Business Law Updates from the 86th Legislature – Part 1

The 86th legislative session produced a number of updates to the Texas Business Organizations Code (the “BOC”) that deal with technological advancements. Senate Bill 1859 (“SB 1859”) allows blockchain and other electronic data systems are authorized for business entity books, records, ownership information, membership documentation, and other entity documents and actions. It also modified the Secretary of State (“SOS”) filing procedures dealing with delayed effective dates. Finally, it updated provisions related to general partnerships modifying (i) individual liability for general partnership debts and obligations and (ii) indemnification of withdrawn partners for partnership debts. This article reviews the electronic data systems and electronic notification updates to the BOC contained in SB 1859.

Blockchain and Electronic Data Systems and Corporate Records

SB 1859 authorizes the use of an electronic data systems (such as blockchain and distributed ledger technology) for the maintenance of books and records of Texas entities. In order to accomplish this, SB 1859 created a new definition (electronic data system), modified two existing definitions (electronic transmission and shareholder/holder of shares), and created new record-keeping rules in BOC § 3.151.

SB 1859 first created a new defined term in the BOC by adding § 1.002(20-a):

“electronic data system” means an electronic network or database. The term includes a distributed electronic network or database, including one that employs blockchain or distributed ledger technology.

Tex. Bus. Org. Code § 1.002(20-a) (Effective Sep. 1, 2019).

The legislature next incorporated the definition above into the existing definition of electronic transmission:

“Electronic transmission” means a form of communication, including communication by the use of or participation in one or more electronic data systems, that:

(A) does not directly involve the physical transmission of paper;

(B) creates a record that may be retained, retrieved, and reviewed by the recipient; and

(C) may be directly reproduced in paper form by the recipient through an automated process.

Tex. Bus. Org. Code § 1.002(20-b) (Effective Sep. 1, 2019).

The terms “shareholder” and “holder of shares” was also slightly modified to add language allowing for stock registers to be maintained by or on behalf of a for-profit corporation. While this modification may appear somewhat insignificant, it was necessary to tie into the new electronic record keeping provisions in Section 3.151.

SB 1859 modified BOC § 3.151 significantly changed the laws regarding corporate record-keeping. First, it struck the requirement that books and records be maintained at a business entity’s registered office or principal place of business. Beginning 9/1/19, a business entity may maintain its books, records, minutes, and ownership information either in paper form or “by means of an information storage device or method of one or more electronic data systems.” The only caveat to the electronic storage system is that, as before, the records must be able to be converted into written paper form within a reasonable time.

Electronic Notices on Uncertificated Interests

Beginning 9/1/19, equity interest holders with uncertificated interests in domestic entities may be electronically notified of information that was previously required to be placed on a certificate representing an ownership interest. Effectively, this means that information traditionally referred to as a “legend” on a share certificate may now be delivered to an owner via electronic transmission. That said, SB 1859 also provides that no notification of that information is required so long as (1) the required information is included in the governing documents of the entity and (2) the owner of the uncertificated interest is provided with a copