Fort Worth, Texas Magazine 2014 Top Attorney List

I'd like to thank the good folks at Fort Worth, Texas magazine for including me on their 2014 Top Attorney List.  I was nominated in the Securities law category.  I am honored to be included on a list with some terrific attorneys.  They held a reception for the winners at the Fort Worth Club last night, which was a lot of fun.  Here's what the entrance to the reception looked like:

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.

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.