Bill Text: TX HB3603 | 2019-2020 | 86th Legislature | Enrolled

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Bill Title: Relating to derivative proceedings on behalf of for-profit corporations, limited liability companies, and limited partnerships.

Spectrum: Bipartisan Bill

Status: (Passed) 2019-06-10 - Effective on 9/1/19 [HB3603 Detail]

Download: Texas-2019-HB3603-Enrolled.html

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H.B. No. 3603

AN ACT
relating to derivative proceedings on behalf of for-profit
corporations, limited liability companies, and limited
partnerships.
BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
SECTION 1. Section 21.551(2), Business Organizations Code,
is amended to read as follows:
(2) "Shareholder" means a shareholder as defined by
Section 1.002 or [includes] a beneficial owner whose shares are
held in a voting trust or by a nominee on the beneficial owner's
behalf.
SECTION 2. Section 21.552, Business Organizations Code, is
amended to read as follows:
Sec. 21.552. STANDING TO BRING PROCEEDING. (a) Subject
to Subsection (b), a [A] shareholder may not institute or maintain a
derivative proceeding unless:
(1) the shareholder:
(A) was a shareholder of the corporation at the
time of the act or omission complained of; or
(B) became a shareholder by operation of law
originating from a person that was a shareholder at the time of the
act or omission complained of; and
(2) the shareholder fairly and adequately represents
the interests of the corporation in enforcing the right of the
corporation.
(b) If the converted entity in a conversion is a
corporation, a shareholder of that corporation may not institute or
maintain a derivative proceeding based on an act or omission that
occurred with respect to the converting entity before the date of
the conversion unless:
(1) the shareholder was an equity owner of the
converting entity at the time of the act or omission; and
(2) the shareholder fairly and adequately represents
the interests of the corporation in enforcing the right of the
corporation.
SECTION 3. Section 21.553(b), Business Organizations Code,
is amended to read as follows:
(b) The waiting period required by Subsection (a) before a
derivative proceeding may be instituted is not required or, if
applicable, shall terminate if:
(1) the shareholder has been [previously] notified
that the demand has been rejected by the corporation;
(2) the corporation is suffering irreparable injury;
or
(3) irreparable injury to the corporation would result
by waiting for the expiration of the 90-day period.
SECTION 4. Section 21.554, Business Organizations Code, is
amended to read as follows:
Sec. 21.554. DETERMINATION BY DIRECTORS OR INDEPENDENT
PERSONS. (a) A determination of how to proceed on allegations made
in a demand or petition relating to a derivative proceeding must be
made by an affirmative vote of the majority of:
(1) all [the] independent and disinterested directors
of the corporation, regardless of whether [present at a meeting of
the board of directors of the corporation at which interested
directors are not present at the time of the vote if] the
independent and disinterested directors constitute a quorum of the
board of directors;
(2) a committee consisting of one [two] or more
independent and disinterested directors appointed by an
affirmative vote of the majority of one or more independent and
disinterested directors [present at a meeting of the board of
directors], regardless of whether the independent and
disinterested directors constitute a quorum of the board of
directors; or
(3) a panel of one or more independent and
disinterested individuals [persons] appointed by the court on a
motion by the corporation listing the names of the individuals
[persons] to be appointed and stating that, to the best of the
corporation's knowledge, the individuals [persons] to be appointed
are disinterested and qualified to make the determinations
contemplated by Section 21.558.
(b) The court shall appoint a panel under Subsection (a)(3)
if the court finds that the individuals [persons] recommended by
the corporation are independent and disinterested and are otherwise
qualified with respect to expertise, experience, independent
judgment, and other factors considered appropriate by the court
under the circumstances to make the determinations. An individual
[A person] appointed by the court to a panel under this section may
not be held liable to the corporation or the corporation's
shareholders for an action taken or omission made by the individual
[person] in that capacity, except for an act or omission
constituting fraud or wilful misconduct.
SECTION 5. Section 21.555, Business Organizations Code, is
amended to read as follows:
Sec. 21.555. STAY OF PROCEEDING. (a) If the [domestic or
foreign] corporation that is the subject of a derivative proceeding
commences an inquiry into the allegations made in a demand or
petition and the person or group of persons described by Section
21.554 is conducting an active review of the allegations in good
faith, the court shall stay a derivative proceeding for not more
than 60 days until the review is completed and a determination is
made by the person or group regarding what further action, if any,
should be taken.
(b) To obtain a stay, the [domestic or foreign] corporation
must [shall] provide the court with a written statement agreeing to
advise the court and the shareholder making the demand of the
determination promptly on the completion of the review of the
matter.
(c) A stay, on motion [application], may be reviewed every
60 days for continuation [the continued necessity] of the stay if
the corporation provides the court and the shareholder with a
written statement of the status of the review and the reasons why an
extension for a period not to exceed 60 additional days is
appropriate. An extension shall be granted for a period not to
exceed 60 days if the court determines that the continuation is
appropriate in the interests of the corporation.
