Texas 2019 - 86th Regular

Texas Senate Bill SB1972 Compare Versions

Version 1 (Old)

Version 2 (New)

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1	1		By: Hancock S.B. No. 1972
2		-	(Martinez Fischer)
3	2
4	3
5	4		A BILL TO BE ENTITLED
6	5		AN ACT
7	6		relating to derivative proceedings on behalf of for-profit
8	7		corporations, limited liability companies, and limited
9	8		partnerships.
10	9		BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
11	10		SECTION 1. Section 21.551(2), Business Organizations Code,
12	11		is amended to read as follows:
13	12		(2) "Shareholder" means a shareholder as defined by
14	13		Section 1.002 or [includes] a beneficial owner whose shares are
15	14		held in a voting trust or by a nominee on the beneficial owner's
16	15		behalf.
17	16		SECTION 2. Section 21.552, Business Organizations Code, is
18	17		amended to read as follows:
19	18		Sec. 21.552. STANDING TO BRING PROCEEDING. (a) Subject to
20	19		Subsection (b), a [A] shareholder may not institute or maintain a
21	20		derivative proceeding unless:
22	21		(1) the shareholder:
23	22		(A) was a shareholder of the corporation at the
24	23		time of the act or omission complained of; or
25	24		(B) became a shareholder by operation of law
26	25		originating from a person that was a shareholder at the time of the
27	26		act or omission complained of; and
28	27		(2) the shareholder fairly and adequately represents
29	28		the interests of the corporation in enforcing the right of the
30	29		corporation.
31	30		(b) If the converted entity in a conversion is a
32	31		corporation, a shareholder of that corporation may not institute or
33	32		maintain a derivative proceeding based on an act or omission that
34	33		occurred with respect to the converting entity before the date of
35	34		the conversion unless:
36	35		(1) the shareholder was an equity owner of the
37	36		converting entity at the time of the act or omission; and
38	37		(2) the shareholder fairly and adequately represents
39	38		the interests of the corporation in enforcing the right of the
40	39		corporation.
41	40		SECTION 3. Section 21.553(b), Business Organizations Code,
42	41		is amended to read as follows:
43	42		(b) The waiting period required by Subsection (a) before a
44	43		derivative proceeding may be instituted is not required or, if
45	44		applicable, shall terminate if:
46	45		(1) the shareholder has been [previously] notified
47	46		that the demand has been rejected by the corporation;
48	47		(2) the corporation is suffering irreparable injury;
49	48		or
50	49		(3) irreparable injury to the corporation would result
51	50		by waiting for the expiration of the 90-day period.
52	51		SECTION 4. Section 21.554, Business Organizations Code, is
53	52		amended to read as follows:
54	53		Sec. 21.554. DETERMINATION BY DIRECTORS OR INDEPENDENT
55	54		PERSONS. (a) A determination of how to proceed on allegations
56	55		made in a demand or petition relating to a derivative proceeding
57	56		must be made by an affirmative vote of the majority of:
58	57		(1) all [the] independent and disinterested directors
59	58		of the corporation, regardless of whether [present at a meeting of
60	59		the board of directors of the corporation at which interested
61	60		directors are not present at the time of the vote if] the
62	61		independent and disinterested directors constitute a quorum of the
63	62		board of directors;
64	63		(2) a committee consisting of one [two] or more
65	64		independent and disinterested directors appointed by an
66	65		affirmative vote of the majority of one or more independent and
67	66		disinterested directors [present at a meeting of the board of
68	67		directors], regardless of whether the independent and
69	68		disinterested directors constitute a quorum of the board of
70	69		directors; or
71	70		(3) a panel of one or more independent and
72	71		disinterested individuals [persons] appointed by the court on a
73	72		motion by the corporation listing the names of the individuals
74	73		[persons] to be appointed and stating that, to the best of the
75	74		corporation's knowledge, the individuals [persons] to be appointed
76	75		are disinterested and qualified to make the determinations
77	76		contemplated by Section 21.558.
78	77		(b) The court shall appoint a panel under Subsection (a)(3)
79	78		if the court finds that the individuals [persons] recommended by
80	79		the corporation are independent and disinterested and are otherwise
81	80		qualified with respect to expertise, experience, independent
82	81		judgment, and other factors considered appropriate by the court
83	82		under the circumstances to make the determinations. An individual
84	83		[A person] appointed by the court to a panel under this section may
85	84		not be held liable to the corporation or the corporation's
86	85		shareholders for an action taken or omission made by the individual
87	86		[person] in that capacity, except for an act or omission
88	87		constituting fraud or wilful misconduct.
89	88		SECTION 5. Section 21.555, Business Organizations Code, is
90	89		amended to read as follows:
91	90		Sec. 21.555. STAY OF PROCEEDING. (a) If the [domestic or
92	91		foreign] corporation that is the subject of a derivative proceeding
93	92		commences an inquiry into the allegations made in a demand or
94	93		petition and the person or group of persons described by Section
95	94		21.554 is conducting an active review of the allegations in good
96	95		faith, the court shall stay a derivative proceeding for not more
97	96		than 60 days until the review is completed and a determination is
98	97		made by the person or group regarding what further action, if any,
99	98		should be taken.
100	99		(b) To obtain a stay, the [domestic or foreign] corporation
101	100		must [shall] provide the court with a written statement agreeing to
102	101		advise the court and the shareholder making the demand of the
103	102		determination promptly on the completion of the review of the
104	103		matter.
105	104		(c) A stay, on motion [application], may be reviewed every
106	105		60 days for continuation [the continued necessity] of the stay if
107	106		the corporation provides the court and the shareholder with a
108	107		written statement of the status of the review and the reasons why an
109	108		extension for a period not to exceed 60 additional days is
110	109		appropriate. An extension shall be granted for a period not to
111	110		exceed 60 days if the court determines that the continuation is
112	111		appropriate in the interests of the corporation.
