Texas 2019 - 86th Regular

Texas House Bill HB3603 Compare Versions

Version 1 (Old)

Version 2 (New)

Old	New		Differences
1		-	H.B. No. 3603
	1	+	By: Martinez Fischer (Senate Sponsor - Hancock) H.B. No. 3603
	2	+	(In the Senate - Received from the House May 7, 2019;
	3	+	May 14, 2019, read first time and referred to Committee on Business &
	4	+	Commerce; May 20, 2019, reported favorably by the following vote:
	5	+	Yeas 8, Nays 0; May 20, 2019, sent to printer.)
	6	+	Click here to see the committee vote
2	7
3	8
	9	+	A BILL TO BE ENTITLED
4	10		AN ACT
5	11		relating to derivative proceedings on behalf of for-profit
6	12		corporations, limited liability companies, and limited
7	13		partnerships.
8	14		BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
9	15		SECTION 1. Section 21.551(2), Business Organizations Code,
10	16		is amended to read as follows:
11	17		(2) "Shareholder" means a shareholder as defined by
12	18		Section 1.002 or [includes] a beneficial owner whose shares are
13	19		held in a voting trust or by a nominee on the beneficial owner's
14	20		behalf.
15	21		SECTION 2. Section 21.552, Business Organizations Code, is
16	22		amended to read as follows:
17	23		Sec. 21.552. STANDING TO BRING PROCEEDING. (a) Subject
18	24		to Subsection (b), a [A] shareholder may not institute or maintain a
19	25		derivative proceeding unless:
20	26		(1) the shareholder:
21	27		(A) was a shareholder of the corporation at the
22	28		time of the act or omission complained of; or
23	29		(B) became a shareholder by operation of law
24	30		originating from a person that was a shareholder at the time of the
25	31		act or omission complained of; and
26	32		(2) the shareholder fairly and adequately represents
27	33		the interests of the corporation in enforcing the right of the
28	34		corporation.
29	35		(b) If the converted entity in a conversion is a
30	36		corporation, a shareholder of that corporation may not institute or
31	37		maintain a derivative proceeding based on an act or omission that
32	38		occurred with respect to the converting entity before the date of
33	39		the conversion unless:
34	40		(1) the shareholder was an equity owner of the
35	41		converting entity at the time of the act or omission; and
36	42		(2) the shareholder fairly and adequately represents
37	43		the interests of the corporation in enforcing the right of the
38	44		corporation.
39	45		SECTION 3. Section 21.553(b), Business Organizations Code,
40	46		is amended to read as follows:
41	47		(b) The waiting period required by Subsection (a) before a
42	48		derivative proceeding may be instituted is not required or, if
43	49		applicable, shall terminate if:
44	50		(1) the shareholder has been [previously] notified
45	51		that the demand has been rejected by the corporation;
46	52		(2) the corporation is suffering irreparable injury;
47	53		or
48	54		(3) irreparable injury to the corporation would result
49	55		by waiting for the expiration of the 90-day period.
50	56		SECTION 4. Section 21.554, Business Organizations Code, is
51	57		amended to read as follows:
52	58		Sec. 21.554. DETERMINATION BY DIRECTORS OR INDEPENDENT
53	59		PERSONS. (a) A determination of how to proceed on allegations made
54	60		in a demand or petition relating to a derivative proceeding must be
55	61		made by an affirmative vote of the majority of:
56	62		(1) all [the] independent and disinterested directors
57	63		of the corporation, regardless of whether [present at a meeting of
58	64		the board of directors of the corporation at which interested
59	65		directors are not present at the time of the vote if] the
60	66		independent and disinterested directors constitute a quorum of the
61	67		board of directors;
62	68		(2) a committee consisting of one [two] or more
63	69		independent and disinterested directors appointed by an
64	70		affirmative vote of the majority of one or more independent and
65	71		disinterested directors [present at a meeting of the board of
66	72		directors], regardless of whether the independent and
67	73		disinterested directors constitute a quorum of the board of
68	74		directors; or
69	75		(3) a panel of one or more independent and
70	76		disinterested individuals [persons] appointed by the court on a
71	77		motion by the corporation listing the names of the individuals
72	78		[persons] to be appointed and stating that, to the best of the
73	79		corporation's knowledge, the individuals [persons] to be appointed
74	80		are disinterested and qualified to make the determinations
75	81		contemplated by Section 21.558.
76	82		(b) The court shall appoint a panel under Subsection (a)(3)
77	83		if the court finds that the individuals [persons] recommended by
78	84		the corporation are independent and disinterested and are otherwise
79	85		qualified with respect to expertise, experience, independent
80	86		judgment, and other factors considered appropriate by the court
81	87		under the circumstances to make the determinations. An individual
82	88		[A person] appointed by the court to a panel under this section may
83	89		not be held liable to the corporation or the corporation's
84	90		shareholders for an action taken or omission made by the individual
85	91		[person] in that capacity, except for an act or omission
86	92		constituting fraud or wilful misconduct.
87	93		SECTION 5. Section 21.555, Business Organizations Code, is
88	94		amended to read as follows:
89	95		Sec. 21.555. STAY OF PROCEEDING. (a) If the [domestic or
90	96		foreign] corporation that is the subject of a derivative proceeding
91	97		commences an inquiry into the allegations made in a demand or
92	98		petition and the person or group of persons described by Section
93	99		21.554 is conducting an active review of the allegations in good
94	100		faith, the court shall stay a derivative proceeding for not more
95	101		than 60 days until the review is completed and a determination is
96	102		made by the person or group regarding what further action, if any,
97	103		should be taken.
98	104		(b) To obtain a stay, the [domestic or foreign] corporation
99	105		must [shall] provide the court with a written statement agreeing to
100	106		advise the court and the shareholder making the demand of the
101	107		determination promptly on the completion of the review of the
102	108		matter.