[(c) If the review and determination made by the person or
group is not completed before the 61st day after the stay is ordered
by the court, the stay may be renewed for one or more additional
60-day periods if the domestic or foreign corporation provides the
court and the shareholder with a written statement of the status of
the review and the reasons why a continued extension of the stay is
necessary.]
SECTION 6. Section 21.556, Business Organizations Code, is
amended to read as follows:
Sec. 21.556. DISCOVERY. (a) If a [domestic or foreign]
corporation proposes to dismiss a derivative proceeding under
Section 21.558, discovery by a shareholder after the filing of the
derivative proceeding in accordance with this subchapter shall be
limited to:
(1) facts relating to whether the person or [group of]
persons described by Section 21.554 are [21.558 is] independent and
disinterested;
(2) the good faith of the inquiry and review by the
person or group; and
(3) the reasonableness of the procedures followed by
the person or group in conducting the review.
(b) Discovery described by Subsection (a) may not be
expanded to include a fact or substantive matter regarding the act,
omission, or other matter that is the subject matter of the
derivative proceeding but the scope of discovery shall not be so
limited [. The scope of discovery may be expanded] if the court
determines after notice and hearing that a good faith review of the
allegations [for purposes of Section 21.558] has not been made by an
independent and disinterested person or group in accordance with
Sections 21.554 and 21.558 [that section].
SECTION 7. Section 21.557, Business Organizations Code, is
amended to read as follows:
Sec. 21.557. TOLLING OF STATUTE OF LIMITATIONS. A written
demand filed with the corporation under Section 21.553 tolls the
statute of limitations on the claim on which demand is made until
the later [earlier] of:
(1) the 31st [91st] day after the expiration of any
waiting period under Section 21.553 [date of the demand]; or
(2) the 31st day after the expiration of any stay
granted under Section 21.555, including all continuations of the
stay [date the corporation advises the shareholder that the demand
has been rejected or the review has been completed].
SECTION 8. Section 21.558, Business Organizations Code, is
amended to read as follows:
Sec. 21.558. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A
court, sitting in equity as the finder of fact, shall dismiss a
derivative proceeding on a motion by the corporation if the person
or group of persons described by Section 21.554 determines in good
faith, after conducting a reasonable inquiry and based on factors
the person or group considers appropriate under the circumstances,
that continuation of the derivative proceeding is not in the best
interests of the corporation.
(b) In determining whether the requirements of Subsection
(a) have been met, the burden of proof shall be on:
(1) the plaintiff shareholder if:
(A) the majority of the board of directors
consists of independent and disinterested directors at the time the
determination is made;
(B) the determination is made by a panel of one or
more independent and disinterested persons appointed under Section
21.554(a)(3); or
(C) the corporation presents prima facie
evidence that demonstrates that the applicable person or persons
making the determination [directors appointed] under Section
21.554(a) [21.554(a)(2)] are independent and disinterested; or
(2) the corporation in any other circumstance.
SECTION 9. Section 21.559, Business Organizations Code, is
amended to read as follows:
Sec. 21.559. ALLEGATIONS [PROCEEDING INSTITUTED] AFTER
DEMAND REJECTED. If a derivative proceeding is instituted after a
demand is rejected, the petition must allege with particularity
facts that establish that the rejection was not made in accordance
with the requirements and standards under [of] Sections 21.554 and
21.558.
SECTION 10. Section 21.561, Business Organizations Code, is
amended to read as follows:
Sec. 21.561. PAYMENT OF EXPENSES. (a) In this section,
"expenses" means reasonable expenses incurred by a party in a
derivative proceeding, including:
(1) attorney's fees;
(2) costs in pursuing an investigation of the matter
that was the subject of the derivative proceeding; or
(3) expenses for which the [domestic or foreign]
corporation [or a corporate defendant] may be required to indemnify
another person.
(b) On termination of a derivative proceeding, the court may
order:
(1) the [domestic or foreign] corporation to pay [the]
expenses the plaintiff incurred in the proceeding if the court
finds the proceeding has resulted in a substantial benefit to the
[domestic or foreign] corporation;
(2) the plaintiff to pay [the] expenses the [domestic
or foreign] corporation or other defendant incurred in
investigating and defending the proceeding if the court finds the
proceeding has been instituted or maintained without reasonable
cause or for an improper purpose; or
(3) a party to pay [the] expenses incurred by another
party relating to the filing of a pleading, motion, or other paper
if the court finds the pleading, motion, or other paper:
(A) was not well grounded in fact after
reasonable inquiry;
(B) was not warranted by existing law or a good
faith argument for the application, extension, modification, or
reversal of existing law; or
(C) was interposed for an improper purpose, such
as to harass, cause unnecessary delay, or cause a needless increase
in the cost of litigation.
