Bill Text: TX SB1972 | 2019-2020 | 86th Legislature | Comm Sub


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

Spectrum: Bipartisan Bill

Status: (Engrossed) 2019-05-15 - Committee report sent to Calendars [SB1972 Detail]

Download: Texas-2019-SB1972-Comm_Sub.html
 
 
  By: Hancock S.B. No. 1972
 
  (Martinez Fischer)
 
   
 
 
A BILL TO BE ENTITLED
 
AN ACT
  relating to derivative proceedings on behalf of for-profit
  corporations, limited liability companies, and limited
  partnerships.
         BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF TEXAS:
         SECTION 1.  Section 21.551(2), Business Organizations Code,
  is amended to read as follows:
               (2)  "Shareholder" means a shareholder as defined by
  Section 1.002 or [includes] a beneficial owner whose shares are
  held in a voting trust or by a nominee on the beneficial owner's
  behalf.
         SECTION 2.  Section 21.552, Business Organizations Code, is
  amended to read as follows:
         Sec. 21.552.  STANDING TO BRING PROCEEDING.  (a)  Subject to
  Subsection (b), a [A] shareholder may not institute or maintain a
  derivative proceeding unless:
               (1)  the shareholder:
                     (A)  was a shareholder of the corporation at the
  time of the act or omission complained of; or
                     (B)  became a shareholder by operation of law
  originating from a person that was a shareholder at the time of the
  act or omission complained of; and
               (2)  the shareholder fairly and adequately represents
  the interests of the corporation in enforcing the right of the
  corporation.
         (b)  If the converted entity in a conversion is a
  corporation, a shareholder of that corporation may not institute or
  maintain a derivative proceeding based on an act or omission that
  occurred with respect to the converting entity before the date of
  the conversion unless:
               (1)  the shareholder was an equity owner of the
  converting entity at the time of the act or omission; and
               (2)  the shareholder fairly and adequately represents
  the interests of the corporation in enforcing the right of the
  corporation.
         SECTION 3.  Section 21.553(b), Business Organizations Code,
  is amended to read as follows:
         (b)  The waiting period required by Subsection (a) before a
  derivative proceeding may be instituted is not required or, if
  applicable, shall terminate if:
               (1)  the shareholder has been [previously] notified
  that the demand has been rejected by the corporation;
               (2)  the corporation is suffering irreparable injury;
  or
               (3)  irreparable injury to the corporation would result
  by waiting for the expiration of the 90-day period.
         SECTION 4.  Section 21.554, Business Organizations Code, is
  amended to read as follows:
         Sec. 21.554.  DETERMINATION BY DIRECTORS OR INDEPENDENT
  PERSONS. (a)  A determination of how to proceed on allegations
  made in a demand or petition relating to a derivative proceeding
  must be made by an affirmative vote of the majority of:
               (1)  all [the] independent and disinterested directors
  of the corporation, regardless of whether [present at a meeting of
  the board of directors of the corporation at which interested
  directors are not present at the time of the vote if] the
  independent and disinterested directors constitute a quorum of the
  board of directors;
               (2)  a committee consisting of one [two] or more
  independent and disinterested directors appointed by an
  affirmative vote of the majority of one or more independent and
  disinterested directors [present at a meeting of the board of
  directors], regardless of whether the independent and
  disinterested directors constitute a quorum of the board of
  directors; or
               (3)  a panel of one or more independent and
  disinterested individuals [persons] appointed by the court on a
  motion by the corporation listing the names of the individuals
  [persons] to be appointed and stating that, to the best of the
  corporation's knowledge, the individuals [persons] to be appointed
  are disinterested and qualified to make the determinations
  contemplated by Section 21.558.
         (b)  The court shall appoint a panel under Subsection (a)(3)
  if the court finds that the individuals [persons] recommended by
  the corporation are independent and disinterested and are otherwise
  qualified with respect to expertise, experience, independent
  judgment, and other factors considered appropriate by the court
  under the circumstances to make the determinations. An individual
  [A person] appointed by the court to a panel under this section may
  not be held liable to the corporation or the corporation's
  shareholders for an action taken or omission made by the individual
  [person] in that capacity, except for an act or omission
  constituting fraud or wilful misconduct.
         SECTION 5.  Section 21.555, Business Organizations Code, is
  amended to read as follows:
         Sec. 21.555.  STAY OF PROCEEDING. (a)  If the [domestic or
  foreign] corporation that is the subject of a derivative proceeding
  commences an inquiry into the allegations made in a demand or
  petition and the person or group of persons described by Section
  21.554 is conducting an active review of the allegations in good
  faith, the court shall stay a derivative proceeding for not more
  than 60 days until the review is completed and a determination is
  made by the person or group regarding what further action, if any,
  should be taken.
         (b)  To obtain a stay, the [domestic or foreign] corporation
  must [shall] provide the court with a written statement agreeing to
  advise the court and the shareholder making the demand of the
  determination promptly on the completion of the review of the
  matter.
         (c)  A stay, on motion [application], may be reviewed every
  60 days for continuation [the continued necessity] of the stay if
  the corporation provides the court and the shareholder with a
  written statement of the status of the review and the reasons why an
  extension for a period not to exceed 60 additional days is
  appropriate. An extension shall be granted for a period not to
  exceed 60 days if the court determines that the continuation is
  appropriate in the interests of the corporation.
