HBA-MSH, CCH H.B. 327 77(R)BILL ANALYSIS


Office of House Bill AnalysisH.B. 327
By: Bosse
Business & Industry
4/27/2001
Committee Report (Amended)



BACKGROUND AND PURPOSE

The Business Organizations Code (code) is a joint, substantive codification
project of the Business Law Section of the State Bar of Texas and the
Office of the Secretary of State.  The code has been under development
since 1995.  The code was introduced as H.B. 2681 late in the 1999 Texas
Legislature, passed by the House Business & Industry Committee, but stalled
in the House Calendars Committee.  With some changes, this bill is
essentially the same as H.B. 2681. 

 
The code is a substantive codification.  The Codification Committee of the
State Bar's Business Law Section had primary responsibility for drafting
and organizing the code.  Representatives of the Office of the Secretary of
State were active participants as members of this committee.  Although the
code represents a nonsubstantive codification of existing statutes,
substantive changes and improvements have been made to effect the
additional goals of modernizing, simplifying, and standardizing provisions
of the code.  All intended substantive changes are described or identified
in the analysis. 

The provisions of this code are revisions of comparable provisions found in
the Texas Business Corporation Act (TBCA), Texas Non-Profit Corporation Act
(TNPCA), Texas Miscellaneous Corporation Laws Act (TMCLA), Texas Limited
Liability Company Act (TLLCA), Texas Revised Limited Partnership Act
(TRLPA), Texas Real Estate Investment Trust Act (TREITA), Texas Uniform
Unincorporated Nonprofit Association Act (TUUNAA), Texas Professional
Corporation Act (TPCA), Texas Professional Association Act (TPAA), the
Texas Revised Partnership Act (TRPA), the Cooperative Association Act
(CAA), and other existing provisions of Texas statutes governing domestic
entities. 

The proposed effective date of the code is January 1, 2002 to allow ample
time to educate and inform all interested persons.  The new code generally
does not apply to an existing entity prior to January 1, 2006, unless the
entity expressly elects to adopt the code as its governing statute.  

RULEMAKING AUTHORITY

It is the opinion of the Office of House Bill Analysis that this bill does
not expressly delegate any additional rulemaking authority to a state
officer, department, agency or institution. 

ANALYSIS

Section 1 of this bill contains the new Business Organizations Code.
Sections 2 through 15 contain conforming amendments to existing statutes.
Section 16 repeals certain statutes.  Section 17 of this bill specifies the
effective date of the bill. 

The code reorganizes, renumbers, revises and otherwise codifies the
existing statutes of Texas governing for-profit and nonprofit, private
sector entities.  The code does not include quasi-governmental
organizations and corporations, including municipal corporations.  

The code adopts a "hub and spoke" organizational approach.  Under this
approach, provisions common  to all entities are included in a central
"hub" of the code, in this case Title 1 - General Provisions.  Outside
Title 1, separate "spokes," or Titles 2 through 7, contain provisions for
different types of entities which are not common or similar among the
different entities. 

In the current Texas statutes, the same terms have different meanings in
different statutes.  Common definitions have been included at the beginning
in Chapter 1 of this code to define terms that are used throughout the code
and especially in Title 1.  In this way, the terms are used more
consistently across the different types of entities. 

I. Title 1 - General Provisions

The "hub" provisions of Title 1 eliminate many of the redundancies that
exist in current Texas statutes governing various private-sector entities.
The differences in procedures and language among the various statutes are
harmonized and standardized. 

a. Chapter 1-Definitions and Other General Provisions

Chapter 1 contains provisions relating to definitions, construction of the
code and determination of applicable law.  Chapter 1 introduces new
terminology primarily for the purpose of the "hub" provisions of Title 1.
Because Title 1 applies to all entities, common terms used for all entities
are added. 

The new term "organization" is intended to refer in the broadest sense to
any kind of entity or organization regardless of jurisdiction of formation
or purpose.  One subset of an "organization" is an "entity," which is
defined to be either a "domestic entity" or a "foreign entity."  A
"domestic entity" means an organization formed under or the internal
affairs of which are governed by the code.  A "foreign entity" means an
organization the governing documents of which are adopted under a
jurisdiction of formation other than Texas.  "Organizations" formed under
Texas law other than the code, for example banks and insurance companies,
are neither domestic entities nor foreign entities. 

The universe of "domestic entities" is further divided into "filing
entities" and "nonfiling entities."  A "filing entity" includes a domestic
corporation, limited partnership, limited liability company, professional
association, professional corporation, cooperative, or real estate
investment trust.  These entities require a filing with the Secretary of
State or a county clerk's office as a condition to formation.  A "nonfiling
entity" includes a domestic general partnership, nonprofit association and
joint stock company.  These domestic entities do not require formal filings
as a condition to formation. 

The universe of entities is further divided into "for-profit entities" and
"nonprofit entities."  A "nonprofit entity" is an entity that is organized
solely for one or more of the nonprofit or charitable purposes specified in
Section 2.002 and includes a nonprofit corporation and nonprofit
association. 

Each entity has either "owners" or "members" which in turn have "ownership
interests" or "membership interests", respectively, in the entity.
For-profit corporations, real estate investment trusts and partnerships
have "owners", while nonprofit corporations and unincorporated nonprofit
associations have "members". Limited liability companies, cooperative
associations and professional associations have both "members" and
"owners", and these terms are used interchangeably for these kinds of
entities. 

A "filing entity" is formed by filing a "certificate of formation", which
replaces the existing articles of incorporation, articles of organization,
certificate of limited partnership or similar document.  A "foreign filing
entity" is a foreign entity that is required to register under the code to
transact business in Texas. 

The certificate of formation and the other documents or agreements adopted
by the entity to govern the formation or internal affairs of the entity
constitute the "governing documents" of the domestic entity. Similarly, for
a foreign entity, the instruments, documents and agreements that govern its
formation or internal affairs constitute its "governing documents".  The
person or group of persons who are entitled to manage and direct the
affairs of an entity under the code and the governing documents of the
entity is  referred to as the "governing authority".  This term refers, for
example, to the board of directors of a corporation, the trust managers of
a real estate investment trust, the general partners of a partnership, the
managers of a limited liability company that is managed by managers or the
members of a limited liability company that is managed by its members.  A
"governing person" is a person who serves on the governing authority of an
entity.  A "managerial official" is an officer or a governing person. 

A "filing instrument" is a document or instrument that is required or
permitted to be filed under the code with the Secretary of State.  The term
"fundamental business transaction" means a merger, interest exchange,
conversion or sale of all or substantially all of an entity's assets.  The
term "interest exchange" is similar to the term "share exchange" as used in
the TBCA but applies to exchanges of membership or ownership interests in
all domestic entities. 

The term "jurisdiction of formation" refers to the jurisdiction in which a
filing entity's certificate of formation is filed.  In the case of
nonfiling entities, "jurisdiction of formation" means the jurisdiction
chosen in the entity's governing documents to govern its internal affairs
if the jurisdiction bears a reasonable relation to the owners or members or
to the nonfiling entity's affairs under contract law principles or
otherwise the jurisdiction in which the entity has its chief executive
office. 

The code also introduces terms to facilitate electronic filing.  A new term
"digital signature" refers to an electronic identifier intended by the
person using it to have the effect of a manual signature.  The code defines
"signature" to mean any symbol executed or adopted by a person with present
intention to authenticate a writing and includes a digital signature,
electronic signature or a facsimile of such.  The terms "writing" or
"written" are defined in a manner that parallels the definition of "record"
in the federal Electronic Signatures in Global and National Commerce Act
that become effective October 1, 2000.  Consequently, these terms are
expanded to encompass textual information stored in an electronic or other
medium that is retrievable in a perceivable form, and include electronic
data and transmissions and reproductions of writings.  These terms do not
include sound or video recordings. 

The terms "certificate of ownership" and "certificated ownership interest"
are introduced to make generally applicable to domestic entities the
certificated share provisions found in the TBCA.  The code also adds a new
phrase "uncertificated ownership interest" to mean those ownership
interests in domestic entities that are not represented by an instrument
and are transferred either by amendment of the governing documents or by
registration on books maintained for that purpose.  The use of the terms
"certificated" or "uncertificated" in connection with particular types of
ownership interests throughout the code should have similar meanings. 

The term "fundamental business transaction" is new and means a merger,
interest exchange, conversion, or sale of all or substantially all of an
entity's assets.  Not all domestic entities provide to their owners the
rights of dissent and appraisal in connection with a fundamental business
transaction.  An entity that provides to its owners such rights is referred
to as a "domestic entity subject to dissenter's rights".  Those entities
that provide rights of dissent and appraisal are identified in the specific
Titles governing the entities and in Subchapter H, Chapter 10. 

The code adopts the definition of "affiliate" from the Federal Securities
Act of 1933, as amended. 

Existing law refers to "registered limited liability partnerships."  The
word "registered" is unnecessary and has been removed throughout the code
when referring to limited liability partnerships.  Removal follows the
trend in the laws of other states. 

Chapter 1 contains additional definitions which can be found in one or more
existing Texas statutes. 

Subchapter C of Chapter 1 contains rules specifying what law governs the
formation and internal affairs of domestic and foreign entities.
Generally, these provisions are derived from existing statutes, but are
expanded and clarified to provide more certainty in application.
Generally, the law of the state or other jurisdiction in which an entity is
formed governs the formation and internal affairs of the entity.  The
liability  of an owner, member or managerial official of the entity is also
governed by the same law. 

b. Chapter 2-Purposes and Powers

Chapter 2 sets forth general provisions governing purposes and powers for
all entities. Specific limitations on purposes remain as supplemental
provisions in the specific Titles governing each type of entity.  The
provisions of Chapter 2 utilize the new terminology of the code and, except
as noted below, are intended to be nonsubstantive revisions of present
provisions found in the TBCA, TNPCA, TLLCA, TREITA, TRLPA, TMCLA and TRPA
which have been made applicable to all domestic entities to achieve
standardization. 

Section 2.003 is derived primarily from TBCA Article 2.01.  Subsection
2.003(1) specifies general rules that are implicit under existing law
applicable to all domestic entities under existing law, even though not
explicit in the governing statute.  Subsection 2.003(2) specifies the types
of entities that must be formed under other Texas statutes and cannot be
formed under the code.  Extending this list to all domestic entities is not
intended as a substantive change because this limitation is implicit in
existing Texas law even though not explicit in the existing statutes
governing each type of domestic entity.  Likewise, Section 2.005 states
what is implicit in existing Texas law governing all entities, namely that
the governing documents of the entity may limit its purposes.  This
statement was not explicit in some existing Texas statutes. 

Section 2.004 pulls together various statutory provisions in existing Texas
law governing the purposes of professional entities, such as professional
corporations, professional associations and professional limited liability
companies.  One change clarifies existing ambiguities in Texas law.
Section 2.004 allows a professional entity to provide more than one
professional service as its purpose if permitted by the Texas law
regulating the professional services.  Existing Texas statutes governing
professional entities have been interpreted in an unduly rigid manner.  The
necessity for a single professional service limitation should be the
subject of the special regulatory law governing the profession and not the
organizational law. 

The concept of perpetual existence of a corporation was a relatively new
concept in 1955 when the TBCA was adopted.  However, that concept is now
ingrained in corporate law.  Accordingly, a provision authorizing
corporations to have perpetual existence is no longer necessary and has
been omitted. 

Although Section 2.101 applies to all domestic entities and is derived
primarily from similar provisions in the TBCA, TNPCA and TRPA, the concept
of broad powers is implicit in existing Texas law for all domestic
entities.  Accordingly, the enumeration of powers has been extended to all
domestic entities even though similar provisions are not explicit in the
statutes currently governing those entities. 

The common law of corporations placed limits on the power of a corporation
to incur debts or make guarantees.  This common law concept has become
antiquated in modern times as corporations have been accepted as separate
entities with full legal capacity in all respects.  Implicit in the
existing Texas law for most domestic entities is the power to incur
indebtedness and make guarantees.  The explicit powers to incur
indebtedness and make guarantees found in Sections 2.103 and 2.104, which
were derived from TMCLA Article 1302-2.06, have been designed to apply to
all domestic entities and confirm such powers of domestic entities.  