SECTION 11. Section 21.562, Business Organizations Code, is
amended to read as follows:
Sec. 21.562. APPLICATION TO FOREIGN CORPORATIONS. (a) In a
derivative proceeding brought in the right of a foreign
corporation, the matters covered by this subchapter are governed by
the laws of the jurisdiction of formation [incorporation] of the
foreign corporation, except for Sections 21.555, 21.560, and
21.561, which are procedural provisions and do not relate to the
internal affairs of the foreign corporation, unless applying the
laws of the jurisdiction of formation of the foreign corporation
requires otherwise with respect to Section 21.555.
(b) In the case of matters relating to a foreign corporation
under Section 21.555 [21.554], a reference to a person or group of
persons described by Section 21.554 [that section] refers to a
person or group entitled under the laws of the jurisdiction of
formation [incorporation] of the foreign corporation to make the
determination described by Section 21.554(a) [review and dispose of
a derivative proceeding]. The standard of review of a
determination [decision] made by the person or group [to dismiss
the derivative proceeding] shall be governed by the laws of the
jurisdiction of formation [incorporation] of the foreign
corporation.
SECTION 12. Section 21.563, Business Organizations Code, is
amended to read as follows:
Sec. 21.563. CLOSELY HELD CORPORATION. (a) In this
section, "closely held corporation" means a corporation that has:
(1) fewer than 35 shareholders; and
(2) no shares listed on a national securities exchange
or regularly quoted in an over-the-counter market by one or more
members of a national securities association.
(b) Sections 21.552-21.560 [21.552-21.559] do not apply to
a claim or a derivative proceeding by a shareholder of a closely
held corporation against a director, officer, or shareholder of the
corporation. In the event the claim or derivative proceeding is
also made against a person who is not that director, officer, or
shareholder, this subsection applies only to the claim or
derivative proceeding against the director, officer, or
shareholder.
(c) If Sections 21.552-21.560 do not apply because of
Subsection (b) and if justice requires:
(1) a derivative proceeding brought by a shareholder
of a closely held corporation may be treated by a court as a direct
action brought by the shareholder for the shareholder's own
benefit; and
(2) a recovery in a direct or derivative proceeding by
a shareholder may be paid directly to the plaintiff or to the
corporation if necessary to protect the interests of creditors or
other shareholders of the corporation.
(d) Other provisions of state law govern whether a
shareholder has a direct cause of action or right to sue a director,
officer, or shareholder, and this section may not be construed to
create that direct cause of action or right to sue.
SECTION 13. Section 101.451, Business Organizations Code,
is amended by amending Subdivision (2) and adding Subdivision (3)
to read as follows:
(2) "Managing entity" means an entity that is either:
(A) a manager of a limited liability company that
is managed by managers; or
(B) a member of a limited liability company that
is managed by members who are entitled to manage the company.
(3) "Member" means [includes] a person who is a member
or is an assignee of a membership interest or a person who
beneficially owns a membership interest through a voting trust or a
nominee on the person's behalf.
SECTION 14. Section 101.452, Business Organizations Code,
is amended to read as follows:
Sec. 101.452. STANDING TO BRING PROCEEDING. (a) Subject
to Subsection (b), a [A] member may not institute or maintain a
derivative proceeding unless:
(1) the member:
(A) was a member of the limited liability company
at the time of the act or omission complained of; or
(B) became a member by operation of law
originating from a person that was a member at the time of the act or
omission complained of; and
(2) the member fairly and adequately represents the
interests of the limited liability company in enforcing the right
of the limited liability company.
(b) If the converted entity in a conversion is a limited
liability company, a member of that limited liability company may
not institute or maintain a derivative proceeding based on an act or
omission that occurred with respect to the converting entity before
the date of the conversion unless:
(1) the member was an equity owner of the converting
entity at the time of the act or omission; and
(2) the member fairly and adequately represents the
interests of the limited liability company in enforcing the right
of the limited liability company.
SECTION 15. Section 101.453(b), Business Organizations
Code, is amended to read as follows:
(b) The waiting period required by Subsection (a) before a
derivative proceeding may be instituted is not required or, if
applicable, shall terminate if:
(1) the member has been [previously] notified that the
demand has been rejected by the limited liability company;
(2) the limited liability company is suffering
irreparable injury; or
(3) irreparable injury to the limited liability
company would result by waiting for the expiration of the 90-day
period.