         [(c)     If the review and determination made by the person or
  group is not completed before the 61st day after the stay is ordered
  by the court, the stay may be renewed for one or more additional
  60-day periods if the domestic or foreign corporation provides the
  court and the shareholder with a written statement of the status of
  the review and the reasons why a continued extension of the stay is
  necessary.]
         SECTION 6.  Section 21.556, Business Organizations Code, is
  amended to read as follows:
         Sec. 21.556.  DISCOVERY. (a)  If a [domestic or foreign]
  corporation proposes to dismiss a derivative proceeding under
  Section 21.558, discovery by a shareholder after the filing of the
  derivative proceeding in accordance with this subchapter shall be
  limited to:
               (1)  facts relating to whether the person or [group of]
  persons described by Section 21.554 are [21.558 is] independent and
  disinterested;
               (2)  the good faith of the inquiry and review by the
  person or group; and
               (3)  the reasonableness of the procedures followed by
  the person or group in conducting the review.
         (b)  Discovery described by Subsection (a) may not be
  expanded to include a fact or substantive matter regarding the act,
  omission, or other matter that is the subject matter of the
  derivative proceeding, but the scope of discovery shall not be so
  limited[. The scope of discovery may be expanded] if the court
  determines after notice and hearing that a good faith review of the
  allegations [for purposes of Section 21.558] has not been made by an
  independent and disinterested person or group in accordance with
  Sections 21.554 and 21.558 [that section].
         SECTION 7.  Section 21.557, Business Organizations Code, is
  amended to read as follows:
         Sec. 21.557.  TOLLING OF STATUTE OF LIMITATIONS. A written
  demand filed with the corporation under Section 21.553 tolls the
  statute of limitations on the claim on which demand is made until
  the later [earlier] of:
               (1)  the 31st [91st] day after the expiration of any
  waiting period under Section 21.553 [date of the demand]; or
               (2)  the 31st day after the expiration of any stay
  granted under Section 21.555, including all continuations of the
  stay [date the corporation advises the shareholder that the demand
  has been rejected or the review has been completed].
         SECTION 8.  Section 21.558, Business Organizations Code, is
  amended to read as follows:
         Sec. 21.558.  DISMISSAL OF DERIVATIVE PROCEEDING. (a)  A
  court, sitting in equity as the finder of fact, shall dismiss a
  derivative proceeding on a motion by the corporation if the person
  or group of persons described by Section 21.554 determines in good
  faith, after conducting a reasonable inquiry and based on factors
  the person or group considers appropriate under the circumstances,
  that continuation of the derivative proceeding is not in the best
  interests of the corporation.
         (b)  In determining whether the requirements of Subsection
  (a) have been met, the burden of proof shall be on:
               (1)  the plaintiff shareholder if:
                     (A)  the majority of the board of directors
  consists of independent and disinterested directors at the time the
  determination is made;
                     (B)  the determination is made by a panel of one or
  more independent and disinterested persons appointed under Section
  21.554(a)(3); or
                     (C)  the corporation presents prima facie
  evidence that demonstrates that the applicable person or persons
  making the determination [directors appointed] under Section
  21.554(a) [21.554(a)(2)] are independent and disinterested; or
               (2)  the corporation in any other circumstance.
         SECTION 9.  Section 21.559, Business Organizations Code, is
  amended to read as follows:
         Sec. 21.559.  ALLEGATIONS [PROCEEDING INSTITUTED] AFTER
  DEMAND REJECTED. If a derivative proceeding is instituted after a
  demand is rejected, the petition must allege with particularity
  facts that establish that the rejection was not made in accordance
  with the requirements and standards under [of] Sections 21.554 and
  21.558.
         SECTION 10.  Section 21.561, Business Organizations Code, is
  amended to read as follows:
         Sec. 21.561.  PAYMENT OF EXPENSES. (a)  In this section,
  "expenses" means reasonable expenses incurred by a party in a
  derivative proceeding, including:
               (1)  attorney's fees;
               (2)  costs in pursuing an investigation of the matter
  that was the subject of the derivative proceeding; or
               (3)  expenses for which the [domestic or foreign]
  corporation [or a corporate defendant] may be required to indemnify
  another person.
         (b)  On termination of a derivative proceeding, the court may
  order:
               (1)  the [domestic or foreign] corporation to pay [the]
  expenses the plaintiff incurred in the proceeding if the court
  finds the proceeding has resulted in a substantial benefit to the
  [domestic or foreign] corporation;
               (2)  the plaintiff to pay [the] expenses the [domestic
  or foreign] corporation or other defendant incurred in
  investigating and defending the proceeding if the court finds the
  proceeding has been instituted or maintained without reasonable
  cause or for an improper purpose; or
               (3)  a party to pay [the] expenses incurred by another
  party relating to the filing of a pleading, motion, or other paper
  if the court finds the pleading, motion, or other paper:
                     (A)  was not well grounded in fact after
  reasonable inquiry;
                     (B)  was not warranted by existing law or a good
  faith argument for the application, extension, modification, or
  reversal of existing law; or
                     (C)  was interposed for an improper purpose, such
  as to harass, cause unnecessary delay, or cause a needless increase
  in the cost of litigation.
