On Sept. 1, the Texas business court will commence accepting the filing of new cases within its jurisdiction. New Chapter 25A creating and governing the Texas business court was added to the Texas Government Code by House Bill 19 in the 2023 Texas Legislature, effective Sept. 1, 2023. It is expected that the new Texas business court will address the growing need for specialized Texas courts to handle complex business and entity governance litigation and will result in more predictable outcomes for business disputes and make Texas a more attractive place for resolving these kinds of disputes. Certain other bills passed in the 2023 Texas Legislature have already gone into effect are summarized below and will affect the governance of entities in Texas.
Business Court
New Chapter 25A to the Texas Government Code specifies that the business court is composed of 11 geographic divisions. The business court in 6 of the 11 geographic divisions will not commence accepting cases until Sept. 1, 2026, and is subject to reauthorization of funding through additional legislative appropriations in the 2025 Texas Legislature. The geographic divisions match the correspondingly numbered administrative judicial regions defined in the Texas Government Code. The five business court divisions that will commence operations on Sept. 1 include the counties containing and surrounding Dallas, Fort Worth, Austin, San Antonio and Houston. These business court divisions will stretch from the Red River boundary with Oklahoma to the Rio Grande border with Mexico and the Gulf Coast and essentially run through the middle of Texas and contain most of the major population centers. The six geographic divisions that must await September 2026 to commence operating include counties in East and Southeast Texas, the Panhandle and West Texas and far South Texas and notably would include El Paso, Lubbock, Amarillo, Tyler, Longview, Beaumont/Port Arthur and Brownsville.
Chapter 25A specifies that business court judges will be appointed by the governor. As of this writing, there has yet not been announcements by the governor’s office of these appointments, but there has been some publicity, especially in The Texas Lawbook, about various attorneys and judges who have submitted their names to the governor’s office for potential appointment. The judges will serve for a two-year term and must have 10 years or more experience in practicing complex civil business litigation or business transaction law or in serving as a judge in a civil court.
The business court has limited civil jurisdiction concurrent with district courts in two different sets of specified actions — one set requires an amount in controversy exceeding $5 million and the second set requires an amount in controversy exceeding $10 million. The specified $5 million–minimum actions include (1) a derivative proceeding, (2) an action regarding governance or internal affairs of an organization, (3) an action involving a claim under a state or federal securities or trade regulation law, (4) an action by an organization or its owner against an owner, controlling person or managerial official of the organization, (5) an action alleging that an owner, controlling person or managerial official breached a duty owed to the organization or its owners, (6) an action seeking to hold an owner or governing person liable for an obligation of the organization and (7) any action arising out of the Texas Business Organizations Code. The $5 million minimum does not apply if any party to the action is a publicly traded company.
The specified $10 million-minimum actions include (1) an action arising out of a “qualified transaction” (which is defined in the statute), (2) an action that arises out of a contract in which the parties agreed that the business court has jurisdiction of the action and (3) an action that arises out of a violation of the Texas Finance Code or Texas Business & Commerce Code by an organization or its officer or governing person. Banks, credit unions and savings and loan associations are excluded from categories (1) and (3).
The business court also has supplemental jurisdiction over any other claim related to a case within the business court’s jurisdiction that forms part of the same controversy but only if all the parties to the claim and the business court judge agree.
Questions have been raised in the past as to whether creation of a business court is consistent with provisions of the Texas Constitution. It is expected that constitutional questions will be raised concerning the business court soon after it commences operations. Proponents of the business court believe that the Texas Constitution and existing Texas case law support the authority of the Texas Legislature to establish the business courts. House Bill 19 specifies that the Texas Supreme Court has exclusive and original jurisdiction over any constitutional challenge to the business court.
A party in an action pending in the business court has the right to a jury trial when required by the Texas Constitution. The jury trial in a case filed initially in the business court will be held in any county in which the case could have been filed under Texas law as chosen by the plaintiff. However, a written contract among the parties can specify a county as venue for the lawsuit. Of course, the parties and the business court judge may agree to hold the jury trial in any other county.
New Chapter 25A provides rules for establishing venue in a county in an operating business court division, for transferring actions to different counties in the business court and for removing actions filed in a district court or county court to the business court. The judge of a court in which an action is filed may also request a transfer of the action to the business court if the action is within the business court’s jurisdiction.
All appeals from an order or judgment of the business court must be taken to the new 15th Court of Appeals which has exclusive jurisdiction over such appeals. The 15th Court of Appeals was also created in the 2023 Texas Legislature and will commence to accept appeals on or after Sept 1.
The Texas Supreme Court is required to adopt rules relating to administration and procedures for the business court, including the required issuance of written court opinions and the setting of fees for filings and actions. The Supreme Court has started the process of drafting these rules for the business court, most of which will be embodied in amendments to the Texas Rules of Civil Procedure and Rules of Judicial Administration. The Supreme Court Advisory Committee has undertaken the task of preparing a recommended draft of these amendments.