103	109		(c) A stay, on motion [application], may be reviewed every
104	110		60 days for continuation [the continued necessity] of the stay if
105	111		the corporation provides the court and the shareholder with a
106	112		written statement of the status of the review and the reasons why an
107	113		extension for a period not to exceed 60 additional days is
108	114		appropriate. An extension shall be granted for a period not to
109	115		exceed 60 days if the court determines that the continuation is
110	116		appropriate in the interests of the corporation.
111	117		[(c) If the review and determination made by the person or
112	118		group is not completed before the 61st day after the stay is ordered
113	119		by the court, the stay may be renewed for one or more additional
114	120		60-day periods if the domestic or foreign corporation provides the
115	121		court and the shareholder with a written statement of the status of
116	122		the review and the reasons why a continued extension of the stay is
117	123		necessary.]
118	124		SECTION 6. Section 21.556, Business Organizations Code, is
119	125		amended to read as follows:
120	126		Sec. 21.556. DISCOVERY. (a) If a [domestic or foreign]
121	127		corporation proposes to dismiss a derivative proceeding under
122	128		Section 21.558, discovery by a shareholder after the filing of the
123	129		derivative proceeding in accordance with this subchapter shall be
124	130		limited to:
125	131		(1) facts relating to whether the person or [group of]
126	132		persons described by Section 21.554 are [21.558 is] independent and
127	133		disinterested;
128	134		(2) the good faith of the inquiry and review by the
129	135		person or group; and
130	136		(3) the reasonableness of the procedures followed by
131	137		the person or group in conducting the review.
132	138		(b) Discovery described by Subsection (a) may not be
133	139		expanded to include a fact or substantive matter regarding the act,
134	140		omission, or other matter that is the subject matter of the
135	141		derivative proceeding but the scope of discovery shall not be so
136	142		limited [. The scope of discovery may be expanded] if the court
137	143		determines after notice and hearing that a good faith review of the
138	144		allegations [for purposes of Section 21.558] has not been made by an
139	145		independent and disinterested person or group in accordance with
140	146		Sections 21.554 and 21.558 [that section].
141	147		SECTION 7. Section 21.557, Business Organizations Code, is
142	148		amended to read as follows:
143	149		Sec. 21.557. TOLLING OF STATUTE OF LIMITATIONS. A written
144	150		demand filed with the corporation under Section 21.553 tolls the
145	151		statute of limitations on the claim on which demand is made until
146	152		the later [earlier] of:
147	153		(1) the 31st [91st] day after the expiration of any
148	154		waiting period under Section 21.553 [date of the demand]; or
149	155		(2) the 31st day after the expiration of any stay
150	156		granted under Section 21.555, including all continuations of the
151	157		stay [date the corporation advises the shareholder that the demand
152	158		has been rejected or the review has been completed].
153	159		SECTION 8. Section 21.558, Business Organizations Code, is
154	160		amended to read as follows:
155	161		Sec. 21.558. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A
156	162		court, sitting in equity as the finder of fact, shall dismiss a
157	163		derivative proceeding on a motion by the corporation if the person
158	164		or group of persons described by Section 21.554 determines in good
159	165		faith, after conducting a reasonable inquiry and based on factors
160	166		the person or group considers appropriate under the circumstances,
161	167		that continuation of the derivative proceeding is not in the best
162	168		interests of the corporation.
163	169		(b) In determining whether the requirements of Subsection
164	170		(a) have been met, the burden of proof shall be on:
165	171		(1) the plaintiff shareholder if:
166	172		(A) the majority of the board of directors
167	173		consists of independent and disinterested directors at the time the
168	174		determination is made;
169	175		(B) the determination is made by a panel of one or
170	176		more independent and disinterested persons appointed under Section
171	177		21.554(a)(3); or
172	178		(C) the corporation presents prima facie
173	179		evidence that demonstrates that the applicable person or persons
174	180		making the determination [directors appointed] under Section
175	181		21.554(a) [21.554(a)(2)] are independent and disinterested; or
176	182		(2) the corporation in any other circumstance.
177	183		SECTION 9. Section 21.559, Business Organizations Code, is
178	184		amended to read as follows:
179	185		Sec. 21.559. ALLEGATIONS [PROCEEDING INSTITUTED] AFTER
180	186		DEMAND REJECTED. If a derivative proceeding is instituted after a
181	187		demand is rejected, the petition must allege with particularity
182	188		facts that establish that the rejection was not made in accordance
183	189		with the requirements and standards under [of] Sections 21.554 and
184	190		21.558.
185	191		SECTION 10. Section 21.561, Business Organizations Code, is
186	192		amended to read as follows:
187	193		Sec. 21.561. PAYMENT OF EXPENSES. (a) In this section,
188	194		"expenses" means reasonable expenses incurred by a party in a
189	195		derivative proceeding, including:
190	196		(1) attorney's fees;
191	197		(2) costs in pursuing an investigation of the matter
192	198		that was the subject of the derivative proceeding; or
193	199		(3) expenses for which the [domestic or foreign]
194	200		corporation [or a corporate defendant] may be required to indemnify
195	201		another person.
196	202		(b) On termination of a derivative proceeding, the court may
197	203		order:
198	204		(1) the [domestic or foreign] corporation to pay [the]
199	205		expenses the plaintiff incurred in the proceeding if the court
200	206		finds the proceeding has resulted in a substantial benefit to the
201	207		[domestic or foreign] corporation;
202	208		(2) the plaintiff to pay [the] expenses the [domestic
203	209		or foreign] corporation or other defendant incurred in
204	210		investigating and defending the proceeding if the court finds the
205	211		proceeding has been instituted or maintained without reasonable
206	212		cause or for an improper purpose; or
207	213		(3) a party to pay [the] expenses incurred by another
208	214		party relating to the filing of a pleading, motion, or other paper
209	215		if the court finds the pleading, motion, or other paper:
210	216		(A) was not well grounded in fact after
211	217		reasonable inquiry;
212	218		(B) was not warranted by existing law or a good
213	219		faith argument for the application, extension, modification, or
214	220		reversal of existing law; or
215	221		(C) was interposed for an improper purpose, such
216	222		as to harass, cause unnecessary delay, or cause a needless increase
217	223		in the cost of litigation.