         SECTION 11.  Section 21.562, Business Organizations Code, is
  amended to read as follows:
         Sec. 21.562.  APPLICATION TO FOREIGN CORPORATIONS. (a)  In
  a derivative proceeding brought in the right of a foreign
  corporation, the matters covered by this subchapter are governed by
  the laws of the jurisdiction of formation [incorporation] of the
  foreign corporation, except for Sections 21.555, 21.560, and
  21.561, which are procedural provisions and do not relate to the
  internal affairs of the foreign corporation, unless applying the
  laws of the jurisdiction of formation of the foreign corporation
  requires otherwise with respect to Section 21.555.
         (b)  In the case of matters relating to a foreign corporation
  under Section 21.555 [21.554], a reference to a person or group of
  persons described by Section 21.554 [that section] refers to a
  person or group entitled under the laws of the jurisdiction of
  formation [incorporation] of the foreign corporation to make the
  determination described by Section 21.554(a) [review and dispose of
  a derivative proceeding]. The standard of review of a
  determination [decision] made by the person or group [to dismiss
  the derivative proceeding] shall be governed by the laws of the
  jurisdiction of formation [incorporation] of the foreign
  corporation.
         SECTION 12.  Section 21.563, Business Organizations Code, is
  amended to read as follows:
         Sec. 21.563.  CLOSELY HELD CORPORATION. (a)  In this
  section, "closely held corporation" means a corporation that has:
               (1)  fewer than 35 shareholders; and
               (2)  no shares listed on a national securities exchange
  or regularly quoted in an over-the-counter market by one or more
  members of a national securities association.
         (b)  Sections 21.552-21.560 [21.552-21.559] do not apply to
  a claim or a derivative proceeding by a shareholder of a closely
  held corporation against a director, officer, or shareholder of the
  corporation. In the event the claim or derivative proceeding is
  also made against a person who is not that director, officer, or
  shareholder, this subsection applies only to the claim or
  derivative proceeding against the director, officer, or
  shareholder.
         (c)  If Sections 21.552-21.560 do not apply because of
  Subsection (b) and if justice requires:
               (1)  a derivative proceeding brought by a shareholder
  of a closely held corporation may be treated by a court as a direct
  action brought by the shareholder for the shareholder's own
  benefit; and
               (2)  a recovery in a direct or derivative proceeding by
  a shareholder may be paid directly to the plaintiff or to the
  corporation if necessary to protect the interests of creditors or
  other shareholders of the corporation.
         (d)  Other provisions of state law govern whether a
  shareholder has a direct cause of action or right to sue a director,
  officer, or shareholder, and this section may not be construed to
  create that direct cause of action or right to sue.
         SECTION 13.  Section 101.451, Business Organizations Code,
  is amended by amending Subdivision (2) and adding Subdivision (3)
  to read as follows:
               (2)  "Managing entity" means an entity that is either:
                     (A)  a manager of a limited liability company that
  is managed by managers; or
                     (B)  a member of a limited liability company that
  is managed by members who are entitled to manage the company.
               (3)  "Member" means [includes] a person who is a member
  or is an assignee of a membership interest or a person who
  beneficially owns a membership interest through a voting trust or a
  nominee on the person's behalf.
         SECTION 14.  Section 101.452, Business Organizations Code,
  is amended to read as follows:
         Sec. 101.452.  STANDING TO BRING PROCEEDING. (a)  Subject
  to Subsection (b), a [A] member may not institute or maintain a
  derivative proceeding unless:
               (1)  the member:
                     (A)  was a member of the limited liability company
  at the time of the act or omission complained of; or
                     (B)  became a member by operation of law
  originating from a person that was a member at the time of the act or
  omission complained of; and
               (2)  the member fairly and adequately represents the
  interests of the limited liability company in enforcing the right
  of the limited liability company.
         (b)  If the converted entity in a conversion is a limited
  liability company, a member of that limited liability company may
  not institute or maintain a derivative proceeding based on an act or
  omission that occurred with respect to the converting entity before
  the date of the conversion unless:
               (1)  the member was an equity owner of the converting
  entity at the time of the act or omission; and
               (2)  the member fairly and adequately represents the
  interests of the limited liability company in enforcing the right
  of the limited liability company.
         SECTION 15.  Section 101.453(b), Business Organizations
  Code, is amended to read as follows:
         (b)  The waiting period required by Subsection (a) before a
  derivative proceeding may be instituted is not required or, if
  applicable, shall terminate if:
               (1)  the member has been [previously] notified that the
  demand has been rejected by the limited liability company;
               (2)  the limited liability company is suffering
  irreparable injury; or
               (3)  irreparable injury to the limited liability
  company would result by waiting for the expiration of the 90-day
  period.