Hear and learn more details about the new Texas business court and updates on other Texas legislation passed in 2023 affecting the governance of Texas entities by attending the “Choice, Governance and Acquisition of Entities” CLE course that will take place in Dallas on May 31. Other important topics relating to Texas entities will be addressed at the conference including, among other things, the Corporate Transparency Act, use of artificial intelligence in the boardroom, multistate tax update, funding sources, asset purchases involving a limited liability company, fiduciary duties of directors, drafting and planning for succession in a closely held business and earnouts in merger and acquisition transactions. Register today by visiting the event website.
Other Legislation — TBOC Amendments
Effective Sept 1, 2023, Senate Bill 1514 made an array of amendments to the Texas Business Organizations Code, or TBOC, covering various topics. Some of these amendments are summarized below.
Omission of Initial Mailing Address in Restated Certificate of Formation. The amendments permit omission of an entity’s initial mailing address, which can become inaccurate as time passes, in a restated certificate of formation. The 2021 Texas Legislature added a requirement that the initial certificate of formation of a domestic filing entity must include its initial mailing address.
Delayed Effective Date for Certificate of Merger, Conversion or Exchange. Several changes enhance the flexibility to file a certificate of merger, exchange or conversion with a delayed effective date.
Dissent and Appraisal Rights Changes. A notice of a meeting of owners who have dissent and appraisal rights must include a copy of the dissent and appraisal provisions of TBOC Chapter 10. As an alternative to a copy, the amendment allows the notice to direct owners to a publicly available electronic resource where those provisions may be accessed without cost. The requirement that dissenting owners must surrender an endorsed certificate representing their ownership interests in order to obtain payment of the appraisal proceeding judgment is replaced by a statement that the judgment must be paid on terms and conditions ordered by the court.
Replacement of LLC’s Last Member. Greater flexibility is provided for continuing the existence of a Texas LLC upon the termination of the member status of the last remaining member. Among other things, the default deadline for the replacement of that member is extended from 90 days to one year after the date of termination of the last member to continue the LLC’s existence. The company agreement can substitute any other period of time as the applicable deadline. The concept of a “springing” member is also confirmed by a new provision.
Reinstatement and Continuation of Terminated Entities or LLC Series. The three-year deadline for reinstatement of a voluntarily terminated domestic entity is eliminated. The provisions allowing continued existence for limited purposes of a terminated filing entity are clarified to apply also to a termination under the Tax Code or any chapter of the TBOC. Also, reinstatement of a terminated LLC under the TBOC or the Tax Code automatically reinstates any protected series or registered series that terminated because of the termination.
Availability of Lists of Shareholders and Voting Members at Corporate Meetings. The requirements for a list of shareholders or voting members of a for-profit or nonprofit corporation to be produced and kept available for inspection at meetings of the shareholders or voting members are eliminated. Other provisions continue to require the list to be made available for inspection before the meeting.
Ratification of Void or Voidable Acts by Partnerships or LLCs. New provisions clarify that a limited liability company or partnership can ratify an act or transaction that was void or voidable when taken or can waive compliance with any requirements of the company agreement or partnership agreement that caused an act or transaction to be void or voidable.
Certificates of Existence for LLC Registered Series. A certificate issued by the secretary of state stating that a domestic registered series of a limited liability company is in existence may be relied on as conclusive evidence of the existence of the series.
Issuance of Shares, Rights and Options. The amendments clarify and harmonize various provisions relating to authorizations by the board of directors for the issuance of shares, and of rights and options to purchase shares, by for-profit corporations and the power to delegate to other persons the authority to determine various matters relating to such issuances.
Inspection Rights of Owners. Various provisions relating to the rights of owners to examine and copy records of for-profit corporations, limited partnerships and limited liability companies are clarified and harmonized.
Certificate of Registered Series. A change clarifies that a certificate of registered series must be amended if the name of the associated LLC changes.
Company and Partnership Agreements. Amendments clarify what writings constitute a company or partnership agreement and that the entity, its owners and any assignees are bound by such agreement regardless of whether they sign the agreement.
Assumed Name Certificates. The definition of “assumed name” in the Texas Business & Commerce Code is amended to confirm that a protected series of an LLC does not have an assumed name if its name includes the name of its associated LLC. The definition of “office” is amended to be for a non-individual that person’s principal office in Texas or outside Texas, as applicable.
Other Legislation — LLC Charging Orders
Effective Sept. 1, 2023, Senate Bill 2314 clarified that both single-member and multiple-member LLCs are subject to the provisions limiting the remedies of a member’s judgment creditor to a charging order against that member’s membership interest.
Other Legislation — Public Inspection of Records of Texas Nonprofit Corporations
Effective Sept. 1, 2023, House Bill 1957 amended TBOC Sec. 22.353 to require only a Texas nonprofit corporation that is an exempt organization under Internal Revenue Code Sec. 501(c)(3) to keep each document it is required to make available for public inspection under such Code at its registered or principal office in Texas for three years after the close of the fiscal year. The nonprofit corporation must make such documents available to the public for inspection and copying at its registered or principal office during regular business hours. As a result of the amendments, the prior requirement that all Texas nonprofit corporations make available for public inspection their records, books and annual reports for three years no longer exists.
Daryl Robertson is an attorney at Hunton Andrews Kurth in Dallas. His practice focuses on business and finance transactions, entity formation, M&A and securities law.