SECTION 16. Section 101.454, Business Organizations Code,
is amended to read as follows:
Sec. 101.454. DETERMINATION BY GOVERNING OR INDEPENDENT
PERSONS. (a) The determination of how to proceed on allegations
made in a demand or petition relating to a derivative proceeding
must be made by an affirmative vote of the majority of:
(1) the independent and disinterested governing
persons of the limited liability company, whether one or more, even
if the independent and disinterested governing persons are not a
majority of the governing persons of the limited liability company
[present at a meeting of the governing authority at which
interested governing persons are not present at the time of the vote
if the independent and disinterested governing persons constitute a
quorum of the governing authority];
(2) a committee consisting of one [two] or more
independent and disinterested governing persons appointed by the
majority of one or more independent and disinterested governing
persons of the limited liability company, even if the appointing
independent and disinterested governing persons are not a majority
of the governing persons of the limited liability company [present
at a meeting of the governing authority, regardless of whether the
independent and disinterested governing persons constitute a
quorum of the governing authority]; or
(3) a panel of one or more independent and
disinterested individuals [persons] appointed by the court on a
motion by the limited liability company listing the names of the
individuals [persons] to be appointed and stating that, to the best
of the limited liability company's knowledge, the individuals
[persons] to be appointed are disinterested and qualified to make
the determinations contemplated by Section 101.458.
(b) An entity to which this subsection applies is
independent and disinterested under this section only if its
decision with respect to the limited liability company's derivative
proceeding is made by a majority of its governing persons who are
independent and disinterested with respect to that derivative
proceeding, even if those governing persons are not a majority of
its governing persons. This subsection applies to an entity that
is:
(1) a managing entity of the limited liability
company; or
(2) directly, or indirectly through one or more other
entities, a governing person of that managing entity.
(c) The court shall appoint a panel under Subsection (a)(3)
if the court finds that the individuals [persons] recommended by
the limited liability company are independent and disinterested and
are otherwise qualified with respect to expertise, experience,
independent judgment, and other factors considered appropriate by
the court under the circumstances to make the determinations. An
individual [A person] appointed by the court to a panel under this
section may not be held liable to the limited liability company or
the limited liability company's members for an action taken or
omission made by the individual [person] in that capacity, except
for acts or omissions constituting fraud or wilful misconduct.
SECTION 17. Section 101.455, Business Organizations Code,
is amended to read as follows:
Sec. 101.455. STAY OF PROCEEDING. (a) If the [domestic or
foreign] limited liability company that is the subject of a
derivative proceeding commences an inquiry into the allegations
made in a demand or petition and the person or group of persons
described by Section 101.454 is conducting an active review of the
allegations in good faith, the court shall stay a derivative
proceeding for not more than 60 days until the review is completed
and a determination is made by the person or group regarding what
further action, if any, should be taken.
(b) To obtain a stay, the [domestic or foreign] limited
liability company must [shall] provide the court with a written
statement agreeing to advise the court and the member making the
demand of the determination promptly on the completion of the
review of the matter.
(c) A stay, on motion, may be reviewed every 60 days for
continuation [the continued necessity] of the stay if the limited
liability company provides the court and the member with a written
statement of the status of the review and the reasons why an
extension for a period not to exceed 60 additional days is
appropriate. An extension shall be granted for a period not to
exceed 60 days if the court determines that the continuation is
appropriate in the interests of the limited liability company.
[(c) If the review and determination made by the person or
group is not completed before the 61st day after the date on which
the court orders the stay, the stay may be renewed for one or more
additional 60-day periods if the domestic or foreign limited
liability company provides the court and the member with a written
statement of the status of the review and the reasons why a
continued extension of the stay is necessary.]
SECTION 18. Section 101.456, Business Organizations Code,
is amended to read as follows:
Sec. 101.456. DISCOVERY. (a) If a [domestic or foreign]
limited liability company proposes to dismiss a derivative
proceeding under Section 101.458, discovery by a member after the
filing of the derivative proceeding in accordance with this
subchapter shall be limited to:
(1) facts relating to whether the person or [group of]
persons described by Section 101.454 are [101.458 is] independent
and disinterested;
(2) the good faith of the inquiry and review by the
person or group; and
(3) the reasonableness of the procedures followed by
the person or group in conducting the review.
(b) Discovery described by Subsection (a) may not be
expanded to include a fact or substantive matter regarding the act,
omission, or other matter that is the subject matter of the
derivative proceeding but the scope of discovery shall not be so
limited [. The scope of discovery may be expanded] if the court
determines after notice and hearing that a good faith review of the
allegations [for purposes of Section 101.458] has not been made by
an independent and disinterested person or group in accordance with
Sections 101.454 and 101.458 [that section].
SECTION 19. Section 101.457, Business Organizations Code,
is amended to read as follows:
Sec. 101.457. TOLLING OF STATUTE OF LIMITATIONS. A written
demand filed with the limited liability company under Section
101.453 tolls the statute of limitations on the claim on which
demand is made until the later [earlier] of:
(1) the 31st [91st] day after the expiration of any
waiting period under Section 153.403 [date of the demand]; or
(2) the 31st day after the expiration of any stay
granted under Section 153.405, including all continuations of the
stay [date the limited liability company advises the member that
the demand has been rejected or the review has been completed].
