Secretary of State) is sufficient evidence for a Texas business lawyer to issue a good standing opinion.

Whew, glad we got that settled!

The Death of Minority Shareholder Oppression Claims in Texas?

Bad news for minority shareholders in Texas.  On June 20, 2014, the Texas Supreme Court delivered the opinion in the case of Ritchie v. Rupe, which is available here.  In one of the most important business law cases decided by the Texas Supreme Court in recent memory, the Court ruled (in a 6-3 decision) that:

(1)   There is no common law cause of action for “minority shareholder oppression” in Texas;

(2)   While shareholder oppression can be asserted under Texas’s court-appointed rehabilitative receivership statute (Section 11.404 of the Texas Business Organizations Code), receivership is the sole remedy for such shareholder oppression (not a buy-out of the minority shareholder being oppressed); and

(3)   The definition of shareholder oppression under the receivership statute is very narrow – it requires that the directors “abuse their authority over the corporation with the intent to harm the interests of one or more shareholders, in a manner that does not comport with the honest exercise of their business judgment, and by doing so create a serious risk of harm to the corporation.”

The facts of the Ritchie v. Rupe case involved alleged oppression of an 18% shareholder of a privately held Texas corporation because the majority shareholders who controlled the corporation, among other things, (i) offered to buy out the minority shareholder at a price representing a significant discount to the shares’ fair market value, and (ii) refused to meet and exchange information about the corporation with other potential buyers of the minority shareholder’s shares, thereby making the shares virtually impossible to sell as a practical matter.  The lower courts determined that the facts supported a claim for minority shareholder oppression and required the corporation’s majority shareholder to purchase the minority shareholder’s shares for a redemption price of $7.3 million.  The Texas Supreme Court reversed that ruling on the basis described above, but it left open the possibility that the minority shareholder might still pursue a potential claim against the controlling shareholder for breach of fiduciary duty.

The Ritchie v. Rupe case overturned several lower court opinions and opinions in other states which generally allowed claims for shareholder oppression merely if the majority shareholder’s conduct either (1) substantially defeats the minority shareholder’s reasonable expectations in joining the company (the “reasonable expectations” test), or (2) (i) is “burdensome, harsh and wrongful,” (ii) involves “a lack of probity and fair dealing in the affairs of a company to the prejudice of some of its members,” or (iii) involves “a visible departure from the standards of fair dealing and [fair play]” (the “fair dealing” test).

The bottom line is that it is now much more difficult for a Texas minority shareholder to successfully bring shareholder oppression claims in Texas.

The take-away is that now it is even more important than ever for shareholders of privately held companies (especially minority shareholders) to enter into shareholder agreements to protect their rights and to provide for a contractual mechanism for a shareholder to exit the company.

Veil-Piercing Success Rate

Corporation and other limited liability business entities are often formed for the purpose of insulating the business's owners from liability. 

For example, a corporation engaged in a business that involves a high risk of liability, such as hauling toxic waste, might choose to operate the high-risk business through a wholly-owned subsidiary.  If the toxic waste spilled, injuring numerous people, the corporation would expect that only the subsidiary would be subject to potential liability for the spill and that the parent corporation's other assets would be free from claims by the injured parties.

An exception to the general rule of limited liability are in cases where the injured party successfully "pierces the corporate veil" thereby making the corporation's owners liable for the debts of the corporation.  Veil-piercing generally applies only in unusual cases, such as when the corporation's corporate structure is designed or used in a fraudulent way. 

Section 21.223 of the Texas Business Organizations Code provides that the owners of a Texas corporation cannot be liable for either (1) the corporation's contractual obligations on the basis of claims that the owner as the alter ego of the corporation or on the basis of actual or constructive fraud, a sham to perpetrate a fraud, or other similar theory, unless the corporation is used for the purpose of perpetrating an actual fraud on the obligee primarily for the direct personal benefit of the owner, or (2) any obligation of the corporation on the basis of failure to follow corporate formalities.