113	112		[(c) If the review and determination made by the person or
114	113		group is not completed before the 61st day after the stay is ordered
115	114		by the court, the stay may be renewed for one or more additional
116	115		60-day periods if the domestic or foreign corporation provides the
117	116		court and the shareholder with a written statement of the status of
118	117		the review and the reasons why a continued extension of the stay is
119	118		necessary.]
120	119		SECTION 6. Section 21.556, Business Organizations Code, is
121	120		amended to read as follows:
122	121		Sec. 21.556. DISCOVERY. (a) If a [domestic or foreign]
123	122		corporation proposes to dismiss a derivative proceeding under
124	123		Section 21.558, discovery by a shareholder after the filing of the
125	124		derivative proceeding in accordance with this subchapter shall be
126	125		limited to:
127	126		(1) facts relating to whether the person or [group of]
128	127		persons described by Section 21.554 are [21.558 is] independent and
129	128		disinterested;
130	129		(2) the good faith of the inquiry and review by the
131	130		person or group; and
132	131		(3) the reasonableness of the procedures followed by
133	132		the person or group in conducting the review.
134	133		(b) Discovery described by Subsection (a) may not be
135	134		expanded to include a fact or substantive matter regarding the act,
136	135		omission, or other matter that is the subject matter of the
137	136		derivative proceeding, but the scope of discovery shall not be so
138	137		limited[. The scope of discovery may be expanded] if the court
139	138		determines after notice and hearing that a good faith review of the
140	139		allegations [for purposes of Section 21.558] has not been made by an
141	140		independent and disinterested person or group in accordance with
142	141		Sections 21.554 and 21.558 [that section].
143	142		SECTION 7. Section 21.557, Business Organizations Code, is
144	143		amended to read as follows:
145	144		Sec. 21.557. TOLLING OF STATUTE OF LIMITATIONS. A written
146	145		demand filed with the corporation under Section 21.553 tolls the
147	146		statute of limitations on the claim on which demand is made until
148	147		the later [earlier] of:
149	148		(1) the 31st [91st] day after the expiration of any
150	149		waiting period under Section 21.553 [date of the demand]; or
151	150		(2) the 31st day after the expiration of any stay
152	151		granted under Section 21.555, including all continuations of the
153	152		stay [date the corporation advises the shareholder that the demand
154	153		has been rejected or the review has been completed].
155	154		SECTION 8. Section 21.558, Business Organizations Code, is
156	155		amended to read as follows:
157	156		Sec. 21.558. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A
158	157		court, sitting in equity as the finder of fact, shall dismiss a
159	158		derivative proceeding on a motion by the corporation if the person
160	159		or group of persons described by Section 21.554 determines in good
161	160		faith, after conducting a reasonable inquiry and based on factors
162	161		the person or group considers appropriate under the circumstances,
163	162		that continuation of the derivative proceeding is not in the best
164	163		interests of the corporation.
165	164		(b) In determining whether the requirements of Subsection
166	165		(a) have been met, the burden of proof shall be on:
167	166		(1) the plaintiff shareholder if:
168	167		(A) the majority of the board of directors
169	168		consists of independent and disinterested directors at the time the
170	169		determination is made;
171	170		(B) the determination is made by a panel of one or
172	171		more independent and disinterested persons appointed under Section
173	172		21.554(a)(3); or
174	173		(C) the corporation presents prima facie
175	174		evidence that demonstrates that the applicable person or persons
176	175		making the determination [directors appointed] under Section
177	176		21.554(a) [21.554(a)(2)] are independent and disinterested; or
178	177		(2) the corporation in any other circumstance.
179	178		SECTION 9. Section 21.559, Business Organizations Code, is
180	179		amended to read as follows:
181	180		Sec. 21.559. ALLEGATIONS [PROCEEDING INSTITUTED] AFTER
182	181		DEMAND REJECTED. If a derivative proceeding is instituted after a
183	182		demand is rejected, the petition must allege with particularity
184	183		facts that establish that the rejection was not made in accordance
185	184		with the requirements and standards under [of] Sections 21.554 and
186	185		21.558.
187	186		SECTION 10. Section 21.561, Business Organizations Code, is
188	187		amended to read as follows:
189	188		Sec. 21.561. PAYMENT OF EXPENSES. (a) In this section,
190	189		"expenses" means reasonable expenses incurred by a party in a
191	190		derivative proceeding, including:
192	191		(1) attorney's fees;
193	192		(2) costs in pursuing an investigation of the matter
194	193		that was the subject of the derivative proceeding; or
195	194		(3) expenses for which the [domestic or foreign]
196	195		corporation [or a corporate defendant] may be required to indemnify
197	196		another person.
198	197		(b) On termination of a derivative proceeding, the court may
199	198		order:
200	199		(1) the [domestic or foreign] corporation to pay [the]
201	200		expenses the plaintiff incurred in the proceeding if the court
202	201		finds the proceeding has resulted in a substantial benefit to the
203	202		[domestic or foreign] corporation;
204	203		(2) the plaintiff to pay [the] expenses the [domestic
205	204		or foreign] corporation or other defendant incurred in
206	205		investigating and defending the proceeding if the court finds the
207	206		proceeding has been instituted or maintained without reasonable
208	207		cause or for an improper purpose; or
209	208		(3) a party to pay [the] expenses incurred by another
210	209		party relating to the filing of a pleading, motion, or other paper
211	210		if the court finds the pleading, motion, or other paper:
212	211		(A) was not well grounded in fact after
213	212		reasonable inquiry;
214	213		(B) was not warranted by existing law or a good
215	214		faith argument for the application, extension, modification, or
216	215		reversal of existing law; or
217	216		(C) was interposed for an improper purpose, such
218	217		as to harass, cause unnecessary delay, or cause a needless increase
219	218		in the cost of litigation.