In a similar manner, the provisions of Section 2.114, which were derived
from TMCLA Article 1302-2.05, have been expanded to apply to certificated
bonds, debentures and other evidences of indebtedness of all domestic
entities and not merely corporations.  By authorizing facsimile signatures
from former officers to be enforceable on such certificates, this provision
permits transfer agents to continue to use preprinted certificate forms
despite a change in officers. 

 c. Chapter 3-Formation and Governance

Chapter 3 contains general provisions relating to formation, existence and
governance of domestic entities. The provisions of Chapter 3 utilize the
new terminology of the code and, except as noted below, are intended to be
nonsubstantive revisions of present provisions found in the TBCA, TNPCA,
TLLCA, TREITA, TRLPA and TRPA which have been made applicable to all
domestic entities to achieve standardization. 

Subchapter A provides that domestic entities are formed through the filing
of a certificate of formation, which differs from existing law where
domestic entities filed organizational documents by different names, such
as "articles of incorporation," "certificate of limited partnership" and
"articles of organization," for example. 

Section 3.003 presumes that domestic filing entities exist perpetually
unless otherwise provided in the governing documents of the entity.
Existing law requires the articles of incorporation of a corporation, the
certificate of organization of a limited liability company or other
formation instruments for other entities other than limited partnerships to
state the period of duration of the entity.  As a corollary, the
certificate of formation under the code for a filing entity other than a
limited partnership only needs to state the period of duration if the
entity is not formed to exist perpetually.  Because most entities formed in
Texas have perpetual duration, a default rule of perpetual duration
eliminates an unnecessary statement from the certificate of formation. 

Section 3.005 contains a necessary substantive change.  The certificate of
formation must state the type of entity being formed. 

The requirement under existing law that a for-profit corporation's articles
of incorporation contain a statement that a corporation will not commence
business until it has received for the issuance of shares consideration of
the value of at least $1,000 has been eliminated from Sections 3.005 and
3.007 since the $1,000 requirement has been eliminated.  A similar change
has been made in Section 9.005 with respect to foreign for-profit
corporations that qualify to do business in Texas inasmuch as they are no
longer required to state that they have received at least $1,000 for their
shares, which had been required by Article 8.05.A(11) of the TBCA.  A
$1,000 minimum capitalization has become outmoded and provides little
comfort as to adequate capitalization. 

The requirement that a real estate investment trust have $1,000 of minimum
capital has likewise been deleted from Sections 3.005 and 3.012 as outmoded
and unnecessary.  A $1,000 minimum capitalization in today's terms does not
provide anyone any comfort as to adequate capitalization.  This change
parallels the change in the for-profit corporation provisions.  The $1,000
minimum capital provisions are currently found in TREITA Sections
3.10(A)(9) and 15.10(A)(3).   

Section 3.053 provides that a certificate of amendment need not specify the
date or method of adoption by the owners, as required by the TLLCA, TBCA,
TNPCA and other existing law.  As to limited partnerships, the requirements
for the certificate of amendment are greater than presently required, but
the new requirements are procedural in nature.  This change simplifies the
filing instrument without any significant detriment.  Details of how a vote
is taken or how many votes supported the action are not necessary for
public filings.  Compliance with legal requirements is the basic necessary
statement. 

Certain provisions in Chapter 3 are new with respect to certain kinds of
domestic entities.  However, these provisions are implicit in existing law.
For example, Section 3.056(b) and (c) specify the effects of an amendment
to a certificate of formation.  There are no similar provisions in TRLPA,
but may be implied. 

Section 3.101 confirms the general rule for most domestic entities that the
entity's business and affairs are managed and directed by its governing
authority.  This rule is subject to the governing documents and the title
of the code governing the entity. 

 Certain other provisions in the code are new to certain types of entities
but are beneficial because they provide default rules when the governing
documents are silent.  Sections 3.102 and 3.105 permit governing persons
and officers to rely on information, opinions, reports and statements
concerning the entity or another person prepared or presented by certain
persons.  These provisions are taken from the TBCA and TREITA but are new
with respect to partnerships and limited liability companies.  Under the
code, partnerships and limited liability companies may revise these rules
by agreement in their governing documents. 

The provisions of Sections 3.103 and 3.104 are also new to partnerships and
limited liability companies. Nevertheless, under existing law, partnerships
and limited liability companies may adopt similar provisions by agreement
in their regulations or partnership agreements.  The code permits limited
liability companies and partnerships to revise these provisions by their
governing documents.  Section 3.103 permits the removal of officers with or
without cause.  It does not carry forward the provision found in Article
2.43 of the TBCA that permitted a board of directors to remove an officer
only if "the best interests of the corporation will be served" by such
removal.  This change is consistent with the Model Business Corporation
Act, which provides that officers may be removed with or without cause. 

Section 3.152 provides a right to the governing persons to inspect the
books and records of a domestic entity.  This provision is based on similar
provisions of the TBCA and TREITA.  Insofar as a limited liability company
may be managed by a manager, this provision has no parallel in existing
limited liability company laws but could be provided for in the regulations
of the limited liability company.  The default rule provided in Section
3.152 may be revised by the company agreement.  Section 152.002(b)(9)
provides that a partner's right of access to books and records shall be
governed by the applicable general partnership spoke provision. 

Sections 3.201 through 3.205 contain detailed provisions relating to
certificated and uncertificated ownership interests in domestic entities
based on similar provisions in the TBCA and TREITA.  TRLPA and TLLCA
contain less detailed provisions that authorize limited liability companies
and limited partnerships to issue certificates representing their ownership
interests.  The code's more detailed provisions represent an improvement
for limited partnerships and limited liability companies because they
provide detailed default rules that may be changed by the governing
documents of limited liability companies and limited partnerships.  The
creation of uniform rules for ownership certificates for all types of
entities should be beneficial and provide protections for transferees of
ownership interests. 

d. Chapter 4-Filings

Chapter 4 contains general provisions relating to filings made with the
Secretary of State under the provisions of the code.  These provisions
govern when a filed instrument becomes effective and the amendment and
correction of filed instruments, and set forth the authorized fees for such
instruments.  The provisions utilize the new terminology of the code and,
except as noted below, are intended to be nonsubstantive revisions of
present provisions found in the TBCA, TNPCA, TLLCA, TREITA and TRLPA which
have been made applicable to all domestic and foreign entities to achieve
standardization. 

In lieu of certificates, as required by the TBCA, TREITA, TNPCA and certain
other existing laws, the Secretary of State merely issues an acknowledgment
of filing in the case of each instrument filed with it. Existing law states
that some instruments are not effective until the Secretary of State issues
a certificate. Most current laws also require the filing of two copies of
each instrument, although TMCLA Art. 7.08 permits one copy only to be
filed.  Under the code, only one copy is filed, and the Secretary of State
does not return a file-stamped copy, unlike current law.  These changes are
included in order to permit electronic filings but also give effect to the
provisions of TMCLA Art. 7.08. 

Present TBCA, TNPCA, and TLLCA provisions make the signing of a false
document a Class A misdemeanor.  However, because prosecution is seldom
brought for a violation of present provisions, more effective means of
deterring such actions are needed.  Section 4.007 imposes civil liability
on a person, managerial official, or entity that signed or authorized the
filing of an instrument which contains a false  statement or the omission
of a material fact.  This provision is similar to that found in the TRLPA.
Presently, a person harmed by the filing of a false instrument has no
statutory right (except under the TRLPA) to recover damages for a loss
caused by the filing of the false instrument or by the person's reliance on
the false instrument. 

Section 2.08(a)(2) of TRLPA imposes liability on a general partner under
certain circumstances but conditions such liability on whether the general
partner had sufficient time to amend or cancel the certificate or to file a
petition for its amendment or cancellation before the false statement was
reasonably relied on. Section 4.007 of the code does not contain any
reference regarding whether there was sufficient time to amend, cancel or
file.  Section 2.08(b) of TRLPA also permits a general partner to avoid
liability for failing to file an amendment or cancellation of a certificate
or a petition for amendment or cancellation if such instrument is filed
within 30 days after the date that the general partner first had or should
have had knowledge that a statement in the certificate was false.  Section
4.007 of the code does contain such a provision in an effort to standardize
this provision for all entities. 

Section 4.008 makes the signing of a filing instrument which contains a
false statement or the omission of a material fact with the intent of
filing the instrument with the Secretary of State a Class A misdemeanor
unless the person's intent is to defraud or harm another.  In the latter
case, the offense is a state jail felony. Existing law simply classifies
the offense as a Class A misdemeanor, which is not a felony. 

Statutory abandonment of any filed instruments prior to effectiveness is
presently limited to instruments filed by limited liability companies and
limited partnerships.  Under the TBCA, such a right is granted only in
certain circumstances, including, for example, Articles 5.03.L (mergers),
5.17.E (conversions) and 6.05.A (dissolutions).  Section 4.057 extends this
procedure to permit any filed instrument subject to a delayed effectiveness
to be abandoned prior to its effectiveness.  Subsection (e) codifies, in
part, a rule of the Texas Secretary of State found at 1 T.A.C.  79.82.
Subsection (e) requires, as a prerequisite to filing the certificate of
abandonment, that an entity that is a party to the abandonment change its
name in the manner required by the code should the name of the entity, in
the interim prior to filing the certificate of abandonment, become the same
as or deceptively similar to the name of another existing entity. 

Section 4.058 lists the filing instruments the effectiveness of which
cannot be delayed.  Existing law lists the filing instruments the
effectiveness of which can be delayed.  This approach is more direct and
easier to understand. 

Section 4.102 codifies the Secretary of State's rule found at 1 T.A.C.
 79.24(1) which describes the limitations on correction of filings.  A
certificate of correction may not revoke or void a filed filing instrument. 

In general, the changes effected by Subchapter D relating to filing fees,
result in a standardization of fees for filing instruments that share a
commonality of procedure, and also standardize the fee for formation of
certain domestic entities that are not subject to franchise taxes under
Chapter 171 of the Tax Code.  This change makes the code more user
friendly. 

In general, Section 4.151 authorizes the Secretary of State to collect
various fees for documents commonly filed by all entities under the
provisions of Title 1 of the code.  The fees are comparable to fees
presently authorized under the TBCA for comparable filing instruments.  The
section also authorizes a fee of $50 for the pre-clearance of any document.
Under existing law, only the TRLPA authorizes the fee for pre-clearance of
limited partnership documents; however, the Secretary of State provides
pre-clearance of a document to be filed on behalf of any other type of
entity.  Additionally, the Secretary of State is authorized to collect the
fee established for the filing of the certificate of formation for a filing
entity created by the terms of a merger or conversion, in addition to
collecting the fee established for the filing of the merger or conversion.
Existing law does not authorize the collection of a fee relative to the
formation of the entity by merger or conversion. 

The fees established by Section 4.154 represent an increase in the fees
presently authorized for filings by  limited liability companies under the
TLLCA.  Section 4.154 authorizes the collection of a fee established under
Section 4.152 for a comparable document filed by a for-profit corporation.
The fee provisions of the TLLCA as enacted in 1987 were drafted to mirror
the TBCA fee provisions for comparable documents.  However, a separate
amendment of the TBCA fee provisions in 1987 established a difference in
fees between limited liability companies and corporations which was not
originally intended. Section 4.154 standardizes and makes uniform the fees
for comparable filing instruments by limited liability companies. 

Section 4.155 authorizes the Secretary of State to collect fees for various
instruments filed by a limited partnership.  The filing fee for an
amendment to the certificate of formation is reduced from $200 to $150 to
make the fee conform to the fee established for an amendment filed by a
for-profit corporation. 

Section 4.156 authorizes the Secretary of State to collect fees for various
instruments filed by a professional association.  The fee for a certificate
of formation for a professional association was increased to be comparable
to the formation fee for a limited partnership.  A professional
association, as well as a limited partnership, is not subject to franchise
tax under the Tax Code.  By increasing the $200 formation filing fee to
$750, the professional association formation fee is made comparable to the
fee established for formation of a limited partnership. 

