Texas A&M University Law School Adjunct Professor

Last month I started teaching a class on Entrepreneurship Law as an Adjunct Professor at Texas A&M University Law School as part of its Entrepreneurship Law Clinic.  It's been a great experience so far, and I've been very impressed with the students and faculty at the law school. The law school is a real asset to the Fort Worth/Tarrant County legal community. 

Of course, teaching a law school class has many benefits, but my favorite part so far might be the cookies that we were offered at adjunct professor orientation night. Take a look:

  Gig 'Em!

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.

The Multi-Million Dollar E-mail

How can an e-mail create a multi-million dollar problem?  Well, many ways, I suppose.

One potential problem is if the e-mail is deemed to be a signed, written contract under Texas's Uniform Electronic Transactions Act.  It can happen more easily than you might think.

I recently wrote an article on this topic for the Fort Worth Business Press which is available here.

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.     

Buyer Beware: Texas Comptroller Certificate of No Tax Due

If you are buying the assets of a Texas business (but not assuming any of its liabilities), you cannot be held liable for any of the business's liabilities, correct?

Wrong. A potential source of successor liability for the purchaser of a business is Section 111.020 of the Texas Tax Code.

If a business or stock of goods (inventory) of a business is sold, the purchaser will be liable for the seller’s taxes due to the Texas Comptroller’s office (such as sales, excise, use and franchise taxes), unless the purchaser withholds a portion of the purchase price equal to the amount the seller owes to the Texas Comptroller’s office (including, if applicable, any interest or penalties thereon). 

Fortunately, the purchaser of a business may protect itself from successor liability under Section 111.020 of the Texas Tax Code by requesting that the Comptroller issue a certificate stating that no tax is due from the seller.  Surprisingly enough, that certificate is called a "Certificate of No Tax Due"!

The Comptroller must issue the Certificate of No Tax Due (or a statement setting forth the amount of taxes due) within 60 days after receiving the request (or within 60 days of the seller making its records available for audit), but in either event within 90 days after the date of receiving the request.

The Texas Comptroller’s office has a useful guide to Certificates of No Tax Due called “Tax Information:  Buying an Existing Business” which is available here.

2014 TECH Fort Worth IMPACT Awards

Yesterday, I attended the 2014 IMPACT Awards celebrating TECH Fort Worth and its technology-based entrepreneurial clients.  As usual, it was a great event.  Actually, it is one of my favorite events of the year. The IMPACT Awards highlight the special things going on at TECH Fort Worth and in the entrepreneurial community.

As you may know, TECH Fort Worth is a non-profit organization that assists entrepreneurs in our region with launching and growing emerging technology companies. They identify start-up companies with technologies that have a high potential and coach them toward success.

This years awards winners were:

(1)  E-mist Innovations Inc., who has developed a superior disinfectant misting delivery system that makes sprays cling to surfaces;

(2)  E-3 Water LLC, who has developed a mobile wastewater treatment system that purifies wastewater in a quick, powerful, reliable and enclosed (odorless) manner; and

(3)  SurgeryLink, who has developed a software platform for surgery scheduling and surgery team coordination that is simple, accurate, reliable and, importantly, compliant with the medical information security guidelines mandated by HIPAA.

It is inspiring to see these creative and courageous entrepreneurs making our world a better place.

Congratulations to this year's winners and to high-tech start-up companies everywhere!