218	224		SECTION 11. Section 21.562, Business Organizations Code, is
219	225		amended to read as follows:
220	226		Sec. 21.562. APPLICATION TO FOREIGN CORPORATIONS. (a) In a
221	227		derivative proceeding brought in the right of a foreign
222	228		corporation, the matters covered by this subchapter are governed by
223	229		the laws of the jurisdiction of formation [incorporation] of the
224	230		foreign corporation, except for Sections 21.555, 21.560, and
225	231		21.561, which are procedural provisions and do not relate to the
226	232		internal affairs of the foreign corporation, unless applying the
227	233		laws of the jurisdiction of formation of the foreign corporation
228	234		requires otherwise with respect to Section 21.555.
229	235		(b) In the case of matters relating to a foreign corporation
230	236		under Section 21.555 [21.554], a reference to a person or group of
231	237		persons described by Section 21.554 [that section] refers to a
232	238		person or group entitled under the laws of the jurisdiction of
233	239		formation [incorporation] of the foreign corporation to make the
234	240		determination described by Section 21.554(a) [review and dispose of
235	241		a derivative proceeding]. The standard of review of a
236	242		determination [decision] made by the person or group [to dismiss
237	243		the derivative proceeding] shall be governed by the laws of the
238	244		jurisdiction of formation [incorporation] of the foreign
239	245		corporation.
240	246		SECTION 12. Section 21.563, Business Organizations Code, is
241	247		amended to read as follows:
242	248		Sec. 21.563. CLOSELY HELD CORPORATION. (a) In this
243	249		section, "closely held corporation" means a corporation that has:
244	250		(1) fewer than 35 shareholders; and
245	251		(2) no shares listed on a national securities exchange
246	252		or regularly quoted in an over-the-counter market by one or more
247	253		members of a national securities association.
248	254		(b) Sections 21.552-21.560 [21.552-21.559] do not apply to
249	255		a claim or a derivative proceeding by a shareholder of a closely
250	256		held corporation against a director, officer, or shareholder of the
251	257		corporation. In the event the claim or derivative proceeding is
252	258		also made against a person who is not that director, officer, or
253	259		shareholder, this subsection applies only to the claim or
254	260		derivative proceeding against the director, officer, or
255	261		shareholder.
256	262		(c) If Sections 21.552-21.560 do not apply because of
257	263		Subsection (b) and if justice requires:
258	264		(1) a derivative proceeding brought by a shareholder
259	265		of a closely held corporation may be treated by a court as a direct
260	266		action brought by the shareholder for the shareholder's own
261	267		benefit; and
262	268		(2) a recovery in a direct or derivative proceeding by
263	269		a shareholder may be paid directly to the plaintiff or to the
264	270		corporation if necessary to protect the interests of creditors or
265	271		other shareholders of the corporation.
266	272		(d) Other provisions of state law govern whether a
267	273		shareholder has a direct cause of action or right to sue a director,
268	274		officer, or shareholder, and this section may not be construed to
269	275		create that direct cause of action or right to sue.
270	276		SECTION 13. Section 101.451, Business Organizations Code,
271	277		is amended by amending Subdivision (2) and adding Subdivision (3)
272	278		to read as follows:
273	279		(2) "Managing entity" means an entity that is either:
274	280		(A) a manager of a limited liability company that
275	281		is managed by managers; or
276	282		(B) a member of a limited liability company that
277	283		is managed by members who are entitled to manage the company.
278	284		(3) "Member" means [includes] a person who is a member
279	285		or is an assignee of a membership interest or a person who
280	286		beneficially owns a membership interest through a voting trust or a
281	287		nominee on the person's behalf.
282	288		SECTION 14. Section 101.452, Business Organizations Code,
283	289		is amended to read as follows:
284	290		Sec. 101.452. STANDING TO BRING PROCEEDING. (a) Subject
285	291		to Subsection (b), a [A] member may not institute or maintain a
286	292		derivative proceeding unless:
287	293		(1) the member:
288	294		(A) was a member of the limited liability company
289	295		at the time of the act or omission complained of; or
290	296		(B) became a member by operation of law
291	297		originating from a person that was a member at the time of the act or
292	298		omission complained of; and
293	299		(2) the member fairly and adequately represents the
294	300		interests of the limited liability company in enforcing the right
295	301		of the limited liability company.
296	302		(b) If the converted entity in a conversion is a limited
297	303		liability company, a member of that limited liability company may
298	304		not institute or maintain a derivative proceeding based on an act or
299	305		omission that occurred with respect to the converting entity before
300	306		the date of the conversion unless:
301	307		(1) the member was an equity owner of the converting
302	308		entity at the time of the act or omission; and
303	309		(2) the member fairly and adequately represents the
304	310		interests of the limited liability company in enforcing the right
305	311		of the limited liability company.
306	312		SECTION 15. Section 101.453(b), Business Organizations
307	313		Code, is amended to read as follows:
308	314		(b) The waiting period required by Subsection (a) before a
309	315		derivative proceeding may be instituted is not required or, if
310	316		applicable, shall terminate if:
311	317		(1) the member has been [previously] notified that the
312	318		demand has been rejected by the limited liability company;
313	319		(2) the limited liability company is suffering
314	320		irreparable injury; or
315	321		(3) irreparable injury to the limited liability
316	322		company would result by waiting for the expiration of the 90-day
317	323		period.