220	219		SECTION 11. Section 21.562, Business Organizations Code, is
221	220		amended to read as follows:
222	221		Sec. 21.562. APPLICATION TO FOREIGN CORPORATIONS. (a) In
223	222		a derivative proceeding brought in the right of a foreign
224	223		corporation, the matters covered by this subchapter are governed by
225	224		the laws of the jurisdiction of formation [incorporation] of the
226	225		foreign corporation, except for Sections 21.555, 21.560, and
227	226		21.561, which are procedural provisions and do not relate to the
228	227		internal affairs of the foreign corporation, unless applying the
229	228		laws of the jurisdiction of formation of the foreign corporation
230	229		requires otherwise with respect to Section 21.555.
231	230		(b) In the case of matters relating to a foreign corporation
232	231		under Section 21.555 [21.554], a reference to a person or group of
233	232		persons described by Section 21.554 [that section] refers to a
234	233		person or group entitled under the laws of the jurisdiction of
235	234		formation [incorporation] of the foreign corporation to make the
236	235		determination described by Section 21.554(a) [review and dispose of
237	236		a derivative proceeding]. The standard of review of a
238	237		determination [decision] made by the person or group [to dismiss
239	238		the derivative proceeding] shall be governed by the laws of the
240	239		jurisdiction of formation [incorporation] of the foreign
241	240		corporation.
242	241		SECTION 12. Section 21.563, Business Organizations Code, is
243	242		amended to read as follows:
244	243		Sec. 21.563. CLOSELY HELD CORPORATION. (a) In this
245	244		section, "closely held corporation" means a corporation that has:
246	245		(1) fewer than 35 shareholders; and
247	246		(2) no shares listed on a national securities exchange
248	247		or regularly quoted in an over-the-counter market by one or more
249	248		members of a national securities association.
250	249		(b) Sections 21.552-21.560 [21.552-21.559] do not apply to
251	250		a claim or a derivative proceeding by a shareholder of a closely
252	251		held corporation against a director, officer, or shareholder of the
253	252		corporation. In the event the claim or derivative proceeding is
254	253		also made against a person who is not that director, officer, or
255	254		shareholder, this subsection applies only to the claim or
256	255		derivative proceeding against the director, officer, or
257	256		shareholder.
258	257		(c) If Sections 21.552-21.560 do not apply because of
259	258		Subsection (b) and if justice requires:
260	259		(1) a derivative proceeding brought by a shareholder
261	260		of a closely held corporation may be treated by a court as a direct
262	261		action brought by the shareholder for the shareholder's own
263	262		benefit; and
264	263		(2) a recovery in a direct or derivative proceeding by
265	264		a shareholder may be paid directly to the plaintiff or to the
266	265		corporation if necessary to protect the interests of creditors or
267	266		other shareholders of the corporation.
268	267		(d) Other provisions of state law govern whether a
269	268		shareholder has a direct cause of action or right to sue a director,
270	269		officer, or shareholder, and this section may not be construed to
271	270		create that direct cause of action or right to sue.
272	271		SECTION 13. Section 101.451, Business Organizations Code,
273	272		is amended by amending Subdivision (2) and adding Subdivision (3)
274	273		to read as follows:
275	274		(2) "Managing entity" means an entity that is either:
276	275		(A) a manager of a limited liability company that
277	276		is managed by managers; or
278	277		(B) a member of a limited liability company that
279	278		is managed by members who are entitled to manage the company.
280	279		(3) "Member" means [includes] a person who is a member
281	280		or is an assignee of a membership interest or a person who
282	281		beneficially owns a membership interest through a voting trust or a
283	282		nominee on the person's behalf.
284	283		SECTION 14. Section 101.452, Business Organizations Code,
285	284		is amended to read as follows:
286	285		Sec. 101.452. STANDING TO BRING PROCEEDING. (a) Subject
287	286		to Subsection (b), a [A] member may not institute or maintain a
288	287		derivative proceeding unless:
289	288		(1) the member:
290	289		(A) was a member of the limited liability company
291	290		at the time of the act or omission complained of; or
292	291		(B) became a member by operation of law
293	292		originating from a person that was a member at the time of the act or
294	293		omission complained of; and
295	294		(2) the member fairly and adequately represents the
296	295		interests of the limited liability company in enforcing the right
297	296		of the limited liability company.
298	297		(b) If the converted entity in a conversion is a limited
299	298		liability company, a member of that limited liability company may
300	299		not institute or maintain a derivative proceeding based on an act or
301	300		omission that occurred with respect to the converting entity before
302	301		the date of the conversion unless:
303	302		(1) the member was an equity owner of the converting
304	303		entity at the time of the act or omission; and
305	304		(2) the member fairly and adequately represents the
306	305		interests of the limited liability company in enforcing the right
307	306		of the limited liability company.
308	307		SECTION 15. Section 101.453(b), Business Organizations
309	308		Code, is amended to read as follows:
310	309		(b) The waiting period required by Subsection (a) before a
311	310		derivative proceeding may be instituted is not required or, if
312	311		applicable, shall terminate if:
313	312		(1) the member has been [previously] notified that the
314	313		demand has been rejected by the limited liability company;
315	314		(2) the limited liability company is suffering
316	315		irreparable injury; or
317	316		(3) irreparable injury to the limited liability
318	317		company would result by waiting for the expiration of the 90-day
319	318		period.