         SECTION 16.  Section 101.454, Business Organizations Code,
  is amended to read as follows:
         Sec. 101.454.  DETERMINATION BY GOVERNING OR INDEPENDENT
  PERSONS. (a)  The determination of how to proceed on allegations
  made in a demand or petition relating to a derivative proceeding
  must be made by an affirmative vote of the majority of:
               (1)  the independent and disinterested governing
  persons of the limited liability company, whether one or more, even
  if the independent and disinterested governing persons are not a
  majority of the governing persons of the limited liability company
  [present at a meeting of the governing authority at which
  interested governing persons are not present at the time of the vote
  if the independent and disinterested governing persons constitute a
  quorum of the governing authority];
               (2)  a committee consisting of one [two] or more
  independent and disinterested governing persons appointed by the
  majority of one or more independent and disinterested governing
  persons of the limited liability company, even if the appointing
  independent and disinterested governing persons are not a majority
  of the governing persons of the limited liability company [present
  at a meeting of the governing authority, regardless of whether the
  independent and disinterested governing persons constitute a
  quorum of the governing authority]; or
               (3)  a panel of one or more independent and
  disinterested individuals [persons] appointed by the court on a
  motion by the limited liability company listing the names of the
  individuals [persons] to be appointed and stating that, to the best
  of the limited liability company's knowledge, the individuals
  [persons] to be appointed are disinterested and qualified to make
  the determinations contemplated by Section 101.458.
         (b)  An entity to which this subsection applies is
  independent and disinterested under this section only if its
  decision with respect to the limited liability company's derivative
  proceeding is made by a majority of its governing persons who are
  independent and disinterested with respect to that derivative
  proceeding, even if those governing persons are not a majority of
  its governing persons. This subsection applies to an entity that
  is:
               (1)  a managing entity of the limited liability
  company; or 
               (2)  directly, or indirectly through one or more other
  entities, a governing person of that managing entity.
         (c)  The court shall appoint a panel under Subsection (a)(3)
  if the court finds that the individuals [persons] recommended by
  the limited liability company are independent and disinterested and
  are otherwise qualified with respect to expertise, experience,
  independent judgment, and other factors considered appropriate by
  the court under the circumstances to make the determinations. An
  individual [A person] appointed by the court to a panel under this
  section may not be held liable to the limited liability company or
  the limited liability company's members for an action taken or
  omission made by the individual [person] in that capacity, except
  for acts or omissions constituting fraud or wilful misconduct.
         SECTION 17.  Section 101.455, Business Organizations Code,
  is amended to read as follows:
         Sec. 101.455.  STAY OF PROCEEDING. (a)  If the [domestic or
  foreign] limited liability company that is the subject of a
  derivative proceeding commences an inquiry into the allegations
  made in a demand or petition and the person or group of persons
  described by Section 101.454 is conducting an active review of the
  allegations in good faith, the court shall stay a derivative
  proceeding for not more than 60 days until the review is completed
  and a determination is made by the person or group regarding what
  further action, if any, should be taken.
         (b)  To obtain a stay, the [domestic or foreign] limited
  liability company must [shall] provide the court with a written
  statement agreeing to advise the court and the member making the
  demand of the determination promptly on the completion of the
  review of the matter.
         (c)  A stay, on motion, may be reviewed every 60 days for
  continuation [the continued necessity] of the stay if the limited
  liability company provides the court and the member with a written
  statement of the status of the review and the reasons why an
  extension for a period not to exceed 60 additional days is
  appropriate. An extension shall be granted for a period not to
  exceed 60 days if the court determines that the continuation is
  appropriate in the interests of the limited liability company.
         [(c)     If the review and determination made by the person or
  group is not completed before the 61st day after the date on which
  the court orders the stay, the stay may be renewed for one or more
  additional 60-day periods if the domestic or foreign limited
  liability company provides the court and the member with a written
  statement of the status of the review and the reasons why a
  continued extension of the stay is necessary.]
         SECTION 18.  Section 101.456, Business Organizations Code,
  is amended to read as follows:
         Sec. 101.456.  DISCOVERY. (a)  If a [domestic or foreign]
  limited liability company proposes to dismiss a derivative
  proceeding under Section 101.458, discovery by a member after the
  filing of the derivative proceeding in accordance with this
  subchapter shall be limited to:
               (1)  facts relating to whether the person or [group of]
  persons described by Section 101.454 are [101.458 is] independent
  and disinterested;
               (2)  the good faith of the inquiry and review by the
  person or group; and
               (3)  the reasonableness of the procedures followed by
  the person or group in conducting the review.
         (b)  Discovery described by Subsection (a) may not be
  expanded to include a fact or substantive matter regarding the act,
  omission, or other matter that is the subject matter of the
  derivative proceeding, but the scope of discovery shall not be so
  limited[. The scope of discovery may be expanded] if the court
  determines after notice and hearing that a good faith review of the
  allegations [for purposes of Section 101.458] has not been made by
  an independent and disinterested person or group in accordance with
  Sections 101.454 and 101.458 [that section].
         SECTION 19.  Section 101.457, Business Organizations Code,
  is amended to read as follows:
         Sec. 101.457.  TOLLING OF STATUTE OF LIMITATIONS. A written
  demand filed with the limited liability company under Section
  101.453 tolls the statute of limitations on the claim on which
  demand is made until the later [earlier] of:
               (1)  the 31st [91st] day after the expiration of any
  waiting period under Section 153.403 [date of the demand]; or
               (2)  the 31st day after the expiration of any stay
  granted under Section 153.405, including all continuations of the
  stay [date the limited liability company advises the member that
  the demand has been rejected or the review has been completed].