Although veil-piercing is the exception rather than the rule, an article in The Business Lawyer (November 2011 - citing a report published in 2009) noted that 23.5% of reported appellate decisions in Texas involving parent-subsidiary piercing claims were successful.  That high percentage of success probably reflects the fact that only the strongest veil-piercing claims are pursued all the way through  to appellate courts.     

New Assumed Name Certificate Form

Good news for businesses operating in Texas under an assumed name: the assumed name certificate is now shorter as easier to complete!

As many readers probably know, Section 71.101 of the Texas Business and Commerce Code requires any company regularly conducting business in Texas under a name other than its legal name to file an assumed name certificate with the Texas Secretary of State and the appropriate Texas county.

Thanks to Senate Bill 699 of the 83rd Texas Legislature, effective September 1, 2013, the State of Texas no longer requires an assumed name certificate to include the address of the company's registered office or similar information for company's who are not required to maintain a registered office in Texas.  The only address now required to be included is the principal office of the company, whether such office is inside or outside of Texas.

The Texas Secretary of State's office has prepared a new form of assumed name certificate, which is available here.

This is a change for the better for Texas law because the older, longer information requirements for assumed name certificates were redundant and therefore did not seem to serve any meaningful purpose.

E-Corporate Law Presentation

I am pleased to announce that I will be making a presentation to the Corporate Counsel Section of the Tarrant County Bar Association on December 4, 2013.  The presentation is titled "E-Corporate Law" and tackles issues related to electronic contracting and taking corporate actions by electronic means.  This will be an updated version of a similar presentation I made in 2011 to the UT-CLE Annual Conference on Securities Regulation and Business Law.

Jamie Bryan will be co-presenting with a discussion of Protecting Communications.

Doing Good and Doing Well: Texas Corporations with a Social Purpose

The wall between for-profit and not-for-profit corporations in Texas may be tumbling.

Historically, under Texas corporate law, one could either:

(1) form a for-profit corporation, in which case the corporation ans its management team was expected to maximize shareholder value by maximizing profits for the benefit of the corporation's shareholders; or

(2) form a not-for-profit corporation, in which case the corporation and its management team was expected to pursue one or more social goals (such as enhancing education, culture or the arts) without paying any dividends or other economic benefits to any particular owner or investor.

The so-called "social entrepreneurship" movement has objected to this dichotomy.  Why shouldn't a corporation be allowed to pursue both profits and social benefits so long as the stockholders approved of the approach, this movement asked.  Under prior Texas law, officers and directors of a for-profit corporation might risk liability for breaching their fiduciary duty to the corporation if they pursued a social purpose at the expense of profits.  

But Texas law has become more social entrepreneurship-friendly.  Effective September 1, 2013, Section 3.007 of the Texas Business Organizations Code (TBOC) has been amended to authorize Texas corporations to include a social purpose in their certificates of formation.

Under the new law, "social purpose" is defined as: "promoting one or more positive impacts on society or the environment or of minimizing one or more adverse impacts of the corporation's activities on society or the environment. Those impacts may include:
                      (A)  providing low-income or underserved individuals or communities with beneficial products or services;
                      (B)  promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business;
                      (C)  preserving the environment;
                      (D)  improving human health;
                      (E)  promoting the arts, sciences, or advancement of knowledge;
                      (F)  increasing the flow of capital to entities with a social purpose; and
                      (G)  conferring any particular benefit on society or the environment."

Section 21.101(a) of the TBOC now permits shareholders of a for-profit corporation to enter into an agreement governing the manner in which the corporation may exercise its power pursue a social purpose permitted by its certificate of formation.

Finally, Section 21.401 of the TBOC now authorizes directors and officers of a for-profit corporation to consider the social purpose of the corporation in discharging their duties to the corporation if such social purpose is stated in the corporation's certificate of formation.

It will be interesting to see how many Texas for-profit corporations take advantage of this new flexibility permitting Texas corporations to seek to both "do good" and "do well."