1. THE TEXAS BUSINESS ORGANIZATIONS CODE: THE REVOLUTION IS HERE Prepared and Copyright Reserved By: Sabrina A. McTopy 27 th Annual Advanced Real Estate Law Course San Antonio, Texas

2. The “WHY” BACKGROUND OF TEXAS BOC  Current Entity Statutes Do Not Reflect Modern Practice (Form over Substance) – Recognition of increasingly blurred lines between entity types, driven by commercial desire for increased flexibility – 1996 IRS retreat from formalistic four-factor test for corporations/partnerships  Texas Attempting to Promote Itself As a Leader in Entity Laws – Complexity of different entity statutes’ organization and interplay a disincentive to organize in Texas

3. CHOOSING THE RIGHT ENTITY

4. QUOTABLE QUOTES “The biggest winners will be small businesses that no longer have to spend a fortune on lawyers’ fees just to file the right form with the Secretary of State.” -Rep. Helen Giddings, TBOC Sponsoring Democrat “Texas businesses want to play by the rules, but it’s hard to play by the rules when the rules are often incomprehensible."

5. The Evolution of “Enabling” vs “Mandatory” Concept of Entities -Partnerships as contracts among parties free to choose their terms. -Corporations as fictitious entities required to comply with mandatory rules and standards.

6. | _______________ | _____________ | ____________ | The “WHEN” Entity Law Changes Continuum Sept. 1, 2003Sept. 1, 2005Jan. 1, 2006 – HB 1165 – Amended TBCA – HB 1163 – Amended TLLCA TRLPA and TRPA – HB 1156 – BOC enacted HB 1507 – Amends TBCA (technical) HB 1154 – Amends TLLCA, TRLPA and TRPA (technical) HB 1319 – Amends BOC to: (a) incorporate some Sept. 1, 2003 changes (b) correct errors and fill gaps BOC becomes effective for newly-formed entities - New BOC filing fees apply to all entities BOC applies to all entities Pre-Jan. 1, 2006 law repealed Jan. 1, 2010

7. The “WHAT” Substantive codification of Texas statutes for profit and non-profit entities  Texas Business Corporation Act  Texas Non-Profit Corporation Act  Texas Professional Corporation Act  Texas Professional Association Act  Texas Miscellaneous Corporation Laws Act  Texas Limited Liability Company Act Corporations  Texas Revised Limited Partnership Act  Texas Revised Partnership Act  Texas Real Estate Investment Trust Act  Texas Uniform Unincorporated Non-Profit Associations Act  Texas Cooperative Associations Act Partnerships

8. BOC STRUCTURE “Hub and Spoke” Title I is the “hub” - general provisions common to most forms of entities Remaining Titles are “spoke” - provisions specific to entity type  Title 2 – Corporations  Title 3 – LLCs  Title 4 – Partnerships  Title 5 – REITs  Title 6 – Associations  Title 7 – Professional Entities  Title 8 – Miscellaneous/Transition Rules

9. TITLE I GENERAL PROVISIONS The key to understanding the BOC  Chapter 1 -Definitions  Chapter 2 -Purposes and Powers of Domestic Entity  Chapter 3 -Formation and Governance  Chapter 4 -Filings  Chapter 5 -Names of Entities: Registered Agents and Registered Offices  Chapter 6 -Meetings and Voting  Chapter 7 -Liability  Chapter 8 -Indemnification and Insurance  Chapter 9 -Foreign Entities  Chapter 10 -Mergers, Exchanges, Conversions and Sales of Assets  Chapter 11 -Winding up and Termination of Domestic Entity  Chapter 12 -Administrative Powers

10. UNDERSTANDING THE BOC Refer FIRST to Title I THEN refer to the title for the specific entity type Title I applies unless there is a conflicting provision in the entity- specific title

11. Title I Definitions Entities have “Owners” or “Members” Membership Interests For-profit corporations REITs Partnerships Non-profit corporations Unincorporated nonprofit associations Ownership Interests LLCs Professional Associations

12. Title I Definitions (cont’d) Any instrument or document required or permitted to be filed with the Texas SOS  Filing Instrument Articles of Incorporation/Articles of Organization and Certificate of Limited Partnership”  Certificate of Formation Application for Qualification to do Business  Application for Registration Articles of Amendment  Certificate of Amendment Certificate of Dissolution  Certificate of Termination

13. Title I Definitions (cont’d) Certificate of Formation and other agreements that govern an entity’s operations  Governing Documents Board of Directors, Board of Managers or General Partner  Governing Authority One who serves as the Governing Authority of an entity  Governing Person An officer or Governing Person  Managerial Official