         SECTION 20.  Section 101.458, Business Organizations Code,
  is amended to read as follows:
         Sec. 101.458.  DISMISSAL OF DERIVATIVE PROCEEDING. (a)  A
  court, sitting in equity as the finder of fact, shall dismiss a
  derivative proceeding on a motion by the limited liability company
  if the person or group of persons described by Section 101.454
  determines in good faith, after conducting a reasonable inquiry and
  based on factors the person or group considers appropriate under
  the circumstances, that continuation of the derivative proceeding
  is not in the best interests of the limited liability company.
         (b)  In determining whether the requirements of Subsection
  (a) have been met, the burden of proof shall be on:
               (1)  the plaintiff member if:
                     (A)  the applicable person or persons making the
  determination under Section 101.454(a)(1) or (2) are [majority of
  the governing authority consists of] independent and disinterested
  [persons] at the time the determination is made;
                     (B)  the determination is made by a panel of one or
  more independent and disinterested persons appointed under Section
  101.454(a)(3); or
                     (C)  the limited liability company presents prima
  facie evidence that demonstrates that the applicable person or
  persons making the determination [appointed] under Section
  101.454(a) [101.454(a)(2)] are independent and disinterested; or
               (2)  the limited liability company in any other
  circumstance.
         SECTION 21.  Section 101.459, Business Organizations Code,
  is amended to read as follows:
         Sec. 101.459.  ALLEGATIONS AFTER [IF] DEMAND REJECTED. If a
  derivative proceeding is instituted after a demand is rejected, the
  petition must allege with particularity facts that establish that
  the rejection was not made in accordance with the requirements and
  standards under [of] Sections 101.454 and 101.458.
         SECTION 22.  Section 101.461, Business Organizations Code,
  is amended to read as follows:
         Sec. 101.461.  PAYMENT OF EXPENSES. (a)  In this section,
  "expenses" means reasonable expenses incurred by a party in a
  derivative proceeding, including:
               (1)  attorney's fees;
               (2)  costs in [of] pursuing an investigation of the
  matter that was the subject of the derivative proceeding; or
               (3)  expenses for which the [domestic or foreign]
  limited liability company may be required to indemnify another
  person.
         (b)  On termination of a derivative proceeding, the court may
  order:
               (1)  the [domestic or foreign] limited liability
  company to pay [the] expenses the plaintiff incurred in the
  proceeding if the court finds the proceeding has resulted in a
  substantial benefit to the [domestic or foreign] limited liability
  company;
               (2)  the plaintiff to pay [the] expenses the [domestic
  or foreign] limited liability company or other defendant incurred
  in investigating and defending the proceeding if the court finds
  the proceeding has been instituted or maintained without reasonable
  cause or for an improper purpose; or
               (3)  a party to pay [the] expenses incurred by another
  party relating to the filing of a pleading, motion, or other paper
  if the court finds the pleading, motion, or other paper:
                     (A)  was not well grounded in fact after
  reasonable inquiry;
                     (B)  was not warranted by existing law or a good
  faith argument for the application, extension, modification, or
  reversal of existing law; or
                     (C)  was interposed for an improper purpose, such
  as to harass, cause unnecessary delay, or cause a needless increase
  in the cost of litigation.
         SECTION 23.  Section 101.462, Business Organizations Code,
  is amended to read as follows:
         Sec. 101.462.  APPLICATION TO FOREIGN LIMITED LIABILITY
  COMPANIES. (a)  In a derivative proceeding brought in the right of
  a foreign limited liability company, the matters covered by this
  subchapter are governed by the laws of the jurisdiction of
  formation [organization] of the foreign limited liability company,
  except for Sections 101.455, 101.460, and 101.461, which are
  procedural provisions and do not relate to the internal affairs of
  the foreign limited liability company, unless applying the laws of
  the jurisdiction of formation of the foreign limited liability
  company requires otherwise with respect to Section 101.455.
         (b)  In the case of matters relating to a foreign limited
  liability company under Section 101.455 [101.454], a reference to a
  person or group of persons described by Section 101.454 [that
  section] refers to a person or group entitled under the laws of the
  jurisdiction of formation [organization] of the foreign limited
  liability company to make the determination described by Section
  101.454(a) [review and dispose of a derivative proceeding]. The
  standard of review of a determination [decision] made by the person
  or group [to dismiss the derivative proceeding] shall be governed
  by the laws of the jurisdiction of formation [organization] of the
  foreign limited liability company.
         SECTION 24.  Section 101.463, Business Organizations Code,
  is amended to read as follows:
         Sec. 101.463.  CLOSELY HELD LIMITED LIABILITY COMPANY.
  (a)  In this section, "closely held limited liability company"
  means a limited liability company that has:
               (1)  fewer than 35 members; and
               (2)  no membership interests listed on a national
  securities exchange or regularly quoted in an over-the-counter
  market by one or more members of a national securities association.
         (b)  Sections 101.452-101.460 [101.452-101.459] do not apply
  to a claim or a derivative proceeding by a member of a closely held
  limited liability company against a governing person, member, or
  officer of the limited liability company.  In the event the claim or
  derivative proceeding is also made against a person who is not that
  governing person, member, or officer, this subsection applies only
  to the claim or derivative proceeding against the governing person,
  member, or officer.