320	319		SECTION 16. Section 101.454, Business Organizations Code,
321	320		is amended to read as follows:
322	321		Sec. 101.454. DETERMINATION BY GOVERNING OR INDEPENDENT
323	322		PERSONS. (a) The determination of how to proceed on allegations
324	323		made in a demand or petition relating to a derivative proceeding
325	324		must be made by an affirmative vote of the majority of:
326	325		(1) the independent and disinterested governing
327	326		persons of the limited liability company, whether one or more, even
328	327		if the independent and disinterested governing persons are not a
329	328		majority of the governing persons of the limited liability company
330	329		[present at a meeting of the governing authority at which
331	330		interested governing persons are not present at the time of the vote
332	331		if the independent and disinterested governing persons constitute a
333	332		quorum of the governing authority];
334	333		(2) a committee consisting of one [two] or more
335	334		independent and disinterested governing persons appointed by the
336	335		majority of one or more independent and disinterested governing
337	336		persons of the limited liability company, even if the appointing
338	337		independent and disinterested governing persons are not a majority
339	338		of the governing persons of the limited liability company [present
340	339		at a meeting of the governing authority, regardless of whether the
341	340		independent and disinterested governing persons constitute a
342	341		quorum of the governing authority]; or
343	342		(3) a panel of one or more independent and
344	343		disinterested individuals [persons] appointed by the court on a
345	344		motion by the limited liability company listing the names of the
346	345		individuals [persons] to be appointed and stating that, to the best
347	346		of the limited liability company's knowledge, the individuals
348	347		[persons] to be appointed are disinterested and qualified to make
349	348		the determinations contemplated by Section 101.458.
350	349		(b) An entity to which this subsection applies is
351	350		independent and disinterested under this section only if its
352	351		decision with respect to the limited liability company's derivative
353	352		proceeding is made by a majority of its governing persons who are
354	353		independent and disinterested with respect to that derivative
355	354		proceeding, even if those governing persons are not a majority of
356	355		its governing persons. This subsection applies to an entity that
357	356		is:
358	357		(1) a managing entity of the limited liability
359	358		company; or
360	359		(2) directly, or indirectly through one or more other
361	360		entities, a governing person of that managing entity.
362	361		(c) The court shall appoint a panel under Subsection (a)(3)
363	362		if the court finds that the individuals [persons] recommended by
364	363		the limited liability company are independent and disinterested and
365	364		are otherwise qualified with respect to expertise, experience,
366	365		independent judgment, and other factors considered appropriate by
367	366		the court under the circumstances to make the determinations. An
368	367		individual [A person] appointed by the court to a panel under this
369	368		section may not be held liable to the limited liability company or
370	369		the limited liability company's members for an action taken or
371	370		omission made by the individual [person] in that capacity, except
372	371		for acts or omissions constituting fraud or wilful misconduct.
373	372		SECTION 17. Section 101.455, Business Organizations Code,
374	373		is amended to read as follows:
375	374		Sec. 101.455. STAY OF PROCEEDING. (a) If the [domestic or
376	375		foreign] limited liability company that is the subject of a
377	376		derivative proceeding commences an inquiry into the allegations
378	377		made in a demand or petition and the person or group of persons
379	378		described by Section 101.454 is conducting an active review of the
380	379		allegations in good faith, the court shall stay a derivative
381	380		proceeding for not more than 60 days until the review is completed
382	381		and a determination is made by the person or group regarding what
383	382		further action, if any, should be taken.
384	383		(b) To obtain a stay, the [domestic or foreign] limited
385	384		liability company must [shall] provide the court with a written
386	385		statement agreeing to advise the court and the member making the
387	386		demand of the determination promptly on the completion of the
388	387		review of the matter.
389	388		(c) A stay, on motion, may be reviewed every 60 days for
390	389		continuation [the continued necessity] of the stay if the limited
391	390		liability company provides the court and the member with a written
392	391		statement of the status of the review and the reasons why an
393	392		extension for a period not to exceed 60 additional days is
394	393		appropriate. An extension shall be granted for a period not to
395	394		exceed 60 days if the court determines that the continuation is
396	395		appropriate in the interests of the limited liability company.
397	396		[(c) If the review and determination made by the person or
398	397		group is not completed before the 61st day after the date on which
399	398		the court orders the stay, the stay may be renewed for one or more
400	399		additional 60-day periods if the domestic or foreign limited
401	400		liability company provides the court and the member with a written
402	401		statement of the status of the review and the reasons why a
403	402		continued extension of the stay is necessary.]
404	403		SECTION 18. Section 101.456, Business Organizations Code,
405	404		is amended to read as follows:
406	405		Sec. 101.456. DISCOVERY. (a) If a [domestic or foreign]
407	406		limited liability company proposes to dismiss a derivative
408	407		proceeding under Section 101.458, discovery by a member after the
409	408		filing of the derivative proceeding in accordance with this
410	409		subchapter shall be limited to:
411	410		(1) facts relating to whether the person or [group of]
412	411		persons described by Section 101.454 are [101.458 is] independent
413	412		and disinterested;
414	413		(2) the good faith of the inquiry and review by the
415	414		person or group; and
416	415		(3) the reasonableness of the procedures followed by
417	416		the person or group in conducting the review.
418	417		(b) Discovery described by Subsection (a) may not be
419	418		expanded to include a fact or substantive matter regarding the act,
420	419		omission, or other matter that is the subject matter of the
421	420		derivative proceeding, but the scope of discovery shall not be so
422	421		limited[. The scope of discovery may be expanded] if the court
423	422		determines after notice and hearing that a good faith review of the
424	423		allegations [for purposes of Section 101.458] has not been made by
425	424		an independent and disinterested person or group in accordance with
426	425		Sections 101.454 and 101.458 [that section].
427	426		SECTION 19. Section 101.457, Business Organizations Code,
428	427		is amended to read as follows:
429	428		Sec. 101.457. TOLLING OF STATUTE OF LIMITATIONS. A written
430	429		demand filed with the limited liability company under Section
431	430		101.453 tolls the statute of limitations on the claim on which
432	431		demand is made until the later [earlier] of:
433	432		(1) the 31st [91st] day after the expiration of any
434	433		waiting period under Section 153.403 [date of the demand]; or
435	434		(2) the 31st day after the expiration of any stay
436	435		granted under Section 153.405, including all continuations of the
437	436		stay [date the limited liability company advises the member that
438	437		the demand has been rejected or the review has been completed].