318	324		SECTION 16. Section 101.454, Business Organizations Code,
319	325		is amended to read as follows:
320	326		Sec. 101.454. DETERMINATION BY GOVERNING OR INDEPENDENT
321	327		PERSONS. (a) The determination of how to proceed on allegations
322	328		made in a demand or petition relating to a derivative proceeding
323	329		must be made by an affirmative vote of the majority of:
324	330		(1) the independent and disinterested governing
325	331		persons of the limited liability company, whether one or more, even
326	332		if the independent and disinterested governing persons are not a
327	333		majority of the governing persons of the limited liability company
328	334		[present at a meeting of the governing authority at which
329	335		interested governing persons are not present at the time of the vote
330	336		if the independent and disinterested governing persons constitute a
331	337		quorum of the governing authority];
332	338		(2) a committee consisting of one [two] or more
333	339		independent and disinterested governing persons appointed by the
334	340		majority of one or more independent and disinterested governing
335	341		persons of the limited liability company, even if the appointing
336	342		independent and disinterested governing persons are not a majority
337	343		of the governing persons of the limited liability company [present
338	344		at a meeting of the governing authority, regardless of whether the
339	345		independent and disinterested governing persons constitute a
340	346		quorum of the governing authority]; or
341	347		(3) a panel of one or more independent and
342	348		disinterested individuals [persons] appointed by the court on a
343	349		motion by the limited liability company listing the names of the
344	350		individuals [persons] to be appointed and stating that, to the best
345	351		of the limited liability company's knowledge, the individuals
346	352		[persons] to be appointed are disinterested and qualified to make
347	353		the determinations contemplated by Section 101.458.
348	354		(b) An entity to which this subsection applies is
349	355		independent and disinterested under this section only if its
350	356		decision with respect to the limited liability company's derivative
351	357		proceeding is made by a majority of its governing persons who are
352	358		independent and disinterested with respect to that derivative
353	359		proceeding, even if those governing persons are not a majority of
354	360		its governing persons. This subsection applies to an entity that
355	361		is:
356	362		(1) a managing entity of the limited liability
357	363		company; or
358	364		(2) directly, or indirectly through one or more other
359	365		entities, a governing person of that managing entity.
360	366		(c) The court shall appoint a panel under Subsection (a)(3)
361	367		if the court finds that the individuals [persons] recommended by
362	368		the limited liability company are independent and disinterested and
363	369		are otherwise qualified with respect to expertise, experience,
364	370		independent judgment, and other factors considered appropriate by
365	371		the court under the circumstances to make the determinations. An
366	372		individual [A person] appointed by the court to a panel under this
367	373		section may not be held liable to the limited liability company or
368	374		the limited liability company's members for an action taken or
369	375		omission made by the individual [person] in that capacity, except
370	376		for acts or omissions constituting fraud or wilful misconduct.
371	377		SECTION 17. Section 101.455, Business Organizations Code,
372	378		is amended to read as follows:
373	379		Sec. 101.455. STAY OF PROCEEDING. (a) If the [domestic or
374	380		foreign] limited liability company that is the subject of a
375	381		derivative proceeding commences an inquiry into the allegations
376	382		made in a demand or petition and the person or group of persons
377	383		described by Section 101.454 is conducting an active review of the
378	384		allegations in good faith, the court shall stay a derivative
379	385		proceeding for not more than 60 days until the review is completed
380	386		and a determination is made by the person or group regarding what
381	387		further action, if any, should be taken.
382	388		(b) To obtain a stay, the [domestic or foreign] limited
383	389		liability company must [shall] provide the court with a written
384	390		statement agreeing to advise the court and the member making the
385	391		demand of the determination promptly on the completion of the
386	392		review of the matter.
387	393		(c) A stay, on motion, may be reviewed every 60 days for
388	394		continuation [the continued necessity] of the stay if the limited
389	395		liability company provides the court and the member with a written
390	396		statement of the status of the review and the reasons why an
391	397		extension for a period not to exceed 60 additional days is
392	398		appropriate. An extension shall be granted for a period not to
393	399		exceed 60 days if the court determines that the continuation is
394	400		appropriate in the interests of the limited liability company.
395	401		[(c) If the review and determination made by the person or
396	402		group is not completed before the 61st day after the date on which
397	403		the court orders the stay, the stay may be renewed for one or more
398	404		additional 60-day periods if the domestic or foreign limited
399	405		liability company provides the court and the member with a written
400	406		statement of the status of the review and the reasons why a
401	407		continued extension of the stay is necessary.]
402	408		SECTION 18. Section 101.456, Business Organizations Code,
403	409		is amended to read as follows:
404	410		Sec. 101.456. DISCOVERY. (a) If a [domestic or foreign]
405	411		limited liability company proposes to dismiss a derivative
406	412		proceeding under Section 101.458, discovery by a member after the
407	413		filing of the derivative proceeding in accordance with this
408	414		subchapter shall be limited to:
409	415		(1) facts relating to whether the person or [group of]
410	416		persons described by Section 101.454 are [101.458 is] independent
411	417		and disinterested;
412	418		(2) the good faith of the inquiry and review by the
413	419		person or group; and
414	420		(3) the reasonableness of the procedures followed by
415	421		the person or group in conducting the review.
416	422		(b) Discovery described by Subsection (a) may not be
417	423		expanded to include a fact or substantive matter regarding the act,
418	424		omission, or other matter that is the subject matter of the
419	425		derivative proceeding but the scope of discovery shall not be so
420	426		limited [. The scope of discovery may be expanded] if the court
421	427		determines after notice and hearing that a good faith review of the
422	428		allegations [for purposes of Section 101.458] has not been made by
423	429		an independent and disinterested person or group in accordance with
424	430		Sections 101.454 and 101.458 [that section].
425	431		SECTION 19. Section 101.457, Business Organizations Code,
426	432		is amended to read as follows:
427	433		Sec. 101.457. TOLLING OF STATUTE OF LIMITATIONS. A written
428	434		demand filed with the limited liability company under Section
429	435		101.453 tolls the statute of limitations on the claim on which
430	436		demand is made until the later [earlier] of:
431	437		(1) the 31st [91st] day after the expiration of any
432	438		waiting period under Section 153.403 [date of the demand]; or
433	439		(2) the 31st day after the expiration of any stay
434	440		granted under Section 153.405, including all continuations of the
435	441		stay [date the limited liability company advises the member that
436	442		the demand has been rejected or the review has been completed].