         (c)  If Sections 101.452-101.460 do not apply because of
  Subsection (b) and if justice requires:
               (1)  a derivative proceeding brought by a member of a
  closely held limited liability company may be treated by a court as
  a direct action brought by the member for the member's own benefit;
  and
               (2)  a recovery in a direct or derivative proceeding by
  a member may be paid directly to the plaintiff or to the limited
  liability company if necessary to protect the interests of
  creditors or other members of the limited liability company.
         (d)  Other provisions of state law govern whether a member
  has a direct cause of action or right to sue a governing person,
  member, or officer, and this section may not be construed to create
  that direct cause of action or right to sue.
         SECTION 25.  Section 153.401, Business Organizations Code,
  is amended to read as follows:
         Sec. 153.401.  DEFINITIONS [RIGHT TO BRING ACTION]. In this
  subchapter:
               (1)  "Derivative proceeding" means a civil suit in the
  right of a domestic limited partnership or, to the extent provided
  by Section 153.412, in the right of a foreign limited partnership.
               (2)  "Limited partner" means a person who is a limited
  partner or is an assignee of a partnership interest, including the
  partnership interest of a general partner [A limited partner may
  bring an action in a court on behalf of the limited partnership to
  recover a judgment in the limited partnership's favor if:
               [(1)     all general partners with authority to bring the
  action have refused to bring the action; or
               [(2)     an effort to cause those general partners to
  bring the action is not likely to succeed].
         SECTION 26.  Section 153.402, Business Organizations Code,
  is amended to read as follows:
         Sec. 153.402.  STANDING TO BRING PROCEEDING [PROPER
  PLAINTIFF]. (a)  Subject to Subsection (b), a limited partner may
  not institute or maintain a derivative proceeding unless:
               (1)  the limited partner:
                     (A)  was a limited partner of the limited
  partnership at the time of the act or omission complained of; or
                     (B)  became a limited partner by operation of law
  originating from a person that was a limited partner or general
  partner at the time of the act or omission complained of; and 
               (2)  the limited partner fairly and adequately
  represents the interests of the limited partnership in enforcing
  the right of the limited partnership.
         (b)  If the converted entity in a conversion is a limited
  partnership, a limited partner of that limited partnership may not
  institute or maintain a derivative proceeding based on an act or
  omission that occurred with respect to the converting entity before
  the date of the conversion unless:
               (1)  the limited partner was an equity owner of the
  converting entity at the time of the act or omission; and
               (2)  the limited partner fairly and adequately
  represents the interests of the limited partnership in enforcing
  the right of the limited partnership [In a derivative action, the
  plaintiff must be a limited partner when the action is brought and:
               [(1)     the person must have been a limited partner at the
  time of the transaction that is the subject of the action; or
               [(2)     the person's status as a limited partner must have
  arisen by operation of law or under the terms of the partnership
  agreement from a person who was a limited partner at the time of the
  transaction].
         SECTION 27.  Section 153.403, Business Organizations Code,
  is amended to read as follows:
         Sec. 153.403.  DEMAND [PLEADING]. (a)  A limited partner
  may not institute a derivative proceeding until the 91st day after
  the date a written demand is filed with the limited partnership
  stating with particularity the act, omission, or other matter that
  is the subject of the claim or challenge and requesting that the
  limited partnership take suitable action.
         (b)  The waiting period required by Subsection (a) before a
  derivative proceeding may be instituted is not required or, if
  applicable, shall terminate if:
               (1)  the limited partner has been notified that the
  demand has been rejected by the limited partnership;
               (2)  the limited partnership is suffering irreparable
  injury; or 
               (3)  irreparable injury to the limited partnership
  would result by waiting for the expiration of the 90-day period [In
  a derivative action, the complaint must contain with particularity:
               [(1)     the effort, if any, of the plaintiff to secure
  initiation of the action by a general partner; or
               [(2)  the reasons for not making the effort].
         SECTION 28.  Section 153.404, Business Organizations Code,
  is amended to read as follows:
         Sec. 153.404.  DETERMINATION BY INDEPENDENT PERSONS
  [SECURITY FOR EXPENSES OF DEFENDANTS]. (a)  A determination of how
  to proceed on allegations made in a demand or petition relating to a
  derivative proceeding must be made by an affirmative vote of the
  majority of:
               (1)  the independent and disinterested general
  partners of the limited partnership, whether one or more, even if
  the independent and disinterested general partners are not a
  majority of the general partners of the limited partnership;
               (2)  a committee consisting of one or more independent
  and disinterested general partners appointed by a majority of one
  or more independent and disinterested general partners of the
  limited partnership, even if the appointing independent and
  disinterested general partners are not a majority of the general
  partners of the limited partnership; or
               (3)  a panel of one or more independent and
  disinterested individuals appointed by the court on a motion by the
  limited partnership listing the names of the individuals to be
  appointed and stating that, to the best of the limited
  partnership's knowledge, the individuals to be appointed are
  disinterested and qualified to make the determinations
  contemplated by Section 153.408 [In a derivative action, the court
  may require the plaintiff to give security for the reasonable
  expenses incurred or expected to be incurred by a defendant in the
  action, including reasonable attorney's fees].