439	438		SECTION 20. Section 101.458, Business Organizations Code,
440	439		is amended to read as follows:
441	440		Sec. 101.458. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A
442	441		court, sitting in equity as the finder of fact, shall dismiss a
443	442		derivative proceeding on a motion by the limited liability company
444	443		if the person or group of persons described by Section 101.454
445	444		determines in good faith, after conducting a reasonable inquiry and
446	445		based on factors the person or group considers appropriate under
447	446		the circumstances, that continuation of the derivative proceeding
448	447		is not in the best interests of the limited liability company.
449	448		(b) In determining whether the requirements of Subsection
450	449		(a) have been met, the burden of proof shall be on:
451	450		(1) the plaintiff member if:
452	451		(A) the applicable person or persons making the
453	452		determination under Section 101.454(a)(1) or (2) are [majority of
454	453		the governing authority consists of] independent and disinterested
455	454		[persons] at the time the determination is made;
456	455		(B) the determination is made by a panel of one or
457	456		more independent and disinterested persons appointed under Section
458	457		101.454(a)(3); or
459	458		(C) the limited liability company presents prima
460	459		facie evidence that demonstrates that the applicable person or
461	460		persons making the determination [appointed] under Section
462	461		101.454(a) [101.454(a)(2)] are independent and disinterested; or
463	462		(2) the limited liability company in any other
464	463		circumstance.
465	464		SECTION 21. Section 101.459, Business Organizations Code,
466	465		is amended to read as follows:
467	466		Sec. 101.459. ALLEGATIONS AFTER [IF] DEMAND REJECTED. If a
468	467		derivative proceeding is instituted after a demand is rejected, the
469	468		petition must allege with particularity facts that establish that
470	469		the rejection was not made in accordance with the requirements and
471	470		standards under [of] Sections 101.454 and 101.458.
472	471		SECTION 22. Section 101.461, Business Organizations Code,
473	472		is amended to read as follows:
474	473		Sec. 101.461. PAYMENT OF EXPENSES. (a) In this section,
475	474		"expenses" means reasonable expenses incurred by a party in a
476	475		derivative proceeding, including:
477	476		(1) attorney's fees;
478	477		(2) costs in [of] pursuing an investigation of the
479	478		matter that was the subject of the derivative proceeding; or
480	479		(3) expenses for which the [domestic or foreign]
481	480		limited liability company may be required to indemnify another
482	481		person.
483	482		(b) On termination of a derivative proceeding, the court may
484	483		order:
485	484		(1) the [domestic or foreign] limited liability
486	485		company to pay [the] expenses the plaintiff incurred in the
487	486		proceeding if the court finds the proceeding has resulted in a
488	487		substantial benefit to the [domestic or foreign] limited liability
489	488		company;
490	489		(2) the plaintiff to pay [the] expenses the [domestic
491	490		or foreign] limited liability company or other defendant incurred
492	491		in investigating and defending the proceeding if the court finds
493	492		the proceeding has been instituted or maintained without reasonable
494	493		cause or for an improper purpose; or
495	494		(3) a party to pay [the] expenses incurred by another
496	495		party relating to the filing of a pleading, motion, or other paper
497	496		if the court finds the pleading, motion, or other paper:
498	497		(A) was not well grounded in fact after
499	498		reasonable inquiry;
500	499		(B) was not warranted by existing law or a good
501	500		faith argument for the application, extension, modification, or
502	501		reversal of existing law; or
503	502		(C) was interposed for an improper purpose, such
504	503		as to harass, cause unnecessary delay, or cause a needless increase
505	504		in the cost of litigation.
506	505		SECTION 23. Section 101.462, Business Organizations Code,
507	506		is amended to read as follows:
508	507		Sec. 101.462. APPLICATION TO FOREIGN LIMITED LIABILITY
509	508		COMPANIES. (a) In a derivative proceeding brought in the right of
510	509		a foreign limited liability company, the matters covered by this
511	510		subchapter are governed by the laws of the jurisdiction of
512	511		formation [organization] of the foreign limited liability company,
513	512		except for Sections 101.455, 101.460, and 101.461, which are
514	513		procedural provisions and do not relate to the internal affairs of
515	514		the foreign limited liability company, unless applying the laws of
516	515		the jurisdiction of formation of the foreign limited liability
517	516		company requires otherwise with respect to Section 101.455.
518	517		(b) In the case of matters relating to a foreign limited
519	518		liability company under Section 101.455 [101.454], a reference to a
520	519		person or group of persons described by Section 101.454 [that
521	520		section] refers to a person or group entitled under the laws of the
522	521		jurisdiction of formation [organization] of the foreign limited
523	522		liability company to make the determination described by Section
524	523		101.454(a) [review and dispose of a derivative proceeding]. The
525	524		standard of review of a determination [decision] made by the person
526	525		or group [to dismiss the derivative proceeding] shall be governed
527	526		by the laws of the jurisdiction of formation [organization] of the
528	527		foreign limited liability company.
529	528		SECTION 24. Section 101.463, Business Organizations Code,
530	529		is amended to read as follows:
531	530		Sec. 101.463. CLOSELY HELD LIMITED LIABILITY COMPANY.
532	531		(a) In this section, "closely held limited liability company"
533	532		means a limited liability company that has:
534	533		(1) fewer than 35 members; and
535	534		(2) no membership interests listed on a national
536	535		securities exchange or regularly quoted in an over-the-counter
537	536		market by one or more members of a national securities association.
538	537		(b) Sections 101.452-101.460 [101.452-101.459] do not apply
539	538		to a claim or a derivative proceeding by a member of a closely held
540	539		limited liability company against a governing person, member, or
541	540		officer of the limited liability company. In the event the claim or
542	541		derivative proceeding is also made against a person who is not that
543	542		governing person, member, or officer, this subsection applies only
544	543		to the claim or derivative proceeding against the governing person,
545	544		member, or officer.