Section 4.159 codifies the fees for instruments filed by unincorporated
nonprofit associations with the Secretary of State.  Currently, the fees
are established by administrative rules adopted by the Secretary of State. 
 
e. Chapter 5-Names of Entities; Registered Agents and Registered Offices

Chapter 5 contains general provisions relating to restrictions and
requirements for names of entities, name reservations, and name
registrations under the provisions of the code; requirements for registered
agents and registered offices and procedures for effecting a change to
information relating to registered agents and registered offices; and
provisions relating to service of process, notice or demand on a domestic
or foreign entity.  The provisions utilize the new terminology of the code,
and, except as noted below, are intended to be nonsubstantive revisions of
present provisions found in the TBCA, TNPCA, TLLCA, TRLPA, TREITA and TRPA
which have been made applicable to all domestic and foreign entities to
achieve standardization. 

Section 5.051 provides that a domestic entity or a foreign entity having
authority to do business in this state may transact business under an
assumed name.  The assumed name of the entity need not meet the
requirements of the subchapter.  This provision is derived from the TBCA
and is implicit as it relates to the use of assumed names by other domestic
and foreign entities.  Notice regarding the legal identification of the
entity and its organizational form is sufficiently provided for by the
filing of the assumed name certificate under Chapter 36, Business &
Commerce Code. 

Sections 5.054, 5.055, 5.056, 5.057, 5.058, and 5.059 set forth the words
or phrases indicative of status as a particular type or form of entity and
require that the name of an entity contain a word or phrase or an
abbreviation of such word or phrase indicative of such entity type.  These
provisions permit greater flexibility of acceptable abbreviations.
Existing law sets forth the acceptable abbreviations of the words and
phrases with particularity. 

Section 5.054(a)(1) includes the word "limited" as one that is among the
"approved" list of words  that a domestic corporation's name must contain.
Article 2.05.A(1) of the TBCA does not include this word as an option.
This change is consistent with the trend in modern corporate practice. 

Section 5.055 does not include the prohibition contained in TRLPA Section
1.03(1) against the name of a limited partnership containing a limited
partner's name.  The prohibition is outmoded and difficult to enforce and
in practice is not enforced by the Secretary of State.  The prohibition
also creates an issue as to the validity of the formation of the limited
partnership to the detriment of all of the other limited partners. 
 
Section 5.061 prohibits a filing entity or foreign filing entity from
having a name that contains the word "lotto" or "lottery."  The provision
is derived from the TBCA and is made applicable to all filing entities. The
current prohibition relates to use of the term "lottery."  The section
includes the term "lotto" within the prohibition to take into account the
"lotto" game instituted since the time of the constitutional amendment
authorizing the state lottery in November 1991. 

Section 5.101(a) of  the code provides that any person may file an
application with the Secretary of State to reserve the exclusive use of a
name.  This provision varies from Section 1.04(a) of TRLPA which limits the
persons that may reserve a name of a limited partnership to (i) a person
intending to organize a limited partnership under TRLPA and adopt the name,
(ii) a domestic limited partnership or a foreign limited partnership
registered in Texas that proposes to change its name to that name, (iii) a
foreign limited partnership intending to register in Texas that proposes to
use that name, or (iv) a person intending to organize a foreign limited
partnership and intending to have it registered in Texas and adopt that
name. 

Section 5.105 allows a person to renew a name reservation for successive
120-day periods if the person makes a new application for reservation of
the name 30 days prior to the expiration of an effective reservation.
Current statutory provisions do not allow for the "renewal" of the
reservation and require a person to await the termination of the
reservation's duration before making an application to reserve the name for
an additional 120-day period. 

Existing law generally requires that a foreign filing entity not authorized
to transact business in Texas must furnish a certificate evidencing its
good standing under the laws of its jurisdiction of formation in connection
with the registration by such entity of a name in Texas.  Section 5.152 of
the code eliminates this requirement.  However, the foreign filing entity
must include a statement in its application to register that such entity
validly exists and is doing business. 

Section 5.201 requires each filing entity and foreign filing entity to
designate and maintain a registered agent and registered office address in
this state.  The section defines a registered agent and sets forth the
requirements of a registered agent and requirements of a registered office.
The requirements of a registered agent for a business corporation, limited
partnership, and limited liability company vary under current law. Section
5.201 makes the requirements uniform and applicable to all filing entities
and foreign filing entities. Paragraphs (1) and (3) of Subsection (c)
codify 1 T.A.C.  79.28, in part, and make explicit that the registered
office address must include a street address where process may be
personally served on the entity's registered agent and that such location
not be solely the location of a business providing the entity with mailbox
service or telephone answering service.  Paragraph (2) of Subsection (c) is
derived from current statutory provisions.  Unlike TBCA Art. 2.09 or TRLPA
Section 1.06, Section 5.201 permits any entity, not just a corporation, to
serve as a registered agent for a corporation.  With respect to limited
liability companies, there is no material change. 

Section 5.203 permits a registered agent of a filing entity or foreign
filing entity to change its address or name, or both, by filing a statement
with the Secretary of State.  Current law provides no means for allowing a
registered agent, such as a corporation or limited liability company, to
update information relating to the registered agent's name when an
amendment to the agent's organizational document effects a name change.
Section 5.203 permits the information to be updated by the registered agent
rather than the filing entity represented by the registered agent.  Section
5.203 permits a registered agent to make a single filing relating to more
than one entity.  Under the TBCA, multiple filings were required to change
a registered agent's name. 

f. Chapter 6-Meetings and Voting

This chapter contains several provisions relating to calling proper
meetings, taking action by consent, and establishing valid voting trusts
and voting agreements.  The provisions utilize the new terminology of the
code, and, except as noted below, are intended to be nonsubstantive
revisions of present provisions found in the TBCA, TNPCA, TLLCA, TRLPA,
TRPA, and TREITA which have been made applicable to all domestic and
foreign entities other than partnerships to achieve standardization. 
 
Generally, most of the provisions found in Chapter 6 are composed of the
rules found in the TBCA and the TREITA.  These provisions have now been
broadened to apply to the entities previously governed by the TNPCA and
TLLCA. 

Section 6.001 is derived from the TBCA which permitted the locations of
meetings to be set by an entity's governing documents or to be held at the
entity's registered or principal office if the governing documents were
silent.  The code, however, varies from existing law by also allowing all
the persons entitled to notice of the meeting to set the location of the
meeting. 

Section 6.002 is derived from provisions in the TBCA, TNPCA, TLLCA and
TREITA which permit meetings to be held by conference telephone or other
communications equipment so long as each participant can communicate with
all other participants.  Section 6.002 recognizes the continuing
advancements in electronic communications technology and explicitly
authorizes use of other suitable electronic communications systems
including video conferencing or the Internet.  This approach is consistent
with recent amendments made to the Delaware corporation law permitting the
use of new technologies to conduct shareholder meetings entirely by remote
communication; however, the code is broader than Delaware law regarding
director meetings in that the code does not require that all directors be
able to "hear" one another.   

Section 6.051 permits each entity to choose the method of notice that it
utilizes, sets out the type of information that must be included in the
notice and establishes when notice is deemed to be delivered.  The code
expands on this provision formerly found in the TBCA and TREITA and now
enables notice to be sent by electronic message or facsimile.
Additionally, the similar provisions found in the TLLCA enabled regular
meetings to be held with or without notice.  The code, however, requires
notice for both regular and special meetings. 

Section 6.052 permits any person entitled to notice to waive notice in
writing or by participating in the meeting.  This provision is derived from
the TBCA and is made applicable to all filing entities.  Existing law does
not explicitly state that participation by shareholders in the meeting of
shareholders would constitute waiver of notice of that meeting. 

Section 6.053 is derived from a provision found in the TBCA which enables
an entity to have valid meetings without giving notice to an owner or
member when certain previous notices or distributions mailed to that
person's address have been returned undeliverable.  The code, however, adds
SEC rules in Section 6.053(b), which permit an entity not to provide notice
to a "lost security holder." 

Section 6.203 is derived from TBCA Art. 9.10.A(2) and TNPCA Art. 9.10.C(2)
and specifies how a written consent of owners or members that is less than
unanimous must be delivered to the entity or its governing authority.
These requirements have been expanded to apply to other filing entities,
other than limited partnerships.  Non-filing entities tend to act with less
formality in the governing of their affairs.  In addition, the strict
consent delivery requirements of Section 6.203 have been eliminated when
the entity is soliciting the consent.  Presumably, in that situation, the
filing entity is aware when a consent is signed. 

Sections 6.251 and 6.252 contain provisions relating to voting trusts and
voting agreements.  These provisions are materially the same as those found
in the TBCA and TREITA, but are new for limited liability companies.  The
TLLCA does not contain a similar provision. 

Section 6.301 provides that none of Chapter 6 applies to a general
partnership or a limited partnership except to the extent the partnership
agreement specifies.  Partnerships were excluded from this Chapter to take
into account their often informal nature; however, partners may elect to
adopt these provisions by agreement. 

 g. Chapter 7-Liability

Chapter 7 contains provisions relating to liabilities of owners, members,
subscribers, managerial officials and other persons for the liabilities of
a domestic entity.  All the provisions in this chapter are derived from or
based on comparable or identical provisions in current Texas statutes.
While the current Texas statutes do not, in all cases, spell out all
aspects of these rules in the same detail as Chapter 7, they are all
implicit in provisions of current Texas law.  For those types of business
entities whose current statutes are not as complete, the principles
described in this Chapter would probably be applied by analogy under
current law to those types of business entities and, therefore, do not
effect a material change in current law. 

Section 7.001 is based on Section 2.01 of TRPA, Section 7(a) of TUUNAA and
Section 8(B)(1) of TPAA.  It codifies a basic principle of Texas law that
endows domestic entities with a legal personality of their own apart from
their owners or members.  This is a fundamental characteristic of all
modern entities. 

Section 7.002 is based on TBCA Article 2.21A and TREITA Section 8.10(A).
It limits the liability of an owner, member, subscriber, or affiliate
arising from a domestic entity's contractual obligation or any matter
relating to or arising from such contractual obligation, on the basis of
various subjective theories Texas courts have used to disregard the
entity's separate existence in contract cases, such as "alter ego,"
"constructive fraud," or "sham to perpetrate a fraud."  This Section also
incorporates provisions from TBCA Article 2.21A and TREITA Section 8.10(A)
that limit the liability of an owner, member, subscriber, or affiliate of a
domestic entity for its contractual or other obligations merely because the
entity failed to observe a formality or procedure required by its governing
documents or this code or in taking action thereunder. Important exceptions
to these limitations that appear in current Texas statutes are set forth in
Sections 7.004 and 7.007. The disregard doctrine has historically been
utilized only in corporate law cases, and for that reason, the other Texas
organizational statutes do not have a counterpart to Section 7.002.
Nevertheless, these other entities, given their separate personality as
expressed in the code, should be subject to the same legal standards now
applied to their corporate counterparts. 

Section 7.003 is based on TBCA Article 2.21B and TREITA Section 8.10(B). It
specifies that the limitations on liability of an owner, member, subscriber
or affiliate of a domestic entity specified in Section 7.002 are exclusive
and preempt any liability under common law or otherwise.  Important
exceptions to this preemption are set forth in Sections 7.004 and 7.007.  

Section 7.004 is based on TBCA Art. 2.21A & B and TREITA Section 8.10(A) &
(B).  It provides exceptions to the liability limitations in Sections 7.002
and 7.003 for actual fraud primarily for direct personal benefit, express
assumption, guarantee or personal liability agreement for an obligation,
liability imposed by this code or another applicable statute, and
situations where the conduct constituted a tort or breach of duty
actionable under other applicable law independent of a contractual
obligation.  This last exception and the provisions of Section 7.006(b) are
not explicit in TBCA Art. 2.21 or TREITA Section 8.10 but are implicit in
the language of TBCA Article 2.21 and its legislative history.  Further,
these provisions only confirm that Sections 7.002 and 7.003 do not affect
the personal liability of tortfeasors for their own conduct. 

Section 7.005 is based on Section 7(b) of TUUNAA. It provides that a person
is not liable for a domestic entity's debts or obligations solely because
the person is a managerial official of a domestic entity, or is authorized
to participate in its management. 