14. BOC SUMMARY BY TOPIC Formation Provides one form of Certificate of Formation for all entities Specifies basic information that entities must provide in their certificates of formation, and through a series of “additional information required for xxx entity” provisions, specifies additional information specific to particular entity types All entities have perpetual existence unless otherwise specified in Governing Documents

15. BOC SUMMARY BY TOPIC Formation (cont’d) “Limited” may be used in corporation name Permits nonprofit LLCs Voting trusts and voting agreements for LLCs

16. Filings Consolidates filing procedures in one chapter and standardizes rules for filings No “certificate of incorporation/formation” issued; Secretary of State (in the case of a REIT, the county clerk) instead issues an acknowledgment of filing (electronic or written) Retains permissibility of electronic filings and signatures BOC SUMMARY BY TOPIC

17. Filings (cont’d) Filings are effective when filed, not when Secretary of State issues a certificate Entities may abandon any filed instrument before effectiveness Foreign business trusts and REITs must register in Texas ($750 + $750 late filing fee) BOC SUMMARY BY TOPIC

18. Filings (cont’d) Standardizes filing fees by action taken Eliminates need for foreign entity to file certificate of existence with Application For Registration to transact business Requires amendment to Application for Registration filed within 90 days if foreign entity changes its name or business activity BOC SUMMARY BY TOPIC

19. Filings (cont’d) Provides civil remedy (recovery of damages, court costs and reasonable attorneys’ fees) for all entities for false and misleading Filing Instrument Provides more severe criminal penalty (state jail felony rather than a Class A Misdemeanor) for knowingly filing a materially false Filing Instrument BOC SUMMARY BY TOPIC

20. Filings (cont’d) Establishes new or revised civil penalties/late filing fees for foreign entities’ failure to register when required Simplifies filing of Certificate of Merger/ Exchange/Conversion (no need to include plan of merger or to specify actual voting results, and no multiple copy requirement) Adds to Merger/Conversion Fee a fee for creation of newly-formed entity BOC SUMMARY BY TOPIC  LLC conversion to LLP = $300 + $750

21. Governance Directors, managers or managing members have right to inspect to books and records Governing Persons may rely on opinions, reports and statements Partnerships may adopt in their partnership agreements Code provisions as to meetings and voting Managers/officers/directors may be removed with or without cause BOC SUMMARY BY TOPIC

22. Indemnification Committee of one rather than two disinterested Governing Persons may determine that standard for indemnification has been met Owners or members may approve by resolution indemnification and advancement of expenses of any officer, employee or agent who is not also a director (only implied in existing law) Increases (from six to 12 months) maximum time for reporting to limited partners any indemnification or advancement to a general partner BOC SUMMARY BY TOPIC

23. Mergers Plan of merger must contain a description of the organizational form of each entity a party created in the merger Governing Documents of non-BOC organizations that survive or are created by the merger not attached to the plan of merger Clarifies LLC disposition of assets is not a merger, and purchaser not liable for seller liabilities unless expressly assumed All surviving entities are secondarily liable for payment to dissenting owners BOC SUMMARY BY TOPIC

24. Termination One form of certificate of termination for all entities Specifies what events require winding up of a domestic entity, the procedure for winding up and application of liquidation proceeds Secretary of State may involuntarily terminate entity for failure to pay filing fees or maintaining a registered office BOC SUMMARY BY TOPIC

25. Termination (cont’d) Secretary of State may reinstate involuntarily terminated filing entity at any time, with retroactive treatment only if reinstated before the 3 rd anniversary of involuntary termination In case of a retroactively reinstated involuntarily terminated LP, personal liability of Governing Persons is not affected In certain cases, extends ability to reinstate a voluntarily terminated entity from 120 days to three years after termination (C corps, REITs, LLCs and LPs) BOC SUMMARY BY TOPIC

26. Transition JAN. 1, 2006 – JAN. 1, 2010 Pre-BOC and BOC Regimes Coexist  Changes to Entity Statutes Since Sept. 1, 2003 Minimize Substantive Differences Existing Entities May Elect BOC Before Jan. 1, 2010 by Amending Certificate of Formation and Stating Election to Adopt

27. Transition Considerations Nomenclature, Filing Instrument Forms and Governing Documents Will Differ Forms and Drafting Eventually Uniform, but Transition Requires Knowing pre-BOC law and BOC  Purchase and Sale Agreements TSOS Forms Available Dec. 2005  Buyer and Seller Representations  Legal Opinions  Financings