SECTION 20. Section 101.458, Business Organizations Code,
is amended to read as follows:
Sec. 101.458. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A
court, sitting in equity as the finder of fact, shall dismiss a
derivative proceeding on a motion by the limited liability company
if the person or group of persons described by Section 101.454
determines in good faith, after conducting a reasonable inquiry and
based on factors the person or group considers appropriate under
the circumstances, that continuation of the derivative proceeding
is not in the best interests of the limited liability company.
(b) In determining whether the requirements of Subsection
(a) have been met, the burden of proof shall be on:
(1) the plaintiff member if:
(A) the applicable person or persons making the
determination under Section 101.454(a)(1) or (2) are [majority of
the governing authority consists of] independent and disinterested
[persons] at the time the determination is made;
(B) the determination is made by a panel of one or
more independent and disinterested persons appointed under Section
101.454(a)(3); or
(C) the limited liability company presents prima
facie evidence that demonstrates that the applicable person or
persons making the determination [appointed] under Section
101.454(a) [101.454(a)(2)] are independent and disinterested; or
(2) the limited liability company in any other
circumstance.
SECTION 21. Section 101.459, Business Organizations Code,
is amended to read as follows:
Sec. 101.459. ALLEGATIONS AFTER [IF] DEMAND REJECTED. If a
derivative proceeding is instituted after a demand is rejected, the
petition must allege with particularity facts that establish that
the rejection was not made in accordance with the requirements and
standards under [of] Sections 101.454 and 101.458.
SECTION 22. Section 101.461, Business Organizations Code,
is amended to read as follows:
Sec. 101.461. PAYMENT OF EXPENSES. (a) In this section,
"expenses" means reasonable expenses incurred by a party in a
derivative proceeding, including:
(1) attorney's fees;
(2) costs in [of] pursuing an investigation of the
matter that was the subject of the derivative proceeding; or
(3) expenses for which the [domestic or foreign]
limited liability company may be required to indemnify another
person.
(b) On termination of a derivative proceeding, the court may
order:
(1) the [domestic or foreign] limited liability
company to pay [the] expenses the plaintiff incurred in the
proceeding if the court finds the proceeding has resulted in a
substantial benefit to the [domestic or foreign] limited liability
company;
(2) the plaintiff to pay [the] expenses the [domestic
or foreign] limited liability company or other defendant incurred
in investigating and defending the proceeding if the court finds
the proceeding has been instituted or maintained without reasonable
cause or for an improper purpose; or
(3) a party to pay [the] expenses incurred by another
party relating to the filing of a pleading, motion, or other paper
if the court finds the pleading, motion, or other paper:
(A) was not well grounded in fact after
reasonable inquiry;
(B) was not warranted by existing law or a good
faith argument for the application, extension, modification, or
reversal of existing law; or
(C) was interposed for an improper purpose, such
as to harass, cause unnecessary delay, or cause a needless increase
in the cost of litigation.
SECTION 23. Section 101.462, Business Organizations Code,
is amended to read as follows:
Sec. 101.462. APPLICATION TO FOREIGN LIMITED LIABILITY
COMPANIES. (a) In a derivative proceeding brought in the right of
a foreign limited liability company, the matters covered by this
subchapter are governed by the laws of the jurisdiction of
formation [organization] of the foreign limited liability company,
except for Sections 101.455, 101.460, and 101.461, which are
procedural provisions and do not relate to the internal affairs of
the foreign limited liability company, unless applying the laws of
the jurisdiction of formation of the foreign limited liability
company requires otherwise with respect to Section 101.455.
(b) In the case of matters relating to a foreign limited
liability company under Section 101.455 [101.454], a reference to a
person or group of persons described by Section 101.454 [that
section] refers to a person or group entitled under the laws of the
jurisdiction of formation [organization] of the foreign limited
liability company to make the determination described by Section
101.454(a) [review and dispose of a derivative proceeding]. The
standard of review of a determination [decision] made by the person
or group [to dismiss the derivative proceeding] shall be governed
by the laws of the jurisdiction of formation [organization] of the
foreign limited liability company.
SECTION 24. Section 101.463, Business Organizations Code,
is amended to read as follows:
Sec. 101.463. CLOSELY HELD LIMITED LIABILITY COMPANY. (a)
In this section, "closely held limited liability company" means a
limited liability company that has:
(1) fewer than 35 members; and
(2) no membership interests listed on a national
securities exchange or regularly quoted in an over-the-counter
market by one or more members of a national securities association.
(b) Sections 101.452-101.460 [101.452-101.459] do not apply
to a claim or a derivative proceeding by a member of a closely held
limited liability company against a governing person, member, or
officer of the limited liability company. In the event the claim or
derivative proceeding is also made against a person who is not that
governing person, member, or officer, this subsection applies only
to the claim or derivative proceeding against the governing person,
member, or officer.
(c) If Sections 101.452-101.460 do not apply because of
Subsection (b) and if justice requires:
(1) a derivative proceeding brought by a member of a
closely held limited liability company may be treated by a court as
a direct action brought by the member for the member's own benefit;
and
(2) a recovery in a direct or derivative proceeding by
a member may be paid directly to the plaintiff or to the limited
liability company if necessary to protect the interests of
creditors or other members of the limited liability company.