Subsections 7.006(a) and (c) are based on subsections 7(c) and (b) of
TUUNAA. These subsections prohibit liability being imputed to a person
merely because the person is an owner, member, subscriber, affiliate or
managerial official of a domestic entity for a tortious act, omission or
breach of duty by the domestic entity.  Subsection (b) specifies that such
person may be liable for a tortious act, omission or breach of duty if
liability is imposed under Section 7.004 or other applicable law by reason
of the person's conduct independent of this code.  Subsection (b) is not
explicit in existing TBCA Art. 2.21 but is implicit in the language of TBCA
Art. 2.21 and its legislative history.  It does not create a new cause of
action but merely confirms that persons may be liable for their tortious
conduct independent of this code under other  applicable law. 

Section 7.007 sets out additional exceptions found in existing law to the
general principle of non-liability of owners, members, managerial officials
or others, as enunciated in the previous sections of this chapter. These
exceptions preserve the liability of partners in general partnerships,
limited partnerships or limited liability partnerships, as provided in
Title 4, and of stockholders in unincorporated joint stock companies or
associations under Chapter 253 and the obligations of owners to pay
subscriptions or make capital contributions when required by this code or
the governing documents.  The foregoing exceptions are derived from TBCA
Article 2.21A(1), TREITA Section 8.10(A)(1), TRLPA Section 5.02 and TLLCA
Art. 5.02. 

Section 7.008 is based on TBCA Article 2.21D and E and TREITA Section
8.10(D) and (E).  It precludes a pledgee or other holder of an ownership or
membership interest from being held personally liable as an owner or member
of the interest.  Similarly, various personal representatives of a person
or estate cannot be held personally liable as an owner or subscriber of an
ownership interest, although that liability can be imposed on the property
being administered by the representative. 

Section 7.009 is based on Section 7(e) of TUUNAA. It permits a person who
is an owner, member, or managerial official of a domestic entity to assert
a claim against the entity.  Conversely, the entity may assert a claim
against any such person. 

Section 7.010 is based on Section 13 of TUUNAA. It specifies that a claim
for relief against a domestic entity will not abate because there has been
a change in the entity's owners, members, managerial officials, or persons
authorized to manage it. 

Section 7.011 is based on Section 9 of TUUNAA and Section 3.05(a) of TRPA.
It makes clear that a judgment or order by a court or other governmental
entity against a domestic entity is not a judgment or order against a
person who is an owner, member or managerial official of the entity, unless
otherwise provided in the judgment or order. 

Section 7.012 is based on TMCLA Article 1302-7.06.  It permits a domestic
entity, other than a partnership or limited liability company, or certain
other non-code organizations to adopt provisions in its governing documents
that generally exonerate or further limit liability of a governing person
for monetary damages to the entity, or its owners or members, for the
governing person's acts or omissions in that capacity.  The entity may not
eliminate or limit such liability to the extent the person (1) has breached
a duty of loyalty, (2) has taken action or omitted to act not in good faith
in such a way that it breached some other duty owed to the entity or
involved intentional misconduct or knowing violation of the law, (3) has
received an improper benefit, or (4) is otherwise made liable by statute. 

Section 7.013 is based on TLLCA Article 2.20B and TRPA Section 1.03. It
permits a partnership or limited liability company to modify the duties,
including fiduciary ones, of its managerial officials, owners or other
persons in its governing documents to the extent permitted in Sections
152.002 and 101.401. 

h. Chapter 8-Indemnification and Insurance

Chapter 8 contains provisions relating to indemnification of governing
persons, officers and other persons by domestic entities.  The provisions
utilize the new terminology of the code and, except as noted below, are
intended to be nonsubstantive revisions of present provisions found in the
TBCA, TNPCA, TREITA and TRLPA which have been made applicable to most
domestic entities to achieve standardization. 

In Section 8.103(a)(2), a determination that the standard for
indemnification in Section 8.101(a) has been met may be made by a committee
of one disinterested director if no quorum of disinterested directors can
be obtained.  TBCA Article 2.01-1F(2) requires two such directors; TRLPA
Sec. 11.06 and TNPCA have no such provision. 

 Section 8.103(a)(5) has no explicit source in the TBCA, TREITA, TRLPA or
TNPCA but is implicit in the general principle that all the owners or
members of an enterprise may make any disposition of its assets, including
indemnification of a governing person. 

Section 8.105(a)(3) has no explicit source in TBCA, TREITA, TNPCA or TRLPA
but is implicit in the general principle that the owners or members of an
enterprise may make any disposition of its assets for the benefit of a
person who is not a governing person. 

Chapter 8 contains no explicit provision like TBCA Article 2.02-1M, TREITA
Sec. 9.20(M) or TRLPA Sec. 11.13 which state that an indemnification
provision (other than for insurance or related arrangements) is valid only
to the extent it is consistent with the indemnification statute.  

Section 11.19 of TRLPA requires that any indemnification of or advance of
expenses by a limited partnership to a general partner is to be reported
promptly in writing to the limited partners and, in any event, not later
than six months after the date the indemnification occurs.  Section 8.152
of the code requires a reporting deadline of twelve months. 

i. Chapter 9-Foreign Entities

Chapter 9 standardizes the requirements and procedures for registration of
foreign entities to transact business in Texas that are presently located
in the TBCA, TNPCA, TMCLA, TLLCA, TRLPA, and the TRPA.  The provisions
utilize the new terminology of the code, and, except as noted below, are
intended to be nonsubstantive revisions of present provisions or an
expansion of current provisions to new entities to achieve standardization. 

Section 9.001 expands the provisions regarding qualification to require
other foreign entities, including business trusts, real estate investment
trusts, cooperatives and public or private limited companies, to register
with the Secretary of State to transact business in Texas.  Section 9.003
provides for permissive registration of regulated entities.  Existing law
permits the registration of these other entities as foreign limited
liability companies by broadly defining foreign limited liability company
to include those affording limited liability even though the entities are
not considered limited liability companies in the jurisdiction of
formation. 

Currently, the requirements for registering or qualifying a foreign limited
partnership, corporation, and limited liability company to transact
business in this state vary under the different acts.  Section 9.004
standardizes the procedures for foreign registration, eliminates the
requirement for a foreign entity to submit a certificate evidencing
existence, and substitutes an affirmative statement regarding existence
similar to the existing provision in the TRLPA. 

Section 9.009 permits a foreign entity to change information in its
original application by filing an amendment and requires the entity to file
such an amendment when the entity changes its name or its stated purpose.
An amendment to reflect the change of name or purpose must be filed within
90 days following the change.  Existing law does not specify a time frame
for filing the amendment. 

Section 9.011 changes the requirements for the application for withdrawal
for a foreign nonprofit corporation to conform to the requirements for a
for-profit corporation.  Consistent with the withdrawal for a for-profit
corporation, the application for withdrawal will no longer require a
statement that there is no suit pending or threatened against the
corporation in this state. 

Section 9.051(c)(3) adds language indicating that an owner, member or
managerial official of the entity is not liable by contract or under other
provisions of law for failure of the foreign entity to register.  This
language is derived from TLLCA Art. 7.13B and expanded to apply to all
entities. 

Section 9.052 and 9.054 set forth the civil and monetary penalties for
transacting business without registering.  Existing law provides for
judicial imposition of a monetary penalty for foreign corporations and
limited liability companies.  Section 9.054 authorizes the Secretary of
State to collect late filing fees when  an entity has transacted business
in this state for more than 90 days without a certificate of authority.
The late filing fee is equal to the registration fee for the entity for
each year of delinquency.  The code provision is modeled after a TRLPA
provision and provides for the assessment of an administrative penalty by
the Secretary of State since there is no history of the judicial assessment
of the penalties under the TBCA or the TLLCA. 

Section 9.101 permits the Secretary of State to revoke the registration of
a foreign entity under specified circumstances after notice and an
opportunity to correct the entity's failure.  Those circumstances are
consistent with those formerly located in the Texas Business Corporation
Act but are made applicable to all foreign filing entities by this section.
References to revocation because of failure to pay franchise taxes were
removed since the tax deposit requirement was repealed and forfeitures for
failure to pay franchise taxes are governed by the Texas Tax Code. 

Section 9.106 specifies that a foreign filing entity must follow the Tax
Code procedures in order to reinstate its registration after revocation
under the Tax Code.  This provision is a clarifying change from existing
law. 

Existing law restricts reinstatement of a revoked registration to 36 months
for for-profit corporations, 24 months for limited liability companies, and
12 months for non-profit corporations.  Section 9.103 eliminates the time
period during which an entity may reinstate its registration and authorizes
the Secretary of State to reinstate the registration when the circumstances
that led to the revocation are corrected or when the secretary determines
that the circumstances that were the basis for revocation did not exist at
the time of revocation.  Section 9.103 provides that the registration of an
entity that reinstates within three years of revocation is considered to
have been registered at all times during the period of revocation. 

The procedures contained in subchapters C and D relating to revocation of
registration by court action or action of the Secretary of State are
consistent with those located in the TBCA, TLLCA and TNPCA but are made
applicable to all foreign filing entities for sake of consistency. 

Code Section 9.204 clarifies an ambiguity found in TREITA Section 13.10(F)
and TBCA Art. 2.29E.  The new language specifies that a foreign filing
entity has a right to vote shares that it owns in domestic real estate
investment trusts or corporations and to manage or control as a shareholder
such entities.  However, the language leaves to other sections, primarily
Section 9.251, whether these activities rise to the level of transacting
business in this state.  TBCA Art. 2.29E and TREITA Section 13.10(F) are
not clear in this respect. 

j. Chapter 10-Mergers, Interest Exchanges, Conversions and Sales of Assets

Chapter 10 contains general provisions relating to mergers, interest
exchanges, conversions and sales of assets involving domestic entities.
The provisions contained in Chapter 10 are generally based on existing
statutes and, except as noted below, are intended to be non-substantive
revisions of the merger provisions found in the TBCA, TNPCA, TLLCA, TRLPA,
TRPA and TREITA. 

The principal modifications made to existing law in Chapter 10 involve the
extension of the more flexible procedures for effecting mergers, interest
exchanges and conversion applicable to corporations to all entities.  Since
revisions effected in the 1997 Texas Legislature, the provisions of the
TRPA, TLLCA, TRLPA, TREITA and TBCA relating to mergers, interest exchanges
and conversions have been comparable in most respects.  The provisions of
the TNPCA are based on past provisions of the TBCA but have not been
updated.  Thus, although the placement of these provisions in Title 1 may
represent a substantive change from existing law for certain entities, the
extension was considered to be a conforming change that was necessary as
part of the codification process.  The use of a single chapter in the code
for the merger, interest exchange and conversion provisions harmonizes the
laws applicable to all entities and clarifies the interrelationship between
the various statutes governing these activities.    

Chapter 10 modernizes, and provides greater clarity and flexibility than,
the existing TNPCA merger provisions.  However, for public policy reasons,
Section 10.010 continues important merger restrictions  on nonprofit
corporations found in existing law.  As provided in Section 10.010, a
nonprofit entity may not merge into another entity if the domestic entity
would, because of the merger, lose or impair its charitable status.
Mergers with for-profit or non-code organizations are permitted so long as
any domestic nonprofit entities continue as the surviving entities.  The
authority to merge also includes the authority to merge with a foreign
nonprofit entity so long as the foreign nonprofit entity is the survivor as
presently permitted under the TNPCA.  When a foreign nonprofit entity
survives, the entity is deemed to have appointed the Secretary of State its
agent for service of process related to the transaction. 

Sections 10.002, 10.003 and 10.004  set forth the general requirements for
a plan of merger based on existing statutes.  Section 10.002(b) clarifies
existing law on the requirements for a plan of merger where a new entity is
created by the plan of merger.   Section 10.003 makes a minor modification
to the TBCA relating to payment of funds to dissenters in mergers where
there are more than one surviving entity.  This Section requires all
surviving entities to be responsible for the payment of amounts under the
code to any dissenting owner who perfects that owner's rights of dissent
and appraisal.  The TBCA allows the obligation to be allocated to only one
entity.  As a matter of policy, the Committee concluded it would be more
equitable for all surviving entities to be responsible for the payment with
one entity being designated as the entity primarily responsible. 

Section 10.005 expands the existing provisions of the TBCA allowing for the
creation of holding companies without shareholder approval under certain
circumstances to other entities (other than partnerships) subject to the
same protections applicable to for-profit corporations.  This expansion is
intended to modernize the merger provisions applicable to non-corporate
entities and provide greater operational flexibility to those entities. 

