Two significant bills affecting the governance of corporations and other entities were recently passed by the Texas Legislature and have been sent to Governor Abbott for his signature.

These bills are intended to attract more entities to move to and be formed in Texas, thereby enhancing the growth of business in Texas.

New Entity Governance Provisions

Senate Bill 29 (“SB 29”) by Sen. Bryan Hughes (House sponsor was Rep. Morgan Meyer) has garnered some nationwide publicity and notoriety. The low bill number for this bill indicates that it is supported by leadership in the Legislature. Under a provision in this bill, SB 29 will become immediately effective when signed by Governor Abbott because the bill was approved by at least a two-thirds vote in each of the House and Senate.

SB 29 contains a host of new entity governance provisions that apply to Texas entities. This is a lengthy bill, so a complete summary of the bill’s provisions is beyond the scope of this Client Alert. Some highlights of SB 29 are summarized below:

• Authorizes a domestic entity to include in its governing documents a waiver of jury trial concerning internal entity claims (that is, claims involving the internal affairs of the entity);
• Entity governing documents can specify an exclusive court forum and venue for internal entity claims;
• Shareholder records inspection rights are severely limited for a publicly traded corporation if the requesting shareholder has any pending litigation or derivative proceeding with the corporation;
• Authorizes a novel procedure for advance court determination of independence and disinterested status of directors in the context of shareholder derivative actions or conflict of interest transactions;
• The officers and directors of a Texas corporation that has voting shares listed on a national securities exchanges or that has included in its governing documents an affirmative election to be governed by this new provision will be entitled to a presumption that they acted in good faith, on an informed basis, in furtherance of the corporation’s interests and in obedience to the law and the corporation’s governing documents, which could be viewed as a codification of a version of the so-called “business judgment rule” for corporations; and somewhat similar provisions are added for limited liability companies and limited partnerships as well;
• Authorizes a publicly traded Texas corporation (or an electing Texas corporation with more than 500 shareholders) to establish in its governing documents an ownership threshold for shareholder derivative actions, with the threshold not to exceed three percent of its outstanding shares;
• Eliminates awards of attorney fees to a plaintiff for a settlement in a derivative proceeding on behalf of Texas corporations, LLCs or limited partnerships based only on amending disclosures to owners; and
• Clarifies existing Texas law by authorizing a Texas limited partnership or LLC to eliminate the duties of members, partners, managers and officers in its governing documents.

Restrictions on Shareholder Proposals

Senate Bill 1057 (“SB 1057”) by Sen. Tan Parker (House sponsor was Rep. Morgan Meyer) has been passed and would be available to any “nationally listed corporation.” A “nationally listed corporation” is a newly defined phrase that means a corporation that:

1. has a class of equity securities registered under Section 12(b) of the Securities Exchange Act of 1934;
2. is admitted to listing on a national securities exchange; and
3. either (A) has its principal office in Texas or (B) is admitted to listing on a stock exchange that has its principal office in Texas and has received approval by the Texas Securities Commissioner to act as a securities exchange under provisions of Subchapter C of Texas Government Code Chapter 4005.

A nationally listed corporation may opt into the new provisions by amending its governing documents and providing notice of the opt-in amendment to shareholders in any proxy statement prior to the effectiveness of the amendment. SB 1057 would prohibit any shareholder of a nationally listed corporation that has opted into the provision from submitting a proposal for consideration at a meeting of shareholders unless the shareholder (or group of shareholders):

1. owns at least the lesser of $1 million of market value of voting shares or 3% of the corporation’s voting shares;
2. has owned and continues to own those shares for at least six months prior to and through the shareholders meeting; and
3. solicits holders of at least 67% of the voting shares to vote on the

Director nominations and ancillary procedural resolutions would not be subject to this ownership threshold.

A corporation that opts into this provision must include in any proxy statement provided to shareholders specific information about the process by which a shareholder (or group of shareholders) may submit a proposal on a matter requiring shareholder approval, including information as to how shareholders may contact other shareholders for the purpose of satisfying the ownership requirements in these new provisions.

While SB 1057 requires a corporation that opts into the new provision to provide notice of the opt-in amendment to shareholders in any proxy statement prior to the effectiveness of the amendment to the governing documents, it does not require shareholder approval of such amendment . Under Texas law, bylaws are considered to be one of the “governing documents” of a corporation but can generally be amended by unilateral action of the board of directors without shareholder approval unless prohibited by the existing provisions of its bylaws or certificate of formation. In addition, the new provisions are not clear as to whether they apply to a non-Texas corporation that meets the definition of “nationally listed corporation.” The Bill Analysis prepared by the Senate Business & Commerce Committee clearly states that the bill applies to corporations formed under Texas law, but the bill itself does not expressly state that requirement, although it does include the requirement that the corporation’s principal office must be in Texas or that it be listed on a Texas-based stock exchange.