437	443		SECTION 20. Section 101.458, Business Organizations Code,
438	444		is amended to read as follows:
439	445		Sec. 101.458. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A
440	446		court, sitting in equity as the finder of fact, shall dismiss a
441	447		derivative proceeding on a motion by the limited liability company
442	448		if the person or group of persons described by Section 101.454
443	449		determines in good faith, after conducting a reasonable inquiry and
444	450		based on factors the person or group considers appropriate under
445	451		the circumstances, that continuation of the derivative proceeding
446	452		is not in the best interests of the limited liability company.
447	453		(b) In determining whether the requirements of Subsection
448	454		(a) have been met, the burden of proof shall be on:
449	455		(1) the plaintiff member if:
450	456		(A) the applicable person or persons making the
451	457		determination under Section 101.454(a)(1) or (2) are [majority of
452	458		the governing authority consists of] independent and disinterested
453	459		[persons] at the time the determination is made;
454	460		(B) the determination is made by a panel of one or
455	461		more independent and disinterested persons appointed under Section
456	462		101.454(a)(3); or
457	463		(C) the limited liability company presents prima
458	464		facie evidence that demonstrates that the applicable person or
459	465		persons making the determination [appointed] under Section
460	466		101.454(a) [101.454(a)(2)] are independent and disinterested; or
461	467		(2) the limited liability company in any other
462	468		circumstance.
463	469		SECTION 21. Section 101.459, Business Organizations Code,
464	470		is amended to read as follows:
465	471		Sec. 101.459. ALLEGATIONS AFTER [IF] DEMAND REJECTED. If a
466	472		derivative proceeding is instituted after a demand is rejected, the
467	473		petition must allege with particularity facts that establish that
468	474		the rejection was not made in accordance with the requirements and
469	475		standards under [of] Sections 101.454 and 101.458.
470	476		SECTION 22. Section 101.461, Business Organizations Code,
471	477		is amended to read as follows:
472	478		Sec. 101.461. PAYMENT OF EXPENSES. (a) In this section,
473	479		"expenses" means reasonable expenses incurred by a party in a
474	480		derivative proceeding, including:
475	481		(1) attorney's fees;
476	482		(2) costs in [of] pursuing an investigation of the
477	483		matter that was the subject of the derivative proceeding; or
478	484		(3) expenses for which the [domestic or foreign]
479	485		limited liability company may be required to indemnify another
480	486		person.
481	487		(b) On termination of a derivative proceeding, the court may
482	488		order:
483	489		(1) the [domestic or foreign] limited liability
484	490		company to pay [the] expenses the plaintiff incurred in the
485	491		proceeding if the court finds the proceeding has resulted in a
486	492		substantial benefit to the [domestic or foreign] limited liability
487	493		company;
488	494		(2) the plaintiff to pay [the] expenses the [domestic
489	495		or foreign] limited liability company or other defendant incurred
490	496		in investigating and defending the proceeding if the court finds
491	497		the proceeding has been instituted or maintained without reasonable
492	498		cause or for an improper purpose; or
493	499		(3) a party to pay [the] expenses incurred by another
494	500		party relating to the filing of a pleading, motion, or other paper
495	501		if the court finds the pleading, motion, or other paper:
496	502		(A) was not well grounded in fact after
497	503		reasonable inquiry;
498	504		(B) was not warranted by existing law or a good
499	505		faith argument for the application, extension, modification, or
500	506		reversal of existing law; or
501	507		(C) was interposed for an improper purpose, such
502	508		as to harass, cause unnecessary delay, or cause a needless increase
503	509		in the cost of litigation.
504	510		SECTION 23. Section 101.462, Business Organizations Code,
505	511		is amended to read as follows:
506	512		Sec. 101.462. APPLICATION TO FOREIGN LIMITED LIABILITY
507	513		COMPANIES. (a) In a derivative proceeding brought in the right of
508	514		a foreign limited liability company, the matters covered by this
509	515		subchapter are governed by the laws of the jurisdiction of
510	516		formation [organization] of the foreign limited liability company,
511	517		except for Sections 101.455, 101.460, and 101.461, which are
512	518		procedural provisions and do not relate to the internal affairs of
513	519		the foreign limited liability company, unless applying the laws of
514	520		the jurisdiction of formation of the foreign limited liability
515	521		company requires otherwise with respect to Section 101.455.
516	522		(b) In the case of matters relating to a foreign limited
517	523		liability company under Section 101.455 [101.454], a reference to a
518	524		person or group of persons described by Section 101.454 [that
519	525		section] refers to a person or group entitled under the laws of the
520	526		jurisdiction of formation [organization] of the foreign limited
521	527		liability company to make the determination described by Section
522	528		101.454(a) [review and dispose of a derivative proceeding]. The
523	529		standard of review of a determination [decision] made by the person
524	530		or group [to dismiss the derivative proceeding] shall be governed
525	531		by the laws of the jurisdiction of formation [organization] of the
526	532		foreign limited liability company.
527	533		SECTION 24. Section 101.463, Business Organizations Code,
528	534		is amended to read as follows:
529	535		Sec. 101.463. CLOSELY HELD LIMITED LIABILITY COMPANY. (a)
530	536		In this section, "closely held limited liability company" means a
531	537		limited liability company that has:
532	538		(1) fewer than 35 members; and
533	539		(2) no membership interests listed on a national
534	540		securities exchange or regularly quoted in an over-the-counter
535	541		market by one or more members of a national securities association.
536	542		(b) Sections 101.452-101.460 [101.452-101.459] do not apply
537	543		to a claim or a derivative proceeding by a member of a closely held
538	544		limited liability company against a governing person, member, or
539	545		officer of the limited liability company. In the event the claim or
540	546		derivative proceeding is also made against a person who is not that
541	547		governing person, member, or officer, this subsection applies only
542	548		to the claim or derivative proceeding against the governing person,
543	549		member, or officer.
544	550		(c) If Sections 101.452-101.460 do not apply because of
545	551		Subsection (b) and if justice requires:
546	552		(1) a derivative proceeding brought by a member of a
547	553		closely held limited liability company may be treated by a court as
548	554		a direct action brought by the member for the member's own benefit;
549	555		and
550	556		(2) a recovery in a direct or derivative proceeding by
551	557		a member may be paid directly to the plaintiff or to the limited
552	558		liability company if necessary to protect the interests of
553	559		creditors or other members of the limited liability company.