Section 10.006 sets forth the code requirements for effecting "short-form"
mergers where one entity owns more than 90% of the voting ownership
interest in another entity.  These provisions are essentially the same as
the provisions currently contained in the TBCA and TLLCA and have been
expanded to allow other entities to utilize the more flexible procedural
provisions available under the TBCA and TLLCA for completing a merger with
a 90% or more owned subsidiary.  The section does not apply if the
subsidiary is a partnership. 

In 1997, the TBCA, the TLLCA, the TRLPA and the TREITA were amended to
create a new transaction referred to as a "conversion".  A conversion is
nothing more than a statutory mechanism to allow an entity to convert from
one form to another without having to go through the artificial process of
merging into an entity created solely to effect the conversion.  Sections
10.101 through 10.107 codify these provisions and make them applicable to
all entities.  Section 10.108, however, continues the public policy of not
permitting a nonprofit entity to convert into a for-profit entity.  In
order to standardize the conversion provisions, the special provisions of
TRPA Section 9.01 that allow a conversion of a limited partnership to
general partnership and vice versa have been eliminated as unnecessary and
redundant. 

Sections 10.151 through 10.156 set forth the general requirements for
certificates of merger, exchange and conversion. The information required
to be contained in a certificate has been simplified and made consistent
for all transactions.  The code has eliminated a previous requirement of
the TLLCA and TNPCA that a plan of merger or exchange be attached to the
filing on the basis that this requirement has led to excessive paperwork at
the Secretary of State's office for minimal benefit.  In lieu of the
current requirement to file a plan of merger or exchange, the code has
adopted the Delaware approach of requiring the filing entity to undertake
to provide a copy of the plan to certain designated interested parties.
This change also conforms to the current approach in the TBCA.  The code
has also set forth procedures that are to be applicable where a party to a
merger is not a "filing entity". 

Existing law contains provisions that require articles of merger, exchange
or conversion to specify the number of outstanding shares outstanding, the
number of shares entitled to vote, including the number of shares entitled
to vote only as a class, and the number of shares that voted for and
against the transaction. Other states, including in particular Delaware, do
not require such detail.  The code substitutes for these provisions
statements to the effect that the certificate of merger, exchange or
conversion has been approved  in the manner required by the code.  Filing
procedures are consequently simplified. 

The code eliminates the unnecessary paperwork of filing multiple copies of
the certificate of merger or exchange required by existing law based on the
number of surviving, new or acquiring organizations that are parties to the
plan of merger or exchange.  The Secretary of State advises that these
extra copies are simply thrown away.  The code only requires one
certificate of merger or certificate of exchange to be filed. 

Section 10.003(a)(7) eliminates the need to attach the governing documents
of each foreign organization that survives a merger unless the organization
is not required to file its certificate of formation or similar document
with the applicable governmental authority under which the organization is
organized.  Existing law requires the governing documents of each surviving
entity that is party to a merger to be attached to the plan of merger.
This change conforms Texas law to Delaware law governing corporate mergers. 

Sections 10.251 through 10.254 contain provisions regarding the power of
domestic entities to transfer, sell and lease their property.  These
provisions are based generally on similar provisions contained in the TBCA.
The code clarifies and sets forth a general rule that, except as may be
provided elsewhere in the code or in the governing documents of an entity,
transfers of property do not require owner or member approval.  Current
requirements for approval by owners or members of sales of all or
substantially all the assets of an entity have been retained, where
applicable, in the titles governing the separate types of entities. Section
10.254 codifies for all entities that a disposition of assets will not
constitute a merger or conversion such that the acquiring entity would be
liable for the obligations of the transferring entity under the "de facto
merger" doctrine or otherwise unless the acquiring person expressly assumes
an obligation. 

Sections 10.301 through 10.306 codify and conform existing law regarding
the effect of a federal bankruptcy reorganization proceeding on certain
actions that would otherwise require owner or manager approval.  Again,
these provisions expand to all entities existing law found in the TBCA, the
TNPCA and the TREITA. 

Sections 10.351 through 10.368 primarily codify existing provisions under
the TBCA relating to the procedures to be followed where an owner has a
right of dissent and appraisal with respect to a particular act, which the
code defines as "fundamental business transactions".    The code has
combined and simplified a number of different statutes that were contained
in the TBCA that governed the right of dissent with the objective of
providing a clearer procedure to be followed when an owner has a right to
dissent to a fundamental business transaction.  The code does not expand
these provisions to any new type of entities but permits other entities to
adopt these provisions in their governing documents.  The code also adds in
Section 10.352  a definition of a "responsible organization", which is the
organization that is to be primarily responsible for the payment of the
fair value of the ownership interest of a dissenting owner. 

Section 10.354 provides the general rule for when an owner will have a
right of dissent and appraisal.  A more flexible definition is added of
what is a national securities exchange and national automated quotation
system for purposes of determining whether there is a public market for the
securities that are subject to the transaction. 

Section 10.355 through 10.361 represents a codification of the current
notification procedures contained in the TBCA that must be followed by a
domestic entity and dissenting owner.  The current statutes are overly
complex and inconsistent for different types of transactions.  The code has
simplified and conformed the procedures to be followed by eliminating
unnecessary notice requirements and clarifying others.   

Section 10.362 provides for the method of determining the fair value of an
ownership interest in an organization that is subject to a demand for
appraisal under the code.  This section codifies existing law that the
valuation is to be made as of the date of the fundamental business
transaction without giving any value for appreciation or depreciation
occurring in anticipation of the transaction or as a result of the
transaction. Section 10.352(b) adds a new provision defining how "fair
value"  is to be determined.  The current statute does not contain any
definition of "fair value" and leaves that determination up to the
appraiser and court. Section 10.352(b) provides greater clarity for the
determination by providing that the value should be based  on a going
concern basis without  giving effect to any "control premium" or "minority
discount".  This methodology is consistent with that applied in other
states and provides greater certainty to the appraisal process. 

k. Chapter 11-Winding Up and Termination of Domestic Entity

Chapter 11 contains provisions relating to the voluntary and involuntary
winding up and termination of a domestic entity and, except as noted below,
is intended to be nonsubstantive revisions of provisions contained in the
TBCA, TLLCA, TRLPA and TNPCA which have been extended to apply to all
domestic entities. 

Section 11.001 defines terms used in the chapter. Existing terminology and
processes for the termination of the existence of a corporation and
partnership vary.  For example, a corporation's business and affairs are
"liquidated" prior to the formal filing effecting a "dissolution," whereas
a partnership's business and affairs are "wound up" after the occurrence of
an event resulting in "dissolution."  The code standardizes the language
and processes relating to the winding up and termination of all domestic
entities.  Chapter 11 uses the term "terminated entity" to refer to a
domestic entity whose legal existence has come to an end, either
voluntarily or involuntarily; the term "winding up" is used to refer to the
liquidation and termination process. 

Sections 11.001(2) and 11.051 introduce a new term "event requiring a
winding up" to describe the various conditions or events triggering the
liquidation and termination process.  These conditions or events are
derived primarily from the TBCA, TNPCA, TRLPA and TRPA and expanded to
cover all domestic entities.  Sections 11.056, 11.057 and 11.058 set forth
certain supplemental events requiring winding up that pertain solely to
limited liability companies, general partnerships and limited partnerships.
These provisions are derived from the TLLCA, the TRPA and the TRLPA. 

Section 11.052 sets forth the action to be taken by a domestic entity upon
the occurrence of an event requiring the winding up of the entity.  One of
the required actions is the provision of written notice to each known
claimant against the domestic entity.  Existing provisions in the TRLPA and
TRPA do not require written notification be sent to each known claimant.
Existing provisions in the TBCA and TLLCA require a corporation and limited
liability company to mail such notification by registered or certified
mail.  Section 11.052 does not restrict how such notification must be made
and would permit notification by electronic or other technological means. 

Section 11.053 describes the application and distribution of a domestic
entity's property in the process of winding up.  Subsection (d) permits a
domestic entity to continue its business in whole or in part, including
delaying the disposition of the entity's property, only for the limited
period necessary to avoid unreasonable loss of the entity's property or
business.  This provision is similar to a provision found in TRPA Article
8.03(c) and is made applicable to all domestic entities. 

Section 101.056 provides that, in addition to the events listed under
Section 11.051, the termination of the membership of the last remaining
member of a limited liability company is an event that requires the winding
up of the company unless within 90 days after the termination, the legal
representative or successor of the last remaining member agrees to continue
the company and, from the date of the termination, to become a member or to
nominate another person to become a member of the company.  This Section is
new.  The source of this Section is Sec. 18-801(a)(4) of the Delaware
Limited Liability Company Act.  In addition, the death, expulsion,
withdrawal, bankruptcy of a member or other event terminating that member's
membership, which had provided one of the possible events causing a
dissolution of the limited liability company under TLLCA Art. 6.01(5), was
deleted as an event requiring the winding up of a limited liability
company.  Changes in the applicable Treasury Regulations since the passage
of the prior act make a dissolution of the limited liability company as a
result of such an event no longer helpful to ensure treatment of the
limited liability company as a partnership for federal income tax purposes. 

Section 11.101 requires a domestic filing entity to file a certificate of
termination upon completion of the  winding up process, and sets forth the
requirements of a certificate of termination to be filed with the
appropriate filing officer on behalf of the entity.  The filing
requirements and information required in a certificate of dissolution vary
under existing laws governing professional corporations, for-profit
corporations, nonprofit corporations, limited liability companies, and
limited partnerships.  For example, the provisions of Article 6.07 of the
TLLCA require a dissolving limited liability company to attach copies of
the resolution adopted by the members or managers, as appropriate.  The
articles of dissolution of a for-profit corporation do not require the
entity to attach copies of the resolution to dissolve adopted by the
shareholders of the corporation.  Section 11.101 standardizes the
information to be contained in the certificate of termination, and
eliminates the need generally to recite certain information relating to the
winding up process.  The resulting standardization and simplification of
the certificate of termination will facilitate the preparation, filing and
review processes for such documents.  In addition, existing law does not
clearly specify that a filing be made with the filing officer to reflect a
filing entity's termination by reason of the expiration of the entity's
stated period of duration.  Section 11.101 clearly indicates that a
certificate of termination must be filed by the entity under such
circumstances. 

Existing law does not specify when the termination of a nonfiling entity is
effective.  Section 11.103 makes the termination of the entity expressly
effective upon the completion of the winding up process and requires the
giving of any notice required under the entity's governing documents. 

TBCA Article 6.05 permits a for-profit corporation to revoke a voluntary
dissolution by action of its shareholders within 120 days of the filing of
the certificate of dissolution.  The code has no corresponding provision
permitting the revocation of a termination after the filing of a
certificate of termination.  However, Sections 11.201 and 11.202 permit a
terminated entity to reinstate its status when such action is approved by
its owners, members, or governing persons, and a certificate of
reinstatement is filed with the filing officer before the third anniversary
date of the entity's termination.  (The three-year time period is similar
to the period of time set forth in the TBCA and TLLCA provisions relating
to an entity's survival for certain limited purposes after dissolution.)
Section 11.201 permits a terminated entity to reinstate when the
termination occurred without the approval of the entity's governing persons
or if the termination was inadvertent or by mistake; or when the legal
existence of the entity is required to complete the process of winding up,
or to permit the entity to take an action, convey or assign property, or
sign an instrument, or settle or release a claim.  Existing law does not
permit a terminated entity to reinstate or reactivate under any of the
circumstances described. 

Section 11.206 provides that the existence of a reinstated terminated
entity is considered to have continued without interruption from the date
of termination and the terminated entity may carry on its business as if
the termination had not occurred.  The code does not carry forward in
Chapter 11 the concept of Article 7.01.E of the TBCA that provided that
reinstatement has no effect on the personal liability of directors,
officers, and agents during the period between dissolution and
reinstatement. 

