June 1 will arrive before we know it. On that date, amendments to the Texas Business Organizations Code adopted in the 2021 Texas Legislature will become effective. The amendments introduce the concept of registered series of limited liability companies in Texas. The registered series concept can be expected to bring better transparency and usefulness for series of Texas limited liability companies.
For those interested in these changes to the TBOC and numerous other interesting topics, you should consider attending the “20th Annual Choice, Governance & Acquisition of Entities” course to be presented May 20 live in Dallas. The course is co-sponsored by Texas Bar CLE and the Business Law Section of the State Bar of Texas. The webcast of this CLE course will be replayed on June 15, and there will be a video replay June 24 in Houston.
Click here to register for the 20th Annual Choice, Governance & Acquisition of Entities. Early bird registration ends May 6.
Committees of the State Bar of Texas Business Law Section drafted several bills that were passed by the 2021 Texas Legislature. One of those bills (S.B. 1523 – by Sen. Kelly Hancock and Rep. Chris Turner) introduces the concept of registered series of Texas limited liability companies by amending Subchapter M of Chapter 101 of the TBOC. Series of LLCs have been around in Texas since 2009, when Subchapter M was adopted. A key attribute of a series of a limited liability company is that the assets of a series can be protected from any liabilities or obligations of the “parent” LLC generally or of any other series of the LLC. To establish a series, the LLC must include a specific notice of the limitation of liabilities of the series in the LLC’s certificate of formation and meet other requirements. Subchapter M was derived primarily from the series LLC provisions in the Delaware Limited Liability Company Act. In 2019, Delaware substantially revised those provisions to adopt concepts of “protected series” and “registered series.” The new amendments adopted in 2021 by the Texas Legislature are derived in part from the 2019 Delaware amendments but are also based in part on other provisions of the TBOC.
The new amendments enhance the transparency of LLC series to third parties and their ability to obtain financing, to open bank accounts and to contract with third parties. Because the filing of a “certificate of registered series” with the Texas secretary of state will be required to form a registered series, third parties transacting business with a registered series of a Texas LLC will be able to confirm its existence. The certificate of registered series needs to include the name of the parent LLC and the name of the registered series. For a series that does not want to have a specific public filing, the existing LLC series concept is retained but renamed as a “protected series.”
New provisions:
- specify how the certificate of registered series can be amended or terminated,
- specify how a registered series must be wound up and terminated upon the occurrence of an event specified in its governing documents or as determined by its governing persons or a court,
- specify the naming requirements for a registered series (i.e., the name must include the name of the parent LLC and the words “registered series” or the abbreviation “R.S.” or “RS”),
- authorize conversion of a protected series into a registered series, and vice versa, of the same LLC, and
- authorize mergers among protected series and registered series of the same LLC, including so-called “divisive” mergers of a single series.
Clarifying amendments are made to the TBOC for protected series and correspondingly for registered series. Default rules for the approvals that are required to amend the company provisions that govern protected and registered series have been added. Another change provides that the assets of a protected or registered series are protected from other liabilities “to the extent” – not “if” – proper required records are maintained for the series, which means that a record keeping failure as to one aspect of a series will not defeat the liability protection entirely for the series. This matches a change made in the Delaware Limited Liability Company Act. Another clarifying amendment specifies that the notice of limitation on liabilities of a series in the LLC certificate of formation constitutes notice of such limitation to third parties. A member or manager can agree to be obligated personally for debts of a protected or registered series under the company agreement or another agreement. A prospective two year statute of limitations for claims of impermissible distributions by a protected series or a registered series, which is similar to the general LLC provisions on this topic, has also been added.
Outside of the TBOC, the provisions of the Texas Business & Commerce Code are amended to:
(A) authorize assumed name certificates to be filed with the Texas secretary of state by a registered series or by the parent LLC on behalf of a protected series, and
(B) specify that a registered series is a “registered organization” for the purpose of determining the place of filing of a UCC financing statement against the registered series. This change is important because it clarifies where a lender must file a UCC financing statement to perfect a security interest in the assets of the registered series.
The amendments made by the bill will be effective June 1. The primary reason for the delayed effective date is to enable the Texas secretary of state to organize its processes and systems to allow for the various new filings contemplated for registered series.
The “Choice, Governance and Acquisition of Entities” course is an excellent way for practicing attorneys and others to obtain in one day information about these legal developments and lots of other important topics relating to business entities. Other topics include, among others, LLC acquisitions and combinations, LLCs as Subchapter S corporations, redemptions of partnership and LLC interests, governance issues in entities with financial investors and ratification of voidable entity actions. Register today by visiting the event website.
Daryl Robertson is a partner at Hunton Andrews Kurth in Dallas. He focuses his practice on business and finance transactions, entity formation, M&A and securities law.