554	560		(d) Other provisions of state law govern whether a member
555	561		has a direct cause of action or right to sue a governing person,
556	562		member, or officer, and this section may not be construed to create
557	563		that direct cause of action or right to sue.
558	564		SECTION 25. Section 153.401, Business Organizations Code,
559	565		is amended to read as follows:
560	566		Sec. 153.401. DEFINITIONS [RIGHT TO BRING ACTION]. In this
561	567		subchapter:
562	568		(1) "Derivative proceeding" means a civil suit in the
563	569		right of a domestic limited partnership or, to the extent provided
564	570		by Section 153.412, in the right of a foreign limited partnership.
565	571		(2) "Limited partner" means a person who is a limited
566	572		partner or is an assignee of a partnership interest, including the
567	573		partnership interest of a general partner [A limited partner may
568	574		bring an action in a court on behalf of the limited partnership to
569	575		recover a judgment in the limited partnership's favor if:
570	576		[(1) all general partners with authority to bring the
571	577		action have refused to bring the action; or
572	578		[(2) an effort to cause those general partners to
573	579		bring the action is not likely to succeed].
574	580		SECTION 26. Section 153.402, Business Organizations Code,
575	581		is amended to read as follows:
576	582		Sec. 153.402. STANDING TO BRING PROCEEDING [PROPER
577	583		PLAINTIFF]. (a) Subject to Subsection (b), a limited partner may
578	584		not institute or maintain a derivative proceeding unless:
579	585		(1) the limited partner:
580	586		(A) was a limited partner of the limited
581	587		partnership at the time of the act or omission complained of; or
582	588		(B) became a limited partner by operation of law
583	589		originating from a person that was a limited partner or general
584	590		partner at the time of the act or omission complained of; and
585	591		(2) the limited partner fairly and adequately
586	592		represents the interests of the limited partnership in enforcing
587	593		the right of the limited partnership.
588	594		(b) If the converted entity in a conversion is a limited
589	595		partnership, a limited partner of that limited partnership may not
590	596		institute or maintain a derivative proceeding based on an act or
591	597		omission that occurred with respect to the converting entity before
592	598		the date of the conversion unless:
593	599		(1) the limited partner was an equity owner of the
594	600		converting entity at the time of the act or omission; and
595	601		(2) the limited partner fairly and adequately
596	602		represents the interests of the limited partnership in enforcing
597	603		the right of the limited partnership [In a derivative action, the
598	604		plaintiff must be a limited partner when the action is brought and:
599	605		[(1) the person must have been a limited partner at the
600	606		time of the transaction that is the subject of the action; or
601	607		[(2) the person's status as a limited partner must have
602	608		arisen by operation of law or under the terms of the partnership
603	609		agreement from a person who was a limited partner at the time of the
604	610		transaction].
605	611		SECTION 27. Section 153.403, Business Organizations Code,
606	612		is amended to read as follows:
607	613		Sec. 153.403. DEMAND [PLEADING]. (a) A limited partner may
608	614		not institute a derivative proceeding until the 91st day after the
609	615		date a written demand is filed with the limited partnership stating
610	616		with particularity the act, omission, or other matter that is the
611	617		subject of the claim or challenge and requesting that the limited
612	618		partnership take suitable action.
613	619		(b) The waiting period required by Subsection (a) before a
614	620		derivative proceeding may be instituted is not required or, if
615	621		applicable, shall terminate if:
616	622		(1) the limited partner has been notified that the
617	623		demand has been rejected by the limited partnership;
618	624		(2) the limited partnership is suffering irreparable
619	625		injury; or
620	626		(3) irreparable injury to the limited partnership
621	627		would result by waiting for the expiration of the 90-day period [In
622	628		a derivative action, the complaint must contain with particularity:
623	629		[(1) the effort, if any, of the plaintiff to secure
624	630		initiation of the action by a general partner; or
625	631		[(2) the reasons for not making the effort].
626	632		SECTION 28. Section 153.404, Business Organizations Code,
627	633		is amended to read as follows:
628	634		Sec. 153.404. DETERMINATION BY INDEPENDENT PERSONS
629	635		[SECURITY FOR EXPENSES OF DEFENDANTS]. (a) A determination of how
630	636		to proceed on allegations made in a demand or petition relating to a
631	637		derivative proceeding must be made by an affirmative vote of the
632	638		majority of:
633	639		(1) the independent and disinterested general
634	640		partners of the limited partnership, whether one or more, even if
635	641		the independent and disinterested general partners are not a
636	642		majority of the general partners of the limited partnership;
637	643		(2) a committee consisting of one or more independent
638	644		and disinterested general partners appointed by a majority of one
639	645		or more independent and disinterested general partners of the
640	646		limited partnership, even if the appointing independent and
641	647		disinterested general partners are not a majority of the general
642	648		partners of the limited partnership; or
643	649		(3) a panel of one or more independent and
644	650		disinterested individuals appointed by the court on a motion by the
645	651		limited partnership listing the names of the individuals to be
646	652		appointed and stating that, to the best of the limited
647	653		partnership's knowledge, the individuals to be appointed are
648	654		disinterested and qualified to make the determinations
649	655		contemplated by Section 153.408 [In a derivative action, the court
650	656		may require the plaintiff to give security for the reasonable
651	657		expenses incurred or expected to be incurred by a defendant in the
652	658		action, including reasonable attorney's fees].
653	659		(b) An entity to which this subsection applies is
654	660		independent and disinterested under this section only if its
655	661		decision with respect to the limited partnership's derivative
656	662		proceeding is made by a majority of its governing persons who are
657	663		independent and disinterested with respect to that derivative
658	664		proceeding, even if those governing persons are not a majority of
659	665		its governing persons. This subsection applies to an entity that
660	666		is:
661	667		(1) a general partner of the limited partnership; or
662	668		(2) directly, or indirectly through one or more other
663	669		entities, a governing person of that general partner [The court may
664	670		increase or decrease at any time the amount of the security on a
665	671		showing that the security provided is inadequate or excessive].