Section 11.251 clarifies the authority of the Secretary of State to
involuntarily terminate a filing entity.  In addition to authorizing the
Secretary of State to involuntarily terminate an entity for its failure to
file a report or maintain a registered agent, Section 11.251 authorizes the
Secretary of State to involuntarily terminate a filing entity for its
failure to maintain a registered office address in this state, and for its
failure to pay a fee required in connection with a filing, which would
include filing instruments other than organizational instruments.
Moreover, existing provisions in the TRLPA do not authorize the Secretary
of State to cancel the certificate or registration of a limited partnership
for its failure to maintain a registered agent although the entity is
required to continuously maintain a registered agent and registered office
address in this state. Section 11.251 would authorize the involuntary
termination of a limited partnership on such grounds. 

Section 11.251 eliminates the failure of an entity to pay franchise tax or
a tax deposit as grounds for termination.  Although such failure is a basis
for termination in existing provisions of the TBCA, TNPCA, and TLLCA, the
practice of the Secretary of State is to use the provisions of Chapter 171
of the Tax Code to effect a forfeiture of an entity's articles or
certificate.  In addition, existing law requires the Secretary of State to
provide the entity with a 90 day notice and cure period prior to taking
action to involuntarily dissolve the entity for its failure to file a
report or to maintain a registered agent.  Section 11.251 would  require a
90-day notice and cure period prior to termination under all circumstances
specified in 11.251. Existing law requires notice to be sent by certified
mail to the entity's registered office, or to its principal place of
business in Texas, or the last known address of one of its officers,
directors, or managers, or to any other known place of business of entity.
Section 11.251 requires the Secretary of State to provide notice by regular
or certified mail to the entity's registered office address or principal
place of business. Present practice of the Secretary of State is to mail
notification to the addresses indicated in Section 11.251. 

Section 11.253 permits the reinstatement of an involuntarily terminated
entity upon the correction of the circumstances that led to the termination
and the filing of a certificate of reinstatement.  Existing law requires an
involuntarily dissolved entity to make its application for reinstatement
within a specified time frame:  36 months for a domestic for-profit
corporation and limited liability company and a foreign corporation; 24
months for a foreign limited liability company; and 12 months for a
nonprofit corporation.  The code eliminates such variances and permits
reinstatement at any time.  This is somewhat similar to reinstatement
procedures under the Tax Code, which do not restrict the time within which
an entity can reinstate. However, although Section 11.253 eliminates the
time restrictions for reinstatement, an involuntarily terminated entity is
considered to have continued in existence without interruption from the
date of termination only when the certificate of reinstatement is filed
before the third anniversary date of its involuntary termination.  Section
11.253 is silent with respect to the personal liability of an owner,
member, or governing person during the period between involuntary
termination and reinstatement.  Existing provisions in the TBCA, TNPCA, and
TLLCA state that the reinstatement has no effect on the personal liability
of an officer, director, manager, member, or agent during the period
between dissolution or revocation and reinstatement. 

The provisions of Subchapter G, which relate to the judicial winding up and
termination of a filing entity, the provisions of Subchapter H, which
relate to the resolution of claims upon termination, and the provisions of
Subchapter I, which relate to receiverships, correspond, in general, to
existing provisions found in the TBCA and TNPCA.  Except as noted below,
the material changes effected by Subchapters G, H, and I result from making
these provisions applicable to other domestic entities. 

Section 11.314 permits the judicial winding up and termination of a
domestic partnership or limited liability company on the application of a
partner in the partnership when the economic purpose of the partnership is
likely to be unreasonably frustrated; or when the conduct of another
partner has made it impracticable to carry on the business in partnership
with that partner; or when an owner of a limited liability company or
partnership determines that it is not reasonably practicable to carry on
the business in conformity with the entity's governing documents.  This
provision is similar to TRPA Article 6132b-8.01(e) and TRLPA Section 8.02.
The code makes this provision applicable to domestic limited liability
companies, but not to corporations. 

l. Chapter 12-Administrative Powers

Chapter 12 contains provisions relating to the administrative powers of the
Secretary of State and attorney general regarding filing entities and
foreign filing entities.  Unless otherwise noted, the provisions of this
chapter are intended to be nonsubstantive revisions of comparable
provisions found in the TBCA, TNPCA, TMCLA, TLLCA, TRLPA, and TRPA.  The
provisions utilize the new terminology of the code, and expand current
provisions to all domestic and foreign filing entities to achieve
standardization. 

Section 12.001(a) authorizes the Secretary of State to adopt procedural
rules for the filing of instruments under the provisions of the code.  This
authority is explicitly provided for under the TRPA and TUUNAA, and
implicit under present provisions of the TBCA, TNPCA, and TLLCA.  Section
12.001(b) confers upon the Secretary of State the power and authority
reasonably necessary to perform the duties imposed by the code. 

Section 12.003 provides that the interrogatory and answer to the
interrogatory issued under Section 12.002 are subject to disclosure under
the provisions of the Public Information Act, Chapter 552, Government
Code.  Existing law prohibits disclosure of any facts or information
obtained from an interrogatory except when official duty would require the
information to be made public or when needed as evidence in a criminal
proceeding or other state action. 

Section 12.156 makes the failure or refusal of a managerial official or
other authorized individual managing the affairs of an entity to permit the
attorney general to make an investigation of the entity or take copies of a
record of the entity a Class B misdemeanor.  Existing law establishes a
monetary fine and time of imprisonment. 

II. Title 2-Corporations

a. Chapter 20-General Provisions

Chapter 20 contains general provisions for Title 2 but has no material
changes from existing law. 

b. Chapter 21-For-Profit Corporations

Chapter 21 codifies provisions presently located in the TBCA.  The
provisions utilize the new terminology of the code and, except as noted
below, are intended to be nonsubstantive revisions of the TBCA. 

Texas corporate law currently provides shareholders with the preemptive
right to purchase their pro rata share of any newly issued stock and the
right to cumulate their votes in the election of directors.  These rights
may be eliminated by provisions in the corporation's articles of
incorporation.  As a routine matter, most practitioners deny preemptive and
cumulative voting rights in all new Texas corporations they form. The code
provides for corporations formed after the effective date of the code that
shareholders may have preemptive and cumulative voting rights but only if
the rights are set forth in the certificate of formation. These changes are
consistent with developments in modern corporate law and are intended to
make Texas law consistent with Delaware law and the Revised Model Business
Corporation Act.  Delaware is generally recognized as the leading corporate
law state in the U.S.  Special grandfathering rules are added to preserve
shareholders rights in existing corporations. 

The subscription provisions of TBCA Art. 2.14 are antiquated and are rarely
invoked.  Sections 21.16521.167 contain revised provisions that modernize
the law relating to subscriptions and are based primarily on the
subscription provisions of the Model Business Corporation Act.  Eliminated
are the arcane provisions of existing law that provide that any
subscriptions submitted with the articles of incorporation are deemed
accepted by the corporation and any subscriptions not submitted are deemed
rejected, regardless of the parties' intent.  TBCA Article 2.14 requires
the shares to be paid for in full before they can be issued.  Section
21.165 allows installment payments and allows the corporation to keep any
part of the subscription already paid. 

Section 21.167 provides that a written commitment to acquire shares of a
corporation may bind the person making the commitment to act in a specified
manner following the acquisition.  Such a commitment has a six-month term
unless it provides for a different period.  This provision does not have a
predecessor in the TBCA. 

The requirements to make a filing with the Secretary of State with respect
to certain actions that reduce the stated capital of a corporation
previously found in TBCA Articles 4.10, 4.11 and 4.12 have been eliminated
as a result of the diminished importance of stated capital under modern
corporate laws.  Modern corporate laws have generally eliminated public
filings relating to changes in stated capital. 

The provisions of Section 21.169 are new and validate restrictions,
conditions, and limitations on the exercise, transfer, or receipt of rights
and options by certain persons or classes of persons.  The provisions also
make it clear that the board of directors has the exclusive right to grant,
amend, redeem, extend, or replace any options or rights, unless otherwise
provided in such option or right or plan under which the option or right
was granted, and a bylaw provision cannot require the board of directors to
take any such  action.  

In keeping with the goal of modernization of the law and authorization of
use of electronic technologies, Section 21.367 authorizes electronic
proxies, including telephonic proxies.  An electronic transmission must
contain or be accompanied by information from which it can be determined
that the transmission was authorized by the shareholder.  Delaware and most
other states that permit electronic proxies have similar provisions
requiring or facilitating verification. 

Section 21.406 makes clear the right of the shareholders to remove a
director with or without cause absent provision in the certificate of
formation or bylaws.  TBCA Art. 2.32 states that the articles of
incorporation or bylaws may provide for removal of directors with or
without cause but is silent on whether removal can be accomplished without
such a provision.  This clarification is consistent with the approach taken
in the Model Business Corporation Act and Delaware General Corporation
Laws. 

c. Chapter 22-Nonprofit Corporations

Subchapters A through I of Chapter 22 codify provisions presently located
in the TNPCA.  The provisions utilize the new terminology of the code and,
except as described below, are intended to be nonsubstantive revisions of
the TNPCA.  Obsolete transitional provisions enacted with the TNPCA in 1959
have been eliminated. 

The provisions in Section 22.230 have been changed to be consistent with
those applicable to for-profit corporations.  The presumption is that a
contract between the corporation and an officer or director is valid if the
material facts of the relationship and the contract have been disclosed and
one of certain approval procedures are followed.  Currently, in the TNPCA,
the presumption is that the contract is not void or voidable. 

Section 22.235 has been added and specifies that Sections 7.002 and 7.003
do not affect, limit or eliminate any duty owed by a director, officer or
managing member to a charitable non-profit corporation. 

Section 22.355 provides that nonprofit corporations will be excepted from
the requirements relating to financial records and annual reports if the
corporation does not intend to solicit and does not actually receive
contributions in excess of $25,000 from a source other than its own
membership.  The limit in prior law was $10,000.  The increased amount is
consistent with the Internal Revenue Service requirements regarding the
necessity of filing a Form 990. 

Subchapter I includes the current provisions covering church benefit boards
located in Tex. Rev. Civ. Stat. article 1407a.  This subchapter utilizes
the new terminology of the code, but there are no material changes in this
subchapter. 

d. Chapter 23-Special-Purpose Corporations

Subchapter A combines the current applicability provisions from the TMCLA,
TBCA and TNPCA, and makes the code provisions applicable, when not
inconsistent or when specifically made applicable, to special purpose
corporations and corporations created under special statutes other than the
code.  There are no material changes in these provisions. 

Subchapter B codifies the provisions relating to business development
corporations currently located in Art. 1528g, Texas Revised Civil Statutes.
Subchapter B utilizes the new terminology of the code but is a
nonsubstantive codification. 

Subchapter C codifies the provisions relating to grand and subordinate
lodges currently located in articles 1399-1407, Texas Revised Civil
Statutes.  Subchapter C utilizes the new terminology of the code but is a
nonsubstantive codification. 

 III. Title 3-Limited Liability Companies

Title 3 governs limited liability companies.  Title 3 utilizes the new
terminology of the code and, except as described below, is intended to be a
nonsubstantive revision of the TLLCA. 

The most significant change in Title 3 from the TLLCA was a change in the
structure of how the provisions of the limited liability company statute
are applied.  The TLLCA contained numerous provisions that were expressly
qualified with the language "unless otherwise provided in the articles of
organization or regulations," or similar limitations.  In the interest of
clarity and economy of language, the code takes the approach stated in
Section 101.052 that, except as provided in Section 101.054, every
provision of the code governing limited liability companies may be waived
or modified by the company agreement of a limited liability company, and
that the terms of the company agreement will, with that qualification, take
precedence over the terms of the code.  In the absence of a governing
provision in the company agreement, the provisions of the code will govern
as a "default" provision.  This order of precedence is also reflected by
Section 101.252. 

Because of the reversal of the prior assumption that each provision of the
limited liability company statute was mandatory (unless expressly
qualified) to the new assumption in Sections 101.052 and 101.054 that most
provisions of the code governing limited liability companies may be waived
or modified, a number of the provisions of Title 3 are now stated in such a
way that the new provision appears to be the converse of the corresponding
provision under the TLLCA.  But because the actual effect of the operation
of Section 101.052, Section 101.054 and the provisions in question is the
same as existing law in most cases, these reversals in the form of
provisions are not noted separately below unless there is actually a
substantive change from existing law as a result of the reversal.  One
example of a change in the way a provision is stated without a substantive
change in the law is found in the rewording of TLLCA Art. 5.05 to Section
101.107.   