(d) Other provisions of state law govern whether a member
has a direct cause of action or right to sue a governing person,
member, or officer, and this section may not be construed to create
that direct cause of action or right to sue.
SECTION 25. Section 153.401, Business Organizations Code,
is amended to read as follows:
Sec. 153.401. DEFINITIONS [RIGHT TO BRING ACTION]. In this
subchapter:
(1) "Derivative proceeding" means a civil suit in the
right of a domestic limited partnership or, to the extent provided
by Section 153.412, in the right of a foreign limited partnership.
(2) "Limited partner" means a person who is a limited
partner or is an assignee of a partnership interest, including the
partnership interest of a general partner [A limited partner may
bring an action in a court on behalf of the limited partnership to
recover a judgment in the limited partnership's favor if:
[(1) all general partners with authority to bring the
action have refused to bring the action; or
[(2) an effort to cause those general partners to
bring the action is not likely to succeed].
SECTION 26. Section 153.402, Business Organizations Code,
is amended to read as follows:
Sec. 153.402. STANDING TO BRING PROCEEDING [PROPER
PLAINTIFF]. (a) Subject to Subsection (b), a limited partner may
not institute or maintain a derivative proceeding unless:
(1) the limited partner:
(A) was a limited partner of the limited
partnership at the time of the act or omission complained of; or
(B) became a limited partner by operation of law
originating from a person that was a limited partner or general
partner at the time of the act or omission complained of; and
(2) the limited partner fairly and adequately
represents the interests of the limited partnership in enforcing
the right of the limited partnership.
(b) If the converted entity in a conversion is a limited
partnership, a limited partner of that limited partnership may not
institute or maintain a derivative proceeding based on an act or
omission that occurred with respect to the converting entity before
the date of the conversion unless:
(1) the limited partner was an equity owner of the
converting entity at the time of the act or omission; and
(2) the limited partner fairly and adequately
represents the interests of the limited partnership in enforcing
the right of the limited partnership [In a derivative action, the
plaintiff must be a limited partner when the action is brought and:
[(1) the person must have been a limited partner at the
time of the transaction that is the subject of the action; or
[(2) the person's status as a limited partner must have
arisen by operation of law or under the terms of the partnership
agreement from a person who was a limited partner at the time of the
transaction].
SECTION 27. Section 153.403, Business Organizations Code,
is amended to read as follows:
Sec. 153.403. DEMAND [PLEADING]. (a) A limited partner may
not institute a derivative proceeding until the 91st day after the
date a written demand is filed with the limited partnership stating
with particularity the act, omission, or other matter that is the
subject of the claim or challenge and requesting that the limited
partnership take suitable action.
(b) The waiting period required by Subsection (a) before a
derivative proceeding may be instituted is not required or, if
applicable, shall terminate if:
(1) the limited partner has been notified that the
demand has been rejected by the limited partnership;
(2) the limited partnership is suffering irreparable
injury; or
(3) irreparable injury to the limited partnership
would result by waiting for the expiration of the 90-day period [In
a derivative action, the complaint must contain with particularity:
[(1) the effort, if any, of the plaintiff to secure
initiation of the action by a general partner; or
[(2) the reasons for not making the effort].
SECTION 28. Section 153.404, Business Organizations Code,
is amended to read as follows:
Sec. 153.404. DETERMINATION BY INDEPENDENT PERSONS
[SECURITY FOR EXPENSES OF DEFENDANTS]. (a) A determination of how
to proceed on allegations made in a demand or petition relating to a
derivative proceeding must be made by an affirmative vote of the
majority of:
(1) the independent and disinterested general
partners of the limited partnership, whether one or more, even if
the independent and disinterested general partners are not a
majority of the general partners of the limited partnership;
(2) a committee consisting of one or more independent
and disinterested general partners appointed by a majority of one
or more independent and disinterested general partners of the
limited partnership, even if the appointing independent and
disinterested general partners are not a majority of the general
partners of the limited partnership; or
(3) a panel of one or more independent and
disinterested individuals appointed by the court on a motion by the
limited partnership listing the names of the individuals to be
appointed and stating that, to the best of the limited
partnership's knowledge, the individuals to be appointed are
disinterested and qualified to make the determinations
contemplated by Section 153.408 [In a derivative action, the court
may require the plaintiff to give security for the reasonable
expenses incurred or expected to be incurred by a defendant in the
action, including reasonable attorney's fees].
(b) An entity to which this subsection applies is
independent and disinterested under this section only if its
decision with respect to the limited partnership's derivative
proceeding is made by a majority of its governing persons who are
independent and disinterested with respect to that derivative
proceeding, even if those governing persons are not a majority of
its governing persons. This subsection applies to an entity that
is:
(1) a general partner of the limited partnership; or
(2) directly, or indirectly through one or more other
entities, a governing person of that general partner [The court may
increase or decrease at any time the amount of the security on a
showing that the security provided is inadequate or excessive].