666	672		(c) The court shall appoint a panel under Subsection (a)(3)
667	673		if the court finds that the individuals recommended by the limited
668	674		partnership are independent and disinterested and are otherwise
669	675		qualified with respect to expertise, experience, independent
670	676		judgment, and other factors considered appropriate by the court
671	677		under the circumstances to make the determinations. An individual
672	678		appointed by the court to a panel under this section may not be held
673	679		liable to the limited partnership or the limited partnership's
674	680		partners for an action taken or omission made by the individual in
675	681		that capacity, except for an act or omission constituting fraud or
676	682		wilful misconduct [If a plaintiff is unable to give security, the
677	683		plaintiff may file an affidavit in accordance with the Texas Rules
678	684		of Civil Procedure].
679	685		[(d) Except as provided by Subsection (c), if a plaintiff
680	686		fails to give the security within a reasonable time set by the
681	687		court, the court shall dismiss the suit without prejudice.
682	688		[(e) The court, on final judgment for a defendant and on a
683	689		finding that suit was brought without reasonable cause against the
684	690		defendant, may require the plaintiff to pay reasonable expenses,
685	691		including reasonable attorney's fees, to the defendant, regardless
686	692		of whether security has been required.]
687	693		SECTION 29. Section 153.405, Business Organizations Code,
688	694		is amended to read as follows:
689	695		Sec. 153.405. STAY OF PROCEEDING [EXPENSES OF PLAINTIFF].
690	696		(a) If the limited partnership that is the subject of a derivative
691	697		proceeding commences an inquiry into the allegations made in a
692	698		demand or petition and the person or group of persons described by
693	699		Section 153.404 is conducting an active review of the allegations
694	700		in good faith, the court shall stay a derivative proceeding for not
695	701		more than 60 days until the review is completed and a determination
696	702		is made by the person or group regarding what further action, if
697	703		any, should be taken.
698	704		(b) To obtain a stay, the limited partnership must provide
699	705		the court with a written statement agreeing to advise the court and
700	706		the limited partner making the demand of the determination promptly
701	707		on the completion of the review of the matter.
702	708		(c) A stay, on motion, may be reviewed every 60 days for
703	709		continuation of the stay if the limited partnership provides the
704	710		court and the limited partner with a written statement of the status
705	711		of the review and the reasons why an extension for a period not to
706	712		exceed 60 additional days is appropriate. An extension shall be
707	713		granted for a period not to exceed 60 days if the court determines
708	714		that the continuation is appropriate in the interests of the
709	715		partnership [If a derivative action is successful, wholly or
710	716		partly, or if anything is received by the plaintiff because of a
711	717		judgment, compromise, or settlement of the action or claim
712	718		constituting a part of the action, the court may award the plaintiff
713	719		reasonable expenses, including reasonable attorney's fees, and
714	720		shall direct the plaintiff to remit to a party identified by the
715	721		court the remainder of the proceeds received by the plaintiff].
716	722		SECTION 30. Subchapter I, Chapter 153, Business
717	723		Organizations Code, is amended by adding Sections 153.406, 153.407,
718	724		153.408, 153.409, 153.410, 153.411, 153.412, and 153.413 to read as
719	725		follows:
720	726		Sec. 153.406. DISCOVERY. (a) If a limited partnership
721	727		proposes to dismiss a derivative proceeding under Section 153.408,
722	728		discovery by a limited partner after the filing of the derivative
723	729		proceeding in accordance with this subchapter shall be limited to:
724	730		(1) facts relating to whether the person or persons
725	731		described by Section 153.404 are independent and disinterested;
726	732		(2) the good faith of the inquiry and review by the
727	733		person or group; and
728	734		(3) the reasonableness of the procedures followed by
729	735		the person or group in conducting the review.
730	736		(b) Discovery described by Subsection (a) may not be
731	737		expanded to include a fact or substantive matter regarding the act,
732	738		omission, or other matter that is the subject matter of the
733	739		derivative proceeding, but the scope of discovery shall not be so
734	740		limited if the court determines after notice and hearing that a good
735	741		faith review of the allegations has not been made by an independent
736	742		and disinterested person or group in accordance with Sections
737	743		153.404 and 153.408.
738	744		Sec. 153.407. TOLLING OF STATUTE OF LIMITATIONS. A written
739	745		demand filed with the limited partnership under Section 153.403
740	746		tolls the statute of limitations on the claim on which demand is
741	747		made until the later of:
742	748		(1) the 31st day after the expiration of any waiting
743	749		period under Section 153.403; or
744	750		(2) the 31st day after the expiration of any stay
745	751		granted under Section 153.405, including all continuations of the
746	752		stay.
747	753		Sec. 153.408. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A
748	754		court, sitting in equity as the finder of fact, shall dismiss a
749	755		derivative proceeding on a motion by the limited partnership if the
750	756		person or group of persons described by Section 153.404 determines
751	757		in good faith, after conducting a reasonable inquiry and based on
752	758		factors the person or group considers appropriate under the
753	759		circumstances, that continuation of the derivative proceeding is
754	760		not in the best interests of the limited partnership.
755	761		(b) In determining whether the requirements of Subsection
756	762		(a) have been met, the burden of proof shall be on:
757	763		(1) the plaintiff limited partner if:
758	764		(A) the applicable person or persons making the
759	765		determination under Section 153.404(a)(1) or (2) are independent
760	766		and disinterested at the time the determination is made;
761	767		(B) the determination is made by a panel of one or
762	768		more independent and disinterested individuals appointed under
763	769		Section 153.404(a)(3); or
764	770		(C) the limited partnership presents prima facie
765	771		evidence that demonstrates that the applicable person or persons
766	772		making the determination under Section 153.404(a) are independent
767	773		and disinterested; or
768	774		(2) the limited partnership in any other circumstance.