546	545		(c) If Sections 101.452-101.460 do not apply because of
547	546		Subsection (b) and if justice requires:
548	547		(1) a derivative proceeding brought by a member of a
549	548		closely held limited liability company may be treated by a court as
550	549		a direct action brought by the member for the member's own benefit;
551	550		and
552	551		(2) a recovery in a direct or derivative proceeding by
553	552		a member may be paid directly to the plaintiff or to the limited
554	553		liability company if necessary to protect the interests of
555	554		creditors or other members of the limited liability company.
556	555		(d) Other provisions of state law govern whether a member
557	556		has a direct cause of action or right to sue a governing person,
558	557		member, or officer, and this section may not be construed to create
559	558		that direct cause of action or right to sue.
560	559		SECTION 25. Section 153.401, Business Organizations Code,
561	560		is amended to read as follows:
562	561		Sec. 153.401. DEFINITIONS [RIGHT TO BRING ACTION]. In this
563	562		subchapter:
564	563		(1) "Derivative proceeding" means a civil suit in the
565	564		right of a domestic limited partnership or, to the extent provided
566	565		by Section 153.412, in the right of a foreign limited partnership.
567	566		(2) "Limited partner" means a person who is a limited
568	567		partner or is an assignee of a partnership interest, including the
569	568		partnership interest of a general partner [A limited partner may
570	569		bring an action in a court on behalf of the limited partnership to
571	570		recover a judgment in the limited partnership's favor if:
572	571		[(1) all general partners with authority to bring the
573	572		action have refused to bring the action; or
574	573		[(2) an effort to cause those general partners to
575	574		bring the action is not likely to succeed].
576	575		SECTION 26. Section 153.402, Business Organizations Code,
577	576		is amended to read as follows:
578	577		Sec. 153.402. STANDING TO BRING PROCEEDING [PROPER
579	578		PLAINTIFF]. (a) Subject to Subsection (b), a limited partner may
580	579		not institute or maintain a derivative proceeding unless:
581	580		(1) the limited partner:
582	581		(A) was a limited partner of the limited
583	582		partnership at the time of the act or omission complained of; or
584	583		(B) became a limited partner by operation of law
585	584		originating from a person that was a limited partner or general
586	585		partner at the time of the act or omission complained of; and
587	586		(2) the limited partner fairly and adequately
588	587		represents the interests of the limited partnership in enforcing
589	588		the right of the limited partnership.
590	589		(b) If the converted entity in a conversion is a limited
591	590		partnership, a limited partner of that limited partnership may not
592	591		institute or maintain a derivative proceeding based on an act or
593	592		omission that occurred with respect to the converting entity before
594	593		the date of the conversion unless:
595	594		(1) the limited partner was an equity owner of the
596	595		converting entity at the time of the act or omission; and
597	596		(2) the limited partner fairly and adequately
598	597		represents the interests of the limited partnership in enforcing
599	598		the right of the limited partnership [In a derivative action, the
600	599		plaintiff must be a limited partner when the action is brought and:
601	600		[(1) the person must have been a limited partner at the
602	601		time of the transaction that is the subject of the action; or
603	602		[(2) the person's status as a limited partner must have
604	603		arisen by operation of law or under the terms of the partnership
605	604		agreement from a person who was a limited partner at the time of the
606	605		transaction].
607	606		SECTION 27. Section 153.403, Business Organizations Code,
608	607		is amended to read as follows:
609	608		Sec. 153.403. DEMAND [PLEADING]. (a) A limited partner
610	609		may not institute a derivative proceeding until the 91st day after
611	610		the date a written demand is filed with the limited partnership
612	611		stating with particularity the act, omission, or other matter that
613	612		is the subject of the claim or challenge and requesting that the
614	613		limited partnership take suitable action.
615	614		(b) The waiting period required by Subsection (a) before a
616	615		derivative proceeding may be instituted is not required or, if
617	616		applicable, shall terminate if:
618	617		(1) the limited partner has been notified that the
619	618		demand has been rejected by the limited partnership;
620	619		(2) the limited partnership is suffering irreparable
621	620		injury; or
622	621		(3) irreparable injury to the limited partnership
623	622		would result by waiting for the expiration of the 90-day period [In
624	623		a derivative action, the complaint must contain with particularity:
625	624		[(1) the effort, if any, of the plaintiff to secure
626	625		initiation of the action by a general partner; or
627	626		[(2) the reasons for not making the effort].
628	627		SECTION 28. Section 153.404, Business Organizations Code,
629	628		is amended to read as follows:
630	629		Sec. 153.404. DETERMINATION BY INDEPENDENT PERSONS
631	630		[SECURITY FOR EXPENSES OF DEFENDANTS]. (a) A determination of how
632	631		to proceed on allegations made in a demand or petition relating to a
633	632		derivative proceeding must be made by an affirmative vote of the
634	633		majority of:
635	634		(1) the independent and disinterested general
636	635		partners of the limited partnership, whether one or more, even if
637	636		the independent and disinterested general partners are not a
638	637		majority of the general partners of the limited partnership;
639	638		(2) a committee consisting of one or more independent
640	639		and disinterested general partners appointed by a majority of one
641	640		or more independent and disinterested general partners of the
642	641		limited partnership, even if the appointing independent and
643	642		disinterested general partners are not a majority of the general
644	643		partners of the limited partnership; or
645	644		(3) a panel of one or more independent and
646	645		disinterested individuals appointed by the court on a motion by the
647	646		limited partnership listing the names of the individuals to be
648	647		appointed and stating that, to the best of the limited
649	648		partnership's knowledge, the individuals to be appointed are
650	649		disinterested and qualified to make the determinations
651	650		contemplated by Section 153.408 [In a derivative action, the court
652	651		may require the plaintiff to give security for the reasonable
653	652		expenses incurred or expected to be incurred by a defendant in the
654	653		action, including reasonable attorney's fees].