(c) The court shall appoint a panel under Subsection (a)(3)
if the court finds that the individuals recommended by the limited
partnership are independent and disinterested and are otherwise
qualified with respect to expertise, experience, independent
judgment, and other factors considered appropriate by the court
under the circumstances to make the determinations. An individual
appointed by the court to a panel under this section may not be held
liable to the limited partnership or the limited partnership's
partners for an action taken or omission made by the individual in
that capacity, except for an act or omission constituting fraud or
wilful misconduct [If a plaintiff is unable to give security, the
plaintiff may file an affidavit in accordance with the Texas Rules
of Civil Procedure].
[(d) Except as provided by Subsection (c), if a plaintiff
fails to give the security within a reasonable time set by the
court, the court shall dismiss the suit without prejudice.
[(e) The court, on final judgment for a defendant and on a
finding that suit was brought without reasonable cause against the
defendant, may require the plaintiff to pay reasonable expenses,
including reasonable attorney's fees, to the defendant, regardless
of whether security has been required.]
SECTION 29. Section 153.405, Business Organizations Code,
is amended to read as follows:
Sec. 153.405. STAY OF PROCEEDING [EXPENSES OF PLAINTIFF].
(a) If the limited partnership that is the subject of a derivative
proceeding commences an inquiry into the allegations made in a
demand or petition and the person or group of persons described by
Section 153.404 is conducting an active review of the allegations
in good faith, the court shall stay a derivative proceeding for not
more than 60 days until the review is completed and a determination
is made by the person or group regarding what further action, if
any, should be taken.
(b) To obtain a stay, the limited partnership must provide
the court with a written statement agreeing to advise the court and
the limited partner making the demand of the determination promptly
on the completion of the review of the matter.
(c) A stay, on motion, may be reviewed every 60 days for
continuation of the stay if the limited partnership provides the
court and the limited partner with a written statement of the status
of the review and the reasons why an extension for a period not to
exceed 60 additional days is appropriate. An extension shall be
granted for a period not to exceed 60 days if the court determines
that the continuation is appropriate in the interests of the
partnership [If a derivative action is successful, wholly or
partly, or if anything is received by the plaintiff because of a
judgment, compromise, or settlement of the action or claim
constituting a part of the action, the court may award the plaintiff
reasonable expenses, including reasonable attorney's fees, and
shall direct the plaintiff to remit to a party identified by the
court the remainder of the proceeds received by the plaintiff].
SECTION 30. Subchapter I, Chapter 153, Business
Organizations Code, is amended by adding Sections 153.406, 153.407,
153.408, 153.409, 153.410, 153.411, 153.412, and 153.413 to read as
follows:
Sec. 153.406. DISCOVERY. (a) If a limited partnership
proposes to dismiss a derivative proceeding under Section 153.408,
discovery by a limited partner after the filing of the derivative
proceeding in accordance with this subchapter shall be limited to:
(1) facts relating to whether the person or persons
described by Section 153.404 are independent and disinterested;
(2) the good faith of the inquiry and review by the
person or group; and
(3) the reasonableness of the procedures followed by
the person or group in conducting the review.
(b) Discovery described by Subsection (a) may not be
expanded to include a fact or substantive matter regarding the act,
omission, or other matter that is the subject matter of the
derivative proceeding, but the scope of discovery shall not be so
limited if the court determines after notice and hearing that a good
faith review of the allegations has not been made by an independent
and disinterested person or group in accordance with Sections
153.404 and 153.408.
Sec. 153.407. TOLLING OF STATUTE OF LIMITATIONS. A written
demand filed with the limited partnership under Section 153.403
tolls the statute of limitations on the claim on which demand is
made until the later of:
(1) the 31st day after the expiration of any waiting
period under Section 153.403; or
(2) the 31st day after the expiration of any stay
granted under Section 153.405, including all continuations of the
stay.
Sec. 153.408. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A
court, sitting in equity as the finder of fact, shall dismiss a
derivative proceeding on a motion by the limited partnership if the
person or group of persons described by Section 153.404 determines
in good faith, after conducting a reasonable inquiry and based on
factors the person or group considers appropriate under the
circumstances, that continuation of the derivative proceeding is
not in the best interests of the limited partnership.
(b) In determining whether the requirements of Subsection
(a) have been met, the burden of proof shall be on:
(1) the plaintiff limited partner if:
(A) the applicable person or persons making the
determination under Section 153.404(a)(1) or (2) are independent
and disinterested at the time the determination is made;
(B) the determination is made by a panel of one or
more independent and disinterested individuals appointed under
Section 153.404(a)(3); or
(C) the limited partnership presents prima facie
evidence that demonstrates that the applicable person or persons
making the determination under Section 153.404(a) are independent
and disinterested; or
(2) the limited partnership in any other circumstance.
