2019 Advanced Business Law

This article summarizes several pieces of legislation that have been passed by the Texas Legislature in its 2019 Regular Session and that amend the Texas Business Organizations Code and the Texas Business and Commerce Code. It covers changes to assumed name filings, authorized use of electronic data systems, delayed effectiveness of filings, deriviative proceedings, voting agreements, LLC provision amendments, partnership provision amendments, two-step offer merger transactions, ratification of defective acts, directors of non-profit organizations, and notice of redemptions by for profit corporations.

A limited liability company treated as a partnership for federal tax purposes provides its members a vehicle to conduct joint business activities through a flexible economic arrangement without incurring an entity-level federal income tax. To obtain the benefits of flexibility and assurance that allocations will be respected for federal tax purposes, the limited liability company’s company agreement should be drafted to satisfy the requirements of section 704(b) of the Internal Revenue Code of 1986, as amended and the Treasury Regulations thereunder. This paper focuses on the economic effect safe harbors and special rules for non-recourse liabilities. It then addresses three possible approaches for drafting company agreements with an annotated set of tax provisions for each approach. Revaluations, guaranteed payments, preferences, profits interests, family limited partnerships, and other topics are beyond the scope of this outline, but may be the topic of a future paper on advanced annotated tax provisions.

The fiduciary duties of directors or other governing persons of an entity and its officers are generally owed to the corporation, limited liability company (“LLC”) or limited partnership (“LP”) entity they serve and not to any individual owners. Thus, a cause of action against a director or other governing persons of an entity and its officers for breach of fiduciary duty would be vested in, and brought by or in the right of, the entity. Statutes in both Texas6 and Delaware authorize an action brought in the right of the entity by a stakeholder against its Board for breach of fiduciary duty.8 Such an action is called a “derivative action.” The TBOC was amended in the 2019 Legislative Session to make consistent derivative proceedings provisions governing for profit corporations with those governing LLCs and LPs by House Bill No. 3603, which became effective on September 1, 2019.

Valuing assets is part art and part science. In a litigation context, it becomes even harder. In a divorce case, the difficulty again multiplies. Preparing a valuation with the hypothetical assumptions required by Texas case law further complicates the process. There is no simple “cookbook” approach to valuing assets. The appraiser must be intuitive in his or her approach. One challenging the appraiser, in Court or otherwise, must be prepared to not only have a complete understanding of the asset itself, but also a complete understanding of the approach chosen by the appraiser, the approaches discarded as inappropriate, and why one was deemed better than another in this case. There is no substitute for hard work, thorough attention to detail, and that spark of imagination and creativity necessary to achieve results that stand the test of time.

Any time a lawyer negotiates or drafts a contract there are at least six ethical concepts in play which apply to your duties to the client under the Texas Disciplinary Rules of Professional Conduct. The attorney's duty to read the draft contract is excused when there is fraud or mistake. Nevertheless. as a matter of preventive law, the attorney should review the contract- perhaps with the help of a computer program- before it is signed. Also, the attorney should provide the client with an opportunity to review it. Not only can review by a second set of eyes be helpful in detecting problems, but if the attorney victimized by these situations faces a client's malpractice claim, it will be helpful if the attorney gave the client an adequate opportunity to review the contract, for most of the problems could be detected (or at least questioned) by the review of a layperson.

Many attorneys use the term “nonprofit” interchangeably with the term “tax-exempt.” They are not the same. Chapter 22 of the Texas Business Organizations Code (“Code”) governs nonprofit corporations. A nonprofit corporation may be exempt from various taxes, or it may be subject to various other taxes. “Tax-exempt” means that the organization is exempt from one or more federal or state tax. Frequently, the tax exemption requires that the organization qualify as a nonprofit corporation. This paper discusses entities commonly used by non-profits, purposes that qualify non-profits for tax-exempt status and common mistakes made. The author also provides a list of tax-exempt purposes under federal and Texas law, a certificate of formation for a non-profit corporation and bylaws for a non-profit corporation.

Alexis de Tocqueville famously said of lawyers in his ovular work "Democracy in America" that he could not “believe a republic could exist if the influence of lawyers in public business did not increase in proportion to the power of the people". What defines our profession today? Is it a pursuit of justice? Is it the concept of fairness? Is it equality under the law? Most non-lawyers could possibly say that one word defines our profession – Greed. Ours is not an easy profession. Use of the guideposts provided to us by the law, our State Bar of Texas, and, frankly, common sense can help us to avoid the pitfalls. It can help us to do our jobs in a professional and ethical manner while striving to provide high quality legal services. Most importantly, it can help us to sleep easy at night.