655	654		(b) An entity to which this subsection applies is
656	655		independent and disinterested under this section only if its
657	656		decision with respect to the limited partnership's derivative
658	657		proceeding is made by a majority of its governing persons who are
659	658		independent and disinterested with respect to that derivative
660	659		proceeding, even if those governing persons are not a majority of
661	660		its governing persons. This subsection applies to an entity that
662	661		is:
663	662		(1) a general partner of the limited partnership; or
664	663		(2) directly, or indirectly through one or more other
665	664		entities, a governing person of that general partner [The court may
666	665		increase or decrease at any time the amount of the security on a
667	666		showing that the security provided is inadequate or excessive].
668	667		(c) The court shall appoint a panel under Subsection (a)(3)
669	668		if the court finds that the individuals recommended by the limited
670	669		partnership are independent and disinterested and are otherwise
671	670		qualified with respect to expertise, experience, independent
672	671		judgment, and other factors considered appropriate by the court
673	672		under the circumstances to make the determinations. An individual
674	673		appointed by the court to a panel under this section may not be held
675	674		liable to the limited partnership or the limited partnership's
676	675		partners for an action taken or omission made by the individual in
677	676		that capacity, except for an act or omission constituting fraud or
678	677		wilful misconduct [If a plaintiff is unable to give security, the
679	678		plaintiff may file an affidavit in accordance with the Texas Rules
680	679		of Civil Procedure].
681	680		[(d) Except as provided by Subsection (c), if a plaintiff
682	681		fails to give the security within a reasonable time set by the
683	682		court, the court shall dismiss the suit without prejudice.
684	683		[(e) The court, on final judgment for a defendant and on a
685	684		finding that suit was brought without reasonable cause against the
686	685		defendant, may require the plaintiff to pay reasonable expenses,
687	686		including reasonable attorney's fees, to the defendant, regardless
688	687		of whether security has been required.]
689	688		SECTION 29. Section 153.405, Business Organizations Code,
690	689		is amended to read as follows:
691	690		Sec. 153.405. STAY OF PROCEEDING [EXPENSES OF PLAINTIFF].
692	691		(a) If the limited partnership that is the subject of a derivative
693	692		proceeding commences an inquiry into the allegations made in a
694	693		demand or petition and the person or group of persons described by
695	694		Section 153.404 is conducting an active review of the allegations
696	695		in good faith, the court shall stay a derivative proceeding for not
697	696		more than 60 days until the review is completed and a determination
698	697		is made by the person or group regarding what further action, if
699	698		any, should be taken.
700	699		(b) To obtain a stay, the limited partnership must provide
701	700		the court with a written statement agreeing to advise the court and
702	701		the limited partner making the demand of the determination promptly
703	702		on the completion of the review of the matter.
704	703		(c) A stay, on motion, may be reviewed every 60 days for
705	704		continuation of the stay if the limited partnership provides the
706	705		court and the limited partner with a written statement of the status
707	706		of the review and the reasons why an extension for a period not to
708	707		exceed 60 additional days is appropriate. An extension shall be
709	708		granted for a period not to exceed 60 days if the court determines
710	709		that the continuation is appropriate in the interests of the
711	710		partnership [If a derivative action is successful, wholly or
712	711		partly, or if anything is received by the plaintiff because of a
713	712		judgment, compromise, or settlement of the action or claim
714	713		constituting a part of the action, the court may award the plaintiff
715	714		reasonable expenses, including reasonable attorney's fees, and
716	715		shall direct the plaintiff to remit to a party identified by the
717	716		court the remainder of the proceeds received by the plaintiff].
718	717		SECTION 30. Subchapter I, Chapter 153, Business
719	718		Organizations Code, is amended by adding Sections 153.406, 153.407,
720	719		153.408, 153.409, 153.410, 153.411, 153.412, and 153.413 to read as
721	720		follows:
722	721		Sec. 153.406. DISCOVERY. (a) If a limited partnership
723	722		proposes to dismiss a derivative proceeding under Section 153.408,
724	723		discovery by a limited partner after the filing of the derivative
725	724		proceeding in accordance with this subchapter shall be limited to:
726	725		(1) facts relating to whether the person or persons
727	726		described by Section 153.404 are independent and disinterested;
728	727		(2) the good faith of the inquiry and review by the
729	728		person or group; and
730	729		(3) the reasonableness of the procedures followed by
731	730		the person or group in conducting the review.
732	731		(b) Discovery described by Subsection (a) may not be
733	732		expanded to include a fact or substantive matter regarding the act,
734	733		omission, or other matter that is the subject matter of the
735	734		derivative proceeding, but the scope of discovery shall not be so
736	735		limited if the court determines after notice and hearing that a good
737	736		faith review of the allegations has not been made by an independent
738	737		and disinterested person or group in accordance with Sections
739	738		153.404 and 153.408.
740	739		Sec. 153.407. TOLLING OF STATUTE OF LIMITATIONS. A written
741	740		demand filed with the limited partnership under Section 153.403
742	741		tolls the statute of limitations on the claim on which demand is
743	742		made until the later of:
744	743		(1) the 31st day after the expiration of any waiting
745	744		period under Section 153.403; or
746	745		(2) the 31st day after the expiration of any stay
747	746		granted under Section 153.405, including all continuations of the
748	747		stay.
749	748		Sec. 153.408. DISMISSAL OF DERIVATIVE PROCEEDING. (a) A
750	749		court, sitting in equity as the finder of fact, shall dismiss a
751	750		derivative proceeding on a motion by the limited partnership if the
752	751		person or group of persons described by Section 153.404 determines
753	752		in good faith, after conducting a reasonable inquiry and based on
754	753		factors the person or group considers appropriate under the
755	754		circumstances, that continuation of the derivative proceeding is
756	755		not in the best interests of the limited partnership.