Sec. 153.409. ALLEGATIONS AFTER DEMAND REJECTED. If a
derivative proceeding is instituted after a demand is rejected, the
petition must allege with particularity facts that establish that
the rejection was not made in accordance with the requirements and
standards under Sections 153.404 and 153.408.
Sec. 153.410. DISCONTINUANCE OR SETTLEMENT. (a) A
derivative proceeding may not be discontinued or settled without
court approval.
(b) The court shall direct that notice be given to the
affected partners if the court determines that a proposed
discontinuance or settlement may substantially affect the
interests of other partners.
Sec. 153.411. PAYMENT OF EXPENSES. (a) In this section,
"expenses" means reasonable expenses incurred by a party in a
derivative proceeding, including:
(1) attorney's fees;
(2) costs in pursuing an investigation of the matter
that was the subject of the derivative proceeding; or
(3) expenses for which the limited partnership may be
required to indemnify another person.
(b) On termination of a derivative proceeding, the court may
order:
(1) the limited partnership to pay expenses the
plaintiff incurred in the proceeding if the court finds the
proceeding has resulted in a substantial benefit to the limited
partnership;
(2) the plaintiff to pay expenses the limited
partnership or other defendant incurred in investigating and
defending the proceeding if the court finds the proceeding has been
instituted or maintained without reasonable cause or for an
improper purpose; or
(3) a party to pay expenses incurred by another party
relating to the filing of a pleading, motion, or other paper if the
court finds the pleading, motion, or other paper:
(A) was not well grounded in fact after
reasonable inquiry;
(B) was not warranted by existing law or a good
faith argument for the application, extension, modification, or
reversal of existing law; or
(C) was interposed for an improper purpose, such
as to harass, cause unnecessary delay, or cause a needless increase
in the cost of litigation.
Sec. 153.412. APPLICATION TO FOREIGN LIMITED
PARTNERSHIPS. (a) In a derivative proceeding brought in the right
of a foreign limited partnership, the matters covered by this
subchapter are governed by the laws of the jurisdiction of
formation of the foreign limited partnership, except for Sections
153.405, 153.410, and 153.411, which are procedural provisions and
do not relate to the internal affairs of the foreign limited
partnership, unless applying the laws of the jurisdiction of
formation of the foreign limited partnership requires otherwise
with respect to Section 153.405.
(b) In the case of matters relating to a foreign limited
partnership under Section 153.405, a reference to a person or group
of persons described by Section 153.404 refers to a person or group
entitled under the laws of the jurisdiction of formation of the
foreign limited partnership to make the determination described by
Section 153.404(a). The standard of review of a determination made
by the person or group shall be governed by the laws of the
jurisdiction of formation of the foreign limited partnership.
Sec. 153.413. CLOSELY HELD LIMITED PARTNERSHIP. (a) In
this section, "closely held limited partnership" means a limited
partnership that has:
(1) fewer than 35 limited partners; and
(2) no partnership interests listed on a national
securities exchange or regularly quoted in an over-the-counter
market by one or more members of a national securities association.
(b) Sections 153.402-153.410 do not apply to a claim or a
derivative proceeding by a limited partner of a closely held
limited partnership against a general partner, limited partner, or
officer of the limited partnership. In the event the claim or
derivative proceeding is also made against a person who is not that
general partner, limited partner, or officer, this subsection shall
apply only to the claim or derivative proceeding against the
general partner, limited partner, or officer.
(c) If Sections 153.402-153.410 do not apply because of
Subsection (b) and if justice requires:
(1) a derivative proceeding brought by a limited
partner of a closely held limited partnership may be treated by a
court as a direct action brought by the limited partner for the
limited partner's own benefit; and
(2) a recovery in a direct or derivative proceeding by
a limited partner may be paid directly to the plaintiff or to the
limited partnership if necessary to protect the interests of
creditors or other partners of the limited partnership.
(d) Other provisions of state law govern whether a limited
partner has a direct cause of action or right to sue a general
partner, limited partner, or officer, and this section may not be
construed to create that direct cause of action or right to sue.
SECTION 31. The changes in law made by this Act apply only
to a derivative proceeding instituted on or after the effective
date of this Act. A derivative proceeding instituted before the
effective date of this Act is governed by the law in effect on the
date the proceeding was instituted, and the former law is continued
in effect for that purpose.
SECTION 32. This Act takes effect September 1, 2019.
______________________________ ______________________________
President of the Senate Speaker of the House
I certify that H.B. No. 3603 was passed by the House on May 7,
2019, by the following vote: Yeas 146, Nays 0, 1 present, not
voting.
______________________________
Chief Clerk of the House
I certify that H.B. No. 3603 was passed by the Senate on May
22, 2019, by the following vote: Yeas 31, Nays 0.
______________________________
Secretary of the Senate
APPROVED: _____________________
Date
_____________________
Governor