769	775		Sec. 153.409. ALLEGATIONS AFTER DEMAND REJECTED. If a
770	776		derivative proceeding is instituted after a demand is rejected, the
771	777		petition must allege with particularity facts that establish that
772	778		the rejection was not made in accordance with the requirements and
773	779		standards under Sections 153.404 and 153.408.
774	780		Sec. 153.410. DISCONTINUANCE OR SETTLEMENT. (a) A
775	781		derivative proceeding may not be discontinued or settled without
776	782		court approval.
777	783		(b) The court shall direct that notice be given to the
778	784		affected partners if the court determines that a proposed
779	785		discontinuance or settlement may substantially affect the
780	786		interests of other partners.
781	787		Sec. 153.411. PAYMENT OF EXPENSES. (a) In this section,
782	788		"expenses" means reasonable expenses incurred by a party in a
783	789		derivative proceeding, including:
784	790		(1) attorney's fees;
785	791		(2) costs in pursuing an investigation of the matter
786	792		that was the subject of the derivative proceeding; or
787	793		(3) expenses for which the limited partnership may be
788	794		required to indemnify another person.
789	795		(b) On termination of a derivative proceeding, the court may
790	796		order:
791	797		(1) the limited partnership to pay expenses the
792	798		plaintiff incurred in the proceeding if the court finds the
793	799		proceeding has resulted in a substantial benefit to the limited
794	800		partnership;
795	801		(2) the plaintiff to pay expenses the limited
796	802		partnership or other defendant incurred in investigating and
797	803		defending the proceeding if the court finds the proceeding has been
798	804		instituted or maintained without reasonable cause or for an
799	805		improper purpose; or
800	806		(3) a party to pay expenses incurred by another party
801	807		relating to the filing of a pleading, motion, or other paper if the
802	808		court finds the pleading, motion, or other paper:
803	809		(A) was not well grounded in fact after
804	810		reasonable inquiry;
805	811		(B) was not warranted by existing law or a good
806	812		faith argument for the application, extension, modification, or
807	813		reversal of existing law; or
808	814		(C) was interposed for an improper purpose, such
809	815		as to harass, cause unnecessary delay, or cause a needless increase
810	816		in the cost of litigation.
811	817		Sec. 153.412. APPLICATION TO FOREIGN LIMITED
812	818		PARTNERSHIPS. (a) In a derivative proceeding brought in the right
813	819		of a foreign limited partnership, the matters covered by this
814	820		subchapter are governed by the laws of the jurisdiction of
815	821		formation of the foreign limited partnership, except for Sections
816	822		153.405, 153.410, and 153.411, which are procedural provisions and
817	823		do not relate to the internal affairs of the foreign limited
818	824		partnership, unless applying the laws of the jurisdiction of
819	825		formation of the foreign limited partnership requires otherwise
820	826		with respect to Section 153.405.
821	827		(b) In the case of matters relating to a foreign limited
822	828		partnership under Section 153.405, a reference to a person or group
823	829		of persons described by Section 153.404 refers to a person or group
824	830		entitled under the laws of the jurisdiction of formation of the
825	831		foreign limited partnership to make the determination described by
826	832		Section 153.404(a). The standard of review of a determination made
827	833		by the person or group shall be governed by the laws of the
828	834		jurisdiction of formation of the foreign limited partnership.
829	835		Sec. 153.413. CLOSELY HELD LIMITED PARTNERSHIP. (a) In
830	836		this section, "closely held limited partnership" means a limited
831	837		partnership that has:
832	838		(1) fewer than 35 limited partners; and
833	839		(2) no partnership interests listed on a national
834	840		securities exchange or regularly quoted in an over-the-counter
835	841		market by one or more members of a national securities association.
836	842		(b) Sections 153.402-153.410 do not apply to a claim or a
837	843		derivative proceeding by a limited partner of a closely held
838	844		limited partnership against a general partner, limited partner, or
839	845		officer of the limited partnership. In the event the claim or
840	846		derivative proceeding is also made against a person who is not that
841	847		general partner, limited partner, or officer, this subsection shall
842	848		apply only to the claim or derivative proceeding against the
843	849		general partner, limited partner, or officer.
844	850		(c) If Sections 153.402-153.410 do not apply because of
845	851		Subsection (b) and if justice requires:
846	852		(1) a derivative proceeding brought by a limited
847	853		partner of a closely held limited partnership may be treated by a
848	854		court as a direct action brought by the limited partner for the
849	855		limited partner's own benefit; and
850	856		(2) a recovery in a direct or derivative proceeding by
851	857		a limited partner may be paid directly to the plaintiff or to the
852	858		limited partnership if necessary to protect the interests of
853	859		creditors or other partners of the limited partnership.
854	860		(d) Other provisions of state law govern whether a limited
855	861		partner has a direct cause of action or right to sue a general
856	862		partner, limited partner, or officer, and this section may not be
857	863		construed to create that direct cause of action or right to sue.
858	864		SECTION 31. The changes in law made by this Act apply only
859	865		to a derivative proceeding instituted on or after the effective
860	866		date of this Act. A derivative proceeding instituted before the
861	867		effective date of this Act is governed by the law in effect on the
862	868		date the proceeding was instituted, and the former law is continued
863	869		in effect for that purpose.
864	870		SECTION 32. This Act takes effect September 1, 2019.
865		-	______________________________ ______________________________
866		-	President of the Senate Speaker of the House
867		-	I certify that H.B. No. 3603 was passed by the House on May 7,
868		-	2019, by the following vote: Yeas 146, Nays 0, 1 present, not
869		-	voting.
870		-	______________________________
871		-	Chief Clerk of the House
872		-	I certify that H.B. No. 3603 was passed by the Senate on May
873		-	22, 2019, by the following vote: Yeas 31, Nays 0.
874		-	______________________________
875		-	Secretary of the Senate
876		-	APPROVED: _____________________
877		-	Date
878		-	_____________________
879		-	Governor
	871	+	* * * * *