757	756		(b) In determining whether the requirements of Subsection
758	757		(a) have been met, the burden of proof shall be on:
759	758		(1) the plaintiff limited partner if:
760	759		(A) the applicable person or persons making the
761	760		determination under Section 153.404(a)(1) or (2) are independent
762	761		and disinterested at the time the determination is made;
763	762		(B) the determination is made by a panel of one or
764	763		more independent and disinterested individuals appointed under
765	764		Section 153.404(a)(3); or
766	765		(C) the limited partnership presents prima facie
767	766		evidence that demonstrates that the applicable person or persons
768	767		making the determination under Section 153.404(a) are independent
769	768		and disinterested; or
770	769		(2) the limited partnership in any other circumstance.
771	770		Sec. 153.409. ALLEGATIONS AFTER DEMAND REJECTED. If a
772	771		derivative proceeding is instituted after a demand is rejected, the
773	772		petition must allege with particularity facts that establish that
774	773		the rejection was not made in accordance with the requirements and
775	774		standards under Sections 153.404 and 153.408.
776	775		Sec. 153.410. DISCONTINUANCE OR SETTLEMENT. (a) A
777	776		derivative proceeding may not be discontinued or settled without
778	777		court approval.
779	778		(b) The court shall direct that notice be given to the
780	779		affected partners if the court determines that a proposed
781	780		discontinuance or settlement may substantially affect the
782	781		interests of other partners.
783	782		Sec. 153.411. PAYMENT OF EXPENSES. (a) In this section,
784	783		"expenses" means reasonable expenses incurred by a party in a
785	784		derivative proceeding, including:
786	785		(1) attorney's fees;
787	786		(2) costs in pursuing an investigation of the matter
788	787		that was the subject of the derivative proceeding; or
789	788		(3) expenses for which the limited partnership may be
790	789		required to indemnify another person.
791	790		(b) On termination of a derivative proceeding, the court may
792	791		order:
793	792		(1) the limited partnership to pay expenses the
794	793		plaintiff incurred in the proceeding if the court finds the
795	794		proceeding has resulted in a substantial benefit to the limited
796	795		partnership;
797	796		(2) the plaintiff to pay expenses the limited
798	797		partnership or other defendant incurred in investigating and
799	798		defending the proceeding if the court finds the proceeding has been
800	799		instituted or maintained without reasonable cause or for an
801	800		improper purpose; or
802	801		(3) a party to pay expenses incurred by another party
803	802		relating to the filing of a pleading, motion, or other paper if the
804	803		court finds the pleading, motion, or other paper:
805	804		(A) was not well grounded in fact after
806	805		reasonable inquiry;
807	806		(B) was not warranted by existing law or a good
808	807		faith argument for the application, extension, modification, or
809	808		reversal of existing law; or
810	809		(C) was interposed for an improper purpose, such
811	810		as to harass, cause unnecessary delay, or cause a needless increase
812	811		in the cost of litigation.
813	812		Sec. 153.412. APPLICATION TO FOREIGN LIMITED PARTNERSHIPS.
814	813		(a) In a derivative proceeding brought in the right of a foreign
815	814		limited partnership, the matters covered by this subchapter are
816	815		governed by the laws of the jurisdiction of formation of the foreign
817	816		limited partnership, except for Sections 153.405, 153.410, and
818	817		153.411, which are procedural provisions and do not relate to the
819	818		internal affairs of the foreign limited partnership, unless
820	819		applying the laws of the jurisdiction of formation of the foreign
821	820		limited partnership requires otherwise with respect to Section
822	821		153.405.
823	822		(b) In the case of matters relating to a foreign limited
824	823		partnership under Section 153.405, a reference to a person or group
825	824		of persons described by Section 153.404 refers to a person or group
826	825		entitled under the laws of the jurisdiction of formation of the
827	826		foreign limited partnership to make the determination described by
828	827		Section 153.404(a). The standard of review of a determination made
829	828		by the person or group shall be governed by the laws of the
830	829		jurisdiction of formation of the foreign limited partnership.
831	830		Sec. 153.413. CLOSELY HELD LIMITED PARTNERSHIP. (a) In
832	831		this section, "closely held limited partnership" means a limited
833	832		partnership that has:
834	833		(1) fewer than 35 limited partners; and
835	834		(2) no partnership interests listed on a national
836	835		securities exchange or regularly quoted in an over-the-counter
837	836		market by one or more members of a national securities association.
838	837		(b) Sections 153.402-153.410 do not apply to a claim or a
839	838		derivative proceeding by a limited partner of a closely held
840	839		limited partnership against a general partner, limited partner, or
841	840		officer of the limited partnership. In the event the claim or
842	841		derivative proceeding is also made against a person who is not that
843	842		general partner, limited partner, or officer, this subsection shall
844	843		apply only to the claim or derivative proceeding against the
845	844		general partner, limited partner, or officer.
846	845		(c) If Sections 153.402-153.410 do not apply because of
847	846		Subsection (b) and if justice requires:
848	847		(1) a derivative proceeding brought by a limited
849	848		partner of a closely held limited partnership may be treated by a
850	849		court as a direct action brought by the limited partner for the
851	850		limited partner's own benefit; and
852	851		(2) a recovery in a direct or derivative proceeding by
853	852		a limited partner may be paid directly to the plaintiff or to the
854	853		limited partnership if necessary to protect the interests of
855	854		creditors or other partners of the limited partnership.
856	855		(d) Other provisions of state law govern whether a limited
857	856		partner has a direct cause of action or right to sue a general
858	857		partner, limited partner, or officer, and this section may not be
859	858		construed to create that direct cause of action or right to sue.
860	859		SECTION 31. The changes in law made by this Act apply only
861	860		to a derivative proceeding instituted on or after the effective
862	861		date of this Act. A derivative proceeding instituted before the
863	862		effective date of this Act is governed by the law in effect on the
864	863		date the proceeding was instituted, and the former law is continued
865	864		in effect for that purpose.
866	865		SECTION 32. This Act takes effect September 1, 2019.