In some cases, however, the reversal of how code sections are stated
resulted in a particular section being redrafted as a default rule where
there had been none before.  These changes are noted below. 

Section 101.052 represents a change from existing law in two respects:
first, the change in structure of application of the statute described
above, and second, a change of the name of the governing document for a
limited liability company other than its certificate of formation (articles
of organization under existing law) to "company agreement" rather than
"regulations," the term used under prior law.  This change was intended to
emphasize the underlying contractual nature of this governing document for
a limited liability company and to make Texas law more consistent with laws
governing limited liability companies in other states.  The code defines
"company agreement" in Section 100.001(2).  This definition is similar to
the definition of a limited liability company agreement under Delaware law
and is consistent with the treatment of regulations under the TLLCA
although the TLLCA does not contain an actual definition of the term
"regulations."  The code definition recognizes, as does the TLLCA with
respect to regulations, that the company agreement may be oral and
clarifies that a company agreement of a single member limited liability
company is not unenforceable because only one member is a party to the
agreement. The TLLCA has permitted single member limited liability
companies from its inception, and the language in Section 100.001(2) makes
clear that the change in terminology from "regulations" to "company
agreement" does not imply that there must be more than one party to this
governing document. 

Section 101.054 lists the provisions of the code that may not be waived or
modified by the company agreement of a limited liability company, or may be
waived or modified only in certain circumstances.  This section represents
a change in form and structure of the law governing limited liability
companies, but does not result in a substantive change in existing law for
the most part. 

Section 101.102 provides that a person may be a member of a limited
liability company unless the person lacks capacity apart from the code.  In
addition, Subsection (b) represents a change from existing law by providing
that a person is not required to make a contribution, otherwise pay cash or
contribute property, to the limited liability company, or assume an
obligation to do so, as a condition to becoming a member or  acquiring a
membership interest.  This change mirrors the Delaware Limited Liability
Company Act. 

Section 101.105 provides that a limited liability company may issue
additional membership interests in the company with the approval of all of
the members of the company.  Existing law provides that additional
membership interests may be issued upon the vote of a majority of the
members.  The change would correct an inconsistency in the existing law
under which admission of an additional member after formation of the
company requires consent of all members while issuance of the membership
interest requires consent of a mere majority of members.  To the extent
that issuance of additional membership interests implicates or impacts
provisions of the company agreement, a unanimous member approval
requirement is consistent with the rule requiring unanimous consent to
amend the company agreement, as well. 

Section 101.204 provides that until the company is wound up, no member of a
limited liability company is entitled to receive or demand a distribution
from the company until the company's governing authority declares a
distribution to each of the members or to a class or group that includes
the member in question. Existing law leaves the determination and timing of
such distributions to the company's regulations; this change provides a new
default rule. 

Section 101.253 provides that the governing authority of a limited
liability company may designate one or more committees and that such a
committee may exercise the authority of the governing authority as provided
in the resolution designating the committee, but that the designation of a
committee under this section does not relieve the governing authority of
any responsibility imposed by law.  Existing law allows the designation of
committees only if the regulations so provide. 

Section 101.304 makes clear the right of the members to remove a manager
even if the company agreement is silent regarding removal.  TLLCA Art. 2.13
states that "[t]he regulations may provide that at any meeting of the
members called expressly for that purpose any managers may be removed, with
or without cause, as provided therein."  Thus the right of members to
remove managers absent provisions in the regulations is unclear under
existing law.  This change is consistent with the change made in Section
21.409 regarding removal of corporate directors. 

Section 101.352 states the requirements for notice of regular and special
meetings of the members, governing authority, and committees of the
governing authority of a limited liability company.  Existing law leaves
notice requirements solely to the provisions of the regulations; this
change provides a new default rule. 

The source of Section 101.356(c) is Art. 2.23D of the TLLCA.  Art. 2.23D
lists transactions that require approval of a majority of all members of
the limited liability company.  Certain transactions listed in Art. 2.23D
have not been included in Section 101.356(c) in order to correct
inconsistencies in the TLLCA. For example, Art. 2.23D specifies that
changing the status of a limited liability company from one in which
management is reserved to the members to one in which management is vested
in managers, or vice versa, requires approval of a majority of the members.
Yet, such a change would require an amendment to the articles of
organization, which requires consent of all members.  A second
inconsistency is found in the provision of Art. 2.23D that provides for
majority member authorization of an act that is unrelated to a limited
liability company's purpose or that otherwise contravenes the regulations.
Since amendment of the regulations requires the unanimous vote of the
members, a majority of the members should not be able to authorize an act
that contravenes the regulations. By eliminating these provisions, Section
101.356(c) eliminates these inconsistencies.  There are other provisions
included in Art. 2.23D of the TLLCA that are not included in Section
101.356(c) but are addressed in other provisions of Chapter 101. 

Section 101.356(c) requires that a fundamental business transaction receive
approval of a majority of the members and, if the limited liability company
has managers, a majority of the managers.  The requirement that a majority
of the managers approve a fundamental business transaction is new.  If a
limited liability company has managers, the managers are the governing
authority and fulfill a role similar to that of a corporate board of
directors.  The requirement of manager approval for fundamental business
transactions is similar to the requirement that directors of a corporation
act upon fundamental business transactions of  the corporation.  Similarly,
Section 101.356(d) adds a new requirement for amendments to the certificate
of formation of a manager-managed limited liability company.  Section
101.356(c) requires that amendments to a limited liability company's
certificate of formation receive approval of a majority of the managers in
addition to all of the members if the limited liability company has
managers.   

Section 101.552 provides that the requirements for approval of the
voluntary winding up of a limited liability company, or the revocation of
that winding up, or the cancellation of an event requiring the winding up,
or a reinstatement of a terminated limited liability company are a majority
vote of the limited liability company's governing persons and, if the
company has managers, a majority vote of all of the company members.
Existing law requires a majority vote of the members of the limited
liability company to voluntarily dissolve the company, the written consent
of all members to revoke voluntary dissolution, and the vote of all members
(or a different voting requirement stated in the company regulations) to
continue the business of the company following certain events of
dissolution.  In addition, there is no specific provision in the TLLCA
governing reinstatement of a terminated limited liability company.  The
change made by this code results in the standardization of the voting
requirement for these actions to a majority of the members, and adds the
additional requirement of the approval of the actions by the managers of
the limited liability company if it has managers. 

IV. Title 4-Partnerships

Title 4 governs general partnerships and limited partnerships.  The
provisions of Title 4 are derived from the TRPA and TRLPA and, except as
noted below, are intended to be nonsubstantive revisions of existing law. 

Chapter 152 of the code applies to general partnerships and Chapter 153 of
the code applies to limited partnerships.  Chapters 151 and 154 are
applicable to both general partnerships and limited partnerships and
contain definitions and other provisions that are common to both TRPA and
TRLPA.  The inclusion of Chapters 151  and 154, however, does not negate
the notion, as set forth in Section 13.03 of TRLPA and now contained in
Section 153.003, that in a case not provided for in the applicable limited
partnership provisions, the applicable general partnership provisions and
the rules of law and equity govern.  

Section 152.002(b) lists certain statutory provisions that cannot be waived
or modified by the partners in a partnership agreement and is based on TRPA
Article 1.03(b).  Section 152.002(b), however, reflects the move of certain
provisions of TRPA to Title 1.  Specifically, Section 152.002(b)(9)
provides that, with certain exceptions, a partnership agreement or the
partners may not waive or modify specific chapters in Title 1.  Sections
152.002(c) and (d) are new and provide certain exceptions.  Section
152.002(c) provides that a partnership agreement or the partners may waive
or modify a statutory provision listed in Section 152.002(b)(9) if such
statutory provision expressly permits a waiver or modification in the
partnership's governing documents.  Section 152.002(d) provides that a
partnership agreement or the partners may modify a statutory provision
listed in Section 152.002(b)(9) to the extent that such statutory provision
specifies the persons or group of persons which are entitled to approve an
action of the partnership or the vote or other method by which such action
is to be approved. 

Chapter 153 of the code, like TRPA, specifically notes each instance when a
statutory provision may be overridden by a partnership agreement. Chapter
153, however, also includes a provision (Section 153.004) similar to
Section 152.002(b)(9) delineating the provisions of Title 1 that may not be
validly waived or modified by the partners in a limited partnership. 

Section 152.501 of the code lists events the occurrence of which constitute
an event of withdrawal and is the corresponding provision to Article
6.01(b) of TRPA.   Several changes should be noted: 

(1) Section 152.501(b)(4)(C) provides that an event of withdrawal occurs
upon a partner's expulsion by a vote of a majority in interest of the other
partners if, not later than 90 days after the date on which the partnership
notifies an entity partner (other than a nonfiling entity or a foreign
nonfiling entity partner) that it will be expelled because it filed a
certificate of termination or equivalent, its existence has been
involuntarily terminated or its charter revoked or its right to conduct
business has been terminated or suspended, the certificate of termination
or equivalent is not revoked or its existence, charter or right to conduct
business is not reinstated.  Section 152.501(b)(4)(C) is broader than
Article 6.01(b)(4)(C) of TRPA in that such Article only referenced a
"corporate partner."  As noted above, Section 152.501(b)(4)(C) references
an entity partner other than a nonfiling entity or foreign nonfiling entity
partner; as defined, a filing entity includes a corporation, limited
partnership, limited liability company, professional association,
cooperative or real estate investment trust. 

(2) Section 152.501(b)(4)(D) provides that an event of withdrawal occurs
when an event requiring a winding up has occurred with respect to a
nonfiling entity or a foreign nonfiling entity that is a partner.  This
section is broader than Article 6.01(b)(4)(D) which references an event of
withdrawal occurring with respect to a "partnership" that is a partner. 

Section 5.253 of the code provides that if service of process is served on
the Secretary of State due to the failure of an entity to designate a
registered agent, the Secretary of State is required to forward a copy of
such process to the most recent address of such entity on file with the
Secretary of State.  This differs from the procedure set forth in Section
1.08(b) of TRLPA, which requires the Secretary of State to forward a copy
of the process so received to the address of the general partner as it
appears on file with the Secretary of State. 

Section 2.01(b) of TRLPA provides that, with the exceptions of limited
partnerships formed as a result of a merger or conversion, a limited
partnership is formed if there has been "substantial compliance" with the
formation requirements of Section 2.01.  Similarly, Section 2.02(e) of
TRLPA provides that unless otherwise provided, a certificate of amendment
is effective if there is "substantial compliance" with the requirements of
Section 2.02.   In an effort to standardize provisions, the applicable code
provisions (Chapter 3 and Subchapter B of Chapter 153) do not carryover the
"substantial compliance" concept.  This concept is made obsolete by the
simplified form of certificate of formation. 
 
Sections 153.003(b) and (c) are new subsections necessitated by the
organizational scheme of the code. Section 153.003(a) carries forward the
rule from TRLPA Section 13.03 that the law governing general partnerships
applies in a case not provided for by the limited partnership statute.
This concept is sometimes referred to as "linkage" of the limited
partnership act to the law governing general partnerships.  The code
defines "partner" in Chapter 1 to include both general and limited
partners.  A literal application of this definition, along with the linkage
provision in Section 153.003(a), would cause the provisions of Chapter 152
governing general partnerships to apply to limited partners as well as
general partners where Chapter 153 governing limited partnerships was
silent on an issue.  Some of these provisions clearly should not apply to
limited partners.  Thus, the language in Section 153.003(b) has been added
to make it clear that Chapter 152 governing general partnerships does not
apply to limited partners if it would be inconsistent with the nature and
role of a limited partner as contemplated by Chapter 153 governing limited
partnerships.  Section 153.003(c) clarifies that a limited partner does not
have any obligation or duty of a general partner solely by reason of being
a limited partner. 

Section 8.01(3) of the TRLPA provides that the business of a limited
partnership may be continued upon the occurrence of an event of withdrawal
of a general partner under certain circumstances, including if the
remaining partners (or another group or percentage of partners as specified
by the partnership agreement) agree within 90 days after the event of
withdrawal.  Section 153.501(b)(2) carries over the same concept, except to
extend the time afforded the remaining partners (or group or percentage of
partners) to one year. The short 90 day period was thought necessary prior
to the IRS "check-the-box" rules to retain the partnership's "flow through"
tax status.  With the adoption of the check-the-box rules, a more flexible
time period of one year is advisable to prevent an unintended, forced
winding up, especially when the partners are unaware that a corporate
general partner's charter has been forfeited or revoked.   
 