Arbitration is an out-of-court resolution of a dispute between parties decided by an impartial third- party neutral (the arbitrator). Unlike mediation (where the parties work to find a consensus in a non-binding process), arbitration involves private “judges” (referred to as neutrals) who rule on a case to create a binding resolution. Unlike a traditional court case, arbitration is not limited to a single judge or bound by a single set of rules. Rather, arbitration can be decided by a single individual or a panel of neutrals. And the parties can craft the rules that are used including what types of discovery will be permitted and how quickly the proceeding will move forward. This flexibility makes arbitration attractive but also means that parties must do more than cut and paste an arbitration clause to ensure that their interests are best served.

This paper highlights some of the major national and Texas-specific developments in employment law over the course of 2019, particularly those of significance to the business community. Many of the major events affecting businesses this year remain in flux, and it remains to be seen how they will shake out in 2020.

Cybersecurity is the practice of protecting systems, networks, and programs from digital attacks. Clients and regulators are increasingly demanding that their attorneys develop policies and procedures to protect client information. This article is an introduction to some of the more prevalent security issues faced by lawyers in protecting their client’s information and securing the firm’s assets. In addition to offering suggestions on securing client information, it will address the increasing ethical obligations of lawyers to understand technology and plan accordingly.

This article should serve as a reminder of the types of issues that can develop if things go south after your clients have signed on the dotted line. Every time you draft a contract, you are potentially drafting Exhibit Number 1 in a litigation (or arbitration if you thoughtfully crafted an arbitration provision). Make it easy for your client and its litigation counsel to convince a court and jury that the contract clearly says what they claim it says by making the contract easy to follow, stripping away the legalese, and eliminating the need to reference multiple pages to understand the parties’ obligations. Also, resist the temptation to skim over those miscellaneous clauses at the end of your otherwise perfectly drafted contract. These clauses can have a tremendous impact if a dispute arises. Pay as close attention to the miscellaneous provisions as you do to the substantive provisions of the contract.

Over half a century ago, the Texas Supreme court recognized a cause of action by a minority shareholder against the majority shareholder for wrongful suppression of dividends. Following that decision, numerous Texas courts recognized and addressed a cause of action for minority stockholder oppression. But notwithstanding that jurisprudence, the Texas Supreme Court abruptly changed the rules in 2014. There remains a statutory claim for “oppressive” conduct under the TBOC that allows the appointment of a receiver for specific assets of the corporation. And other sections of the TBOC authorize the appointment of a receiver to liquidate the business. This paper examines some of the rights minority shareholders still have after this “seismic shift” in the law.

The paper provides an overview of the Texas Uniform Trade Secret Act ("TUTSA") for non-specialists, recent legislative amendments to TUTSA, pattern jury charges for trade secret litigation, TUTSA business forms and other recent developments in trade secret law. The author also includes an employee termination return of property checklist, an employee handbook provision relating to confidentiality and trade secrets, a template termination letter and a template non-competition, non-solicitation and non-competition agreement.

In a practice that has become alarmingly prevalent, hackers can “spoof,” or mimic, an email address of a trusted individual to manipulate unknowing third parties into transferring funds to the hacker’s account. The Federal Bureau of Investigation received 20,373 reports of these so-called business email compromises (“BEC”) in 2018, and victims reported losses of more than $1.2 billion. It is reasonable to assume that claims arising from BEC schemes will continue to be filed. As long as these schemes are successful in diverting funds, hackers will no doubt continue to execute them, leaving the businesses impacted by diverted transfers to manage the fallout. Based on the limited case law that is available on the subject, courts seem to look for guidance in relevant statutes in analyzing which party should be held responsible for the loss. Absent statutory guidance, courts seem to conduct a fact-specific inquiry to allocate responsibility. Under both approaches, it seems the central inquiry is which party was in the best position to prevent the loss. That party will likely be stuck paying for that loss.

Over the last 25 years, state legislatures in 27 states have passed statutes aimed at halting lawsuits designed to chill the valid exercise of constitutional rights of freedom of speech, association and to petition, which are known as “strategic lawsuits against public participation” (“SLAPP” suits). Effective on June 17, 2011, Texas enacted the TCPA. The TCPA is proving to be a very active source of litigation. The scope of what is covered by the act as modified by the 2019 amendments will be further defined by subsequent appellate opinions. While the 2019 amendments were passed to eliminate applications of the statute to seemingly unrelated claims, the true effects of the amendments will not be known for some time.

17th Annual Course Advanced Business Law November 7-8, 2019 Hilton Houston Westchase.