         (b)  An entity to which this subsection applies is
  independent and disinterested under this section only if its
  decision with respect to the limited partnership's derivative
  proceeding is made by a majority of its governing persons who are
  independent and disinterested with respect to that derivative
  proceeding, even if those governing persons are not a majority of
  its governing persons.  This subsection applies to an entity that
  is:
               (1)  a general partner of the limited partnership; or 
               (2)  directly, or indirectly through one or more other
  entities, a governing person of that general partner [The court may
  increase or decrease at any time the amount of the security on a
  showing that the security provided is inadequate or excessive].
         (c)  The court shall appoint a panel under Subsection (a)(3)
  if the court finds that the individuals recommended by the limited
  partnership are independent and disinterested and are otherwise
  qualified with respect to expertise, experience, independent
  judgment, and other factors considered appropriate by the court
  under the circumstances to make the determinations. An individual
  appointed by the court to a panel under this section may not be held
  liable to the limited partnership or the limited partnership's
  partners for an action taken or omission made by the individual in
  that capacity, except for an act or omission constituting fraud or
  wilful misconduct [If a plaintiff is unable to give security, the
  plaintiff may file an affidavit in accordance with the Texas Rules
  of Civil Procedure].
         [(d)     Except as provided by Subsection (c), if a plaintiff
  fails to give the security within a reasonable time set by the
  court, the court shall dismiss the suit without prejudice.
         [(e)     The court, on final judgment for a defendant and on a
  finding that suit was brought without reasonable cause against the
  defendant, may require the plaintiff to pay reasonable expenses,
  including reasonable attorney's fees, to the defendant, regardless
  of whether security has been required.]
         SECTION 29.  Section 153.405, Business Organizations Code,
  is amended to read as follows:
         Sec. 153.405.  STAY OF PROCEEDING [EXPENSES OF PLAINTIFF].
  (a)  If the limited partnership that is the subject of a derivative
  proceeding commences an inquiry into the allegations made in a
  demand or petition and the person or group of persons described by
  Section 153.404 is conducting an active review of the allegations
  in good faith, the court shall stay a derivative proceeding for not
  more than 60 days until the review is completed and a determination
  is made by the person or group regarding what further action, if
  any, should be taken.
         (b)  To obtain a stay, the limited partnership must provide
  the court with a written statement agreeing to advise the court and
  the limited partner making the demand of the determination promptly
  on the completion of the review of the matter.
         (c)  A stay, on motion, may be reviewed every 60 days for
  continuation of the stay if the limited partnership provides the
  court and the limited partner with a written statement of the status
  of the review and the reasons why an extension for a period not to
  exceed 60 additional days is appropriate. An extension shall be
  granted for a period not to exceed 60 days if the court determines
  that the continuation is appropriate in the interests of the
  partnership [If a derivative action is successful, wholly or
  partly, or if anything is received by the plaintiff because of a
  judgment, compromise, or settlement of the action or claim
  constituting a part of the action, the court may award the plaintiff
  reasonable expenses, including reasonable attorney's fees, and
  shall direct the plaintiff to remit to a party identified by the
  court the remainder of the proceeds received by the plaintiff].
         SECTION 30.  Subchapter I, Chapter 153, Business
  Organizations Code, is amended by adding Sections 153.406, 153.407,
  153.408, 153.409, 153.410, 153.411, 153.412, and 153.413 to read as
  follows:
         Sec. 153.406.  DISCOVERY. (a)  If a limited partnership
  proposes to dismiss a derivative proceeding under Section 153.408,
  discovery by a limited partner after the filing of the derivative
  proceeding in accordance with this subchapter shall be limited to:
               (1)  facts relating to whether the person or persons
  described by Section 153.404 are independent and disinterested;
               (2)  the good faith of the inquiry and review by the
  person or group; and
               (3)  the reasonableness of the procedures followed by
  the person or group in conducting the review.
         (b)  Discovery described by Subsection (a) may not be
  expanded to include a fact or substantive matter regarding the act,
  omission, or other matter that is the subject matter of the
  derivative proceeding, but the scope of discovery shall not be so
  limited if the court determines after notice and hearing that a good
  faith review of the allegations has not been made by an independent
  and disinterested person or group in accordance with Sections
  153.404 and 153.408.
         Sec. 153.407.  TOLLING OF STATUTE OF LIMITATIONS. A written
  demand filed with the limited partnership under Section 153.403
  tolls the statute of limitations on the claim on which demand is
  made until the later of:
               (1)  the 31st day after the expiration of any waiting
  period under Section 153.403; or
               (2)  the 31st day after the expiration of any stay
  granted under Section 153.405, including all continuations of the
  stay.
         Sec. 153.408.  DISMISSAL OF DERIVATIVE PROCEEDING. (a)  A
  court, sitting in equity as the finder of fact, shall dismiss a
  derivative proceeding on a motion by the limited partnership if the
  person or group of persons described by Section 153.404 determines
  in good faith, after conducting a reasonable inquiry and based on
  factors the person or group considers appropriate under the
  circumstances, that continuation of the derivative proceeding is
  not in the best interests of the limited partnership.