V. Title 5-Real Estate Investment Trusts

Title 5 applies to real estate investment trusts.  The provisions utilize
the new terminology of the code and,  except as described below, are
intended to be nonsubstantive revisions of the TREITA. 

Section 200.351 contains provisions stating how transactions and contracts
with interested trust managers may be validated.  The language has been
revised to mirror the counterpart language in the corporation provisions of
Title 2 and the limited liability company provisions of Title 3.  The
language also mirrors the provisions of TBCA Article 2.35-1, which were
revised in the 1997 Texas Legislature to clarify certain ambiguities that
had arisen out of recent Delaware case law.  These ambiguities are
similarly resolved in the revised language of code Section 200.351. 

The provisions of TREITA Sec. 7.10 relating to subscriptions for shares
were based on the similar provisions of TBCA Art. 2.14.  These provisions
have become antiquated and are rarely invoked. Sections 200.110-200.112
contain revised provisions that modernize the law relating to subscriptions
and are based primarily on the subscription provisions contained in the
Revised Model Business Corporation Act.  These provisions are parallel to
the corporate provisions in Sections 21.165-21.167.  For further
information regarding the changes effected by these provisions, see the
discussion relating to Sections 21.165-21.167.  

Section 200.317 provides that contracts or transactions between a real
estate investment trust and an interested manager or officer are valid
notwithstanding the trust manager's vote or participation in the meeting at
which the contract is authorized if one of several approvals is obtained.
The language has been revised to parallel the counterpart language in the
for-profit corporation provisions of Title 2.  The language also parallels
revisions to TBCA Article 2.35-1 effected by the 1997 Texas Legislature to
clarify certain ambiguities that had arisen out of recent Delaware case
law.  These ambiguities are similarly resolved in the revised language of
code Section 200.317. 
 
Section 200.406(d) adds a 20-day notice requirement prior to the date on
which a fundamental business transaction is to become effective as a result
of written consents of shareholders.  A "fundamental business transaction"
is defined in the code to be a merger, interest exchange, conversion or
sale of all or substantially all of the assets of the entity.  Existing law
in TREITA Section 23.30(D) is silent as to any advance notice for
solicitation of written consents from shareholders.   

TREITA Section 19.10 addresses the process of dissolution of a real estate
investment trust in a cursory manner and provides little guidance to trust
managers, legal counsel and courts.  The more detailed Chapter 11 provides
significant guidance to practitioners, real estate investment trusts and
courts with respect to the process of winding up and termination of real
estate investment trusts.  The requirement of filing a withdrawal of an
assumed name certificate in the last sentence of TREITA Section 19.10 is
deleted as unnecessary.  Any requirement for filing and withdrawal of an
assumed name certificate should be left to the assumed name law of this
state. 

VI. Title 6-Associations

a. Chapter 251-Cooperative Associations

Chapter 251 of Title 6 contains  provisions relating to cooperative
associations.  The provisions utilize the new terminology of the code and,
except as noted below, are intended to be nonsubstantive revisions of
present provisions found in the CAA. 

Section 251.001 sets forth definitions applicable to Title 6 but does not
include definitions for "association" and "member" which are defined in
Title 1.  The other definitions contained in this Section have not been
materially changed. 

Section 251.003 carves out an exemption from the applicability of this
Title.  It states that this chapter does not apply to a corporation or
association organized under or having a purpose prohibited under Title 2 or
a law listed in Sections 22.051-.054 which coordinates the CAA provisions
with the nonprofit corporation provisions. 
 
Section 251.152 omits the provision in the CAA that allows any two or more
offices to be held by the same person, except the offices of president and
secretary. 

Section 251.153 states that the certificate of formation or bylaws of the
cooperative association may establish how an officer or director may be
removed and sets forth the same methods of removal as the CAA if the
certificate of formation and the bylaws are silent.  This section sets
forth a default procedure, drawn from current case law, if the certificate
of formation or bylaws contain no provisions. 

Section 251.303 states that a meeting by a unit of the membership must be
called and held in the same manner as a regular meeting of the members
unless the bylaws provide otherwise.  The CAA was silent as to the manner
in which such meetings are called and held. 

Section 251.452 provides that an officer of the cooperative association or
one or more of the persons designated as a liquidating trustee under
Section 251.451 shall execute the certificate of termination on behalf of
the cooperative association. 

Section 251.502 permits the University Cooperative Society, a domestic
non-profit  corporation related to the University of Texas, to use the word
"Cooperative" in its name. 

b. Chapter 252-Unincorporated Non-Profit Association

Section 252.001 does not define "person" or "state," each of which is
defined in TUUNAA; however, these terms are defined in a similar manner in
the code Construction Act, which is incorporated by reference into the code
by Section 1.051. 

No material changes are being made with respect to unincorporated nonprofit
associations by Chapter 252. 

c. Chapter 253-Unincorporated Joint Stock Companies or Associations

No material changes are being made with respect to unincorporated joint
stock companies by Chapter 253. 

VII. Title 7-Professional Entities

Title 7 codifies the provisions relating to professional corporations,
professional associations and professional limited liability companies
presently found in the TPCA (art. 1528e), TPAA (art. 1528f), and in Part
Eleven of the TLLCA (art. 1528n).  The provisions utilize the new
terminology of the code and provide definitions for specific terminology
used in the Title.  Except as noted below, the provisions of Title 7 are
intended to be nonsubstantive revisions of present law.  In general, many
of the substantive changes effected by the code are a result of extending
the provisions of the TLLCA to professional corporations. 

Under existing law, a foreign professional association and a foreign
professional corporation, other than a professional legal corporation,
cannot obtain a certificate of authority from the Secretary of State to
transact business in Texas.  In contrast, the provisions of the TLLCA
provided a qualification process for a foreign professional limited
liability company.  Section 301.005 makes Chapter 9 (relating to the
registration of foreign entities) applicable to foreign professional
entities, thus providing a qualification process otherwise unavailable
under existing law to foreign professional corporations and professional
associations. 

The code also effects a change in the ownership provisions relative to
professional corporations, other than professional legal corporations.
Presently, a professional legal corporation may be owned by professional
individuals and by professional legal corporations.  Ownership in a
professional corporation, other than a professional legal corporation, is
limited to professional individuals.  In contrast, the provisions relating
to professional limited liability companies permit ownership by
professional entities, as well as professional individuals.  Section
301.007, and the definition of "authorized person" found in Section
301.004, in effect open up ownership of professional corporations to
professional organizations.  Ownership in professional associations,
however, remains limited to professional individuals. 
 
Section 2.004 of the code permits a professional entity to render more than
one type of professional service if expressly authorized under state law
regulating the professional services.  With limited exceptions, present law
limits the purpose of a professional corporation and a professional limited
liability company to providing one specific professional service.  Various
exceptions allowing joint ownership of professional entities by certain
kinds of professionals previously scattered throughout the TPCA, TPAA and
Chapter 11 of the TLLCA are now combined in Section 301.012.  This
combination simplifies and makes the law easier to locate and comprehend. 

Although the language in the definition of "professional association"
contained in Section 301.003 differs from the present language of the TPAA
regarding formation of professional associations, the change represents a
clarification of existing law.  The definition makes clear that the
formation of a professional association is limited to persons licensed to
practice certain types of professional services.  The section, in part,
codifies interpretations of the provisions of the TPAA by the Texas
Attorney General [Op. Tex. Att'y Gen. No. M-551 (1970)].  The list of
permitted professional services was also substantially expanded by
legislation in the 1999 Texas Legislature and carried over into this
provision. 

Currently, the provisions of the TPAA, TPCA, and TLLCA only provide
examples of those professionals who would be considered a "licensed mental
health professional."  For purposes of clarification, a definition of the
term "licensed mental health professional" is included in Section 301.003.
The new definition is consistent with the current provisions of the TPAA,
TPCA, and TLLCA. 

VIII. Title 8-Miscellaneous and Transition Provisions

Title 8 of the code contains miscellaneous and transition provisions.  The
effective date of the code is January 1, 2002.  The code applies to a
domestic entity formed on or after the effective date, and to a foreign
filing entity that is not registered before the effective date and that
transacts business in Texas after the effective date.  On January 1, 2006,
the code mandatorily applies to all entities, regardless of when they were
formed or registered with the Texas Secretary of State.   

Domestic entities existing when the code becomes effective may elect to be
governed by the code by amending their governing documents, and, if they
are filing entities, they must file an amendment to their certificates of
formation to conform to the requirements of the code and state their
election to adopt the code. 

Foreign entities previously registered with the Texas Secretary of State
prior to the effective day may voluntarily subject themselves to the code
by filing an amendment to their applications for registration stating that
they adopt the code. 

Section 402.006(b) specifically grandfathers existing certificates of
partnership interests under existing law. The code adds new default rules
for certificates of ownership interests in partnerships.  Because of the
informal nature of some partnerships, it was determined not to apply the
new rules to preexisting certificates.  All new certificates of ownership
interest will be required to satisfy the requirements of the code. 

Section 402.007 clarifies that Chapter 8 governs any proposed
indemnification by a domestic entity after the date that the code commences
to govern the entity, regardless of when the relevant events on which the
indemnification is based occurred. 

The code applies to meetings or written consents of owners, members and
governing persons of a domestic entity, and to any votes at the meetings,
after the code commences to govern the entity.  The code also applies to
transactions consummated after the code commences to govern the entity,
except that if a required approval of owners or members of the entity has
been previously given, the transaction is governed by existing law. 

Section 402.011 specifies that Chapter 11 applies to involuntary or
voluntary winding up proceedings of  entities commenced after the date the
code begins to apply to such entities.  Pending proceedings continue to be
governed by existing law. 

A foreign filing entity that transacts intrastate business in Texas before
the code commenced to apply to it and that is required by Chapter 9 to
register to transact business has a 30-day grace period to file an
application for registration. 

If a domestic filing entity's rights, privileges and powers are suspended
under existing law and continue to be so suspended immediately prior to
when the code commences to apply to the entity, the code will apply to the
entity.  A suspension under the Tax Code will continue until the suspension
is ended under the Tax Code, not under the code. 

Existing law, not the code, applies to an action or proceeding commenced
before the code commences to apply to an entity. 

IX. Title 9-Other Bill Sections

Sections 2 through 15 of this bill contain conforming amendments to the
existing Texas organization statutes that are being reorganized into the
code.  These amendments specify that the existing statutes do not apply to
an entity to which the code applies and expire on January 1, 2006, when the
code applies to all existing entities. 

Section 16 repeals various outmoded statutes.

Section 17 specifies that this bill takes effect January 1, 2002.

EFFECTIVE DATE

January 1, 2002.

EXPLANATION OF AMENDMENTS

Committee Amendment No. 1 amends the Business Organizations Code to modify
the definition of "associate" to include both direct and indirect ownership
of 10 percent or more of a class of voting ownership interests or similar
securities of the entity or organization (Sec 1.002).  The amendment
changes the definition of "member" as it relates to derivative proceedings
to include a person who beneficially owns a membership interest through a
voting trust or a nominee on the person's behalf (Sec. 101.451).  The
amendment removes the provision that provides that a limited partner who
knowingly permits the limited partner's name to be used in the name of the
limited partnership is liable to a creditor who extends credit to the
limited partnership without actual knowledge that the limited partner is
not a general partner (Sec 153.102). 

Committee Amendment No. 2  sets forth provisions relating to the limited
liability of holders of shares, pledgees, and trust administrators (Secs.
21.223-21.226, 101.115, 152.056, and 200.161-200.164).  

Committee Amendment No. 3 removes the provision that exempts a proprietary
school from certain requirements relating to financial records and annual
reports (Sec. 22.355). 

Committee Amendment No. 4 exempts a foundation chartered for the benefit of
a private institution of higher education that is authorized to grant
degrees or any component part of such an institution from certain
requirements relating to financial records and annual reports (Sec.
22.355). 

Committee Amendment No. 5 makes a technical correction relating to actions
not constituting participation in business for liability purposes (Sec.
153.103).