         (b)  In determining whether the requirements of Subsection
  (a) have been met, the burden of proof shall be on:
               (1)  the plaintiff limited partner if:
                     (A)  the applicable person or persons making the
  determination under Section 153.404(a)(1) or (2) are independent
  and disinterested at the time the determination is made;
                     (B)  the determination is made by a panel of one or
  more independent and disinterested individuals appointed under
  Section 153.404(a)(3); or
                     (C)  the limited partnership presents prima facie
  evidence that demonstrates that the applicable person or persons
  making the determination under Section 153.404(a) are independent
  and disinterested; or
               (2)  the limited partnership in any other circumstance.
         Sec. 153.409.  ALLEGATIONS AFTER DEMAND REJECTED. If a
  derivative proceeding is instituted after a demand is rejected, the
  petition must allege with particularity facts that establish that
  the rejection was not made in accordance with the requirements and
  standards under Sections 153.404 and 153.408.
         Sec. 153.410.  DISCONTINUANCE OR SETTLEMENT. (a)  A
  derivative proceeding may not be discontinued or settled without
  court approval.
         (b)  The court shall direct that notice be given to the
  affected partners if the court determines that a proposed
  discontinuance or settlement may substantially affect the
  interests of other partners.
         Sec. 153.411.  PAYMENT OF EXPENSES. (a)  In this section,
  "expenses" means reasonable expenses incurred by a party in a
  derivative proceeding, including:
               (1)  attorney's fees;
               (2)  costs in pursuing an investigation of the matter
  that was the subject of the derivative proceeding; or
               (3)  expenses for which the limited partnership may be
  required to indemnify another person.
         (b)  On termination of a derivative proceeding, the court may
  order:
               (1)  the limited partnership to pay expenses the
  plaintiff incurred in the proceeding if the court finds the
  proceeding has resulted in a substantial benefit to the limited
  partnership;
               (2)  the plaintiff to pay expenses the limited
  partnership or other defendant incurred in investigating and
  defending the proceeding if the court finds the proceeding has been
  instituted or maintained without reasonable cause or for an
  improper purpose; or
               (3)  a party to pay expenses incurred by another party
  relating to the filing of a pleading, motion, or other paper if the
  court finds the pleading, motion, or other paper:
                     (A)  was not well grounded in fact after
  reasonable inquiry;
                     (B)  was not warranted by existing law or a good
  faith argument for the application, extension, modification, or
  reversal of existing law; or
                     (C)  was interposed for an improper purpose, such
  as to harass, cause unnecessary delay, or cause a needless increase
  in the cost of litigation.
         Sec. 153.412.  APPLICATION TO FOREIGN LIMITED PARTNERSHIPS.  
  (a)  In a derivative proceeding brought in the right of a foreign
  limited partnership, the matters covered by this subchapter are
  governed by the laws of the jurisdiction of formation of the foreign
  limited partnership, except for Sections 153.405, 153.410, and
  153.411, which are procedural provisions and do not relate to the
  internal affairs of the foreign limited partnership, unless
  applying the laws of the jurisdiction of formation of the foreign
  limited partnership requires otherwise with respect to Section
  153.405.
         (b)  In the case of matters relating to a foreign limited
  partnership under Section 153.405, a reference to a person or group
  of persons described by Section 153.404 refers to a person or group
  entitled under the laws of the jurisdiction of formation of the
  foreign limited partnership to make the determination described by
  Section 153.404(a). The standard of review of a determination made
  by the person or group shall be governed by the laws of the
  jurisdiction of formation of the foreign limited partnership.
         Sec. 153.413.  CLOSELY HELD LIMITED PARTNERSHIP. (a)  In
  this section, "closely held limited partnership" means a limited
  partnership that has:
               (1)  fewer than 35 limited partners; and
               (2)  no partnership interests listed on a national
  securities exchange or regularly quoted in an over-the-counter
  market by one or more members of a national securities association.
         (b)  Sections 153.402-153.410 do not apply to a claim or a
  derivative proceeding by a limited partner of a closely held
  limited partnership against a general partner, limited partner, or
  officer of the limited partnership. In the event the claim or
  derivative proceeding is also made against a person who is not that
  general partner, limited partner, or officer, this subsection shall
  apply only to the claim or derivative proceeding against the
  general partner, limited partner, or officer.
         (c)  If Sections 153.402-153.410 do not apply because of
  Subsection (b) and if justice requires:
               (1)  a derivative proceeding brought by a limited
  partner of a closely held limited partnership may be treated by a
  court as a direct action brought by the limited partner for the
  limited partner's own benefit; and
               (2)  a recovery in a direct or derivative proceeding by
  a limited partner may be paid directly to the plaintiff or to the
  limited partnership if necessary to protect the interests of
  creditors or other partners of the limited partnership.
         (d)  Other provisions of state law govern whether a limited
  partner has a direct cause of action or right to sue a general
  partner, limited partner, or officer, and this section may not be
  construed to create that direct cause of action or right to sue.
         SECTION 31.  The changes in law made by this Act apply only
  to a derivative proceeding instituted on or after the effective
  date of this Act. A derivative proceeding instituted before the
  effective date of this Act is governed by the law in effect on the
  date the proceeding was instituted, and the former law is continued
  in effect for that purpose.
         SECTION 32.  This Act takes effect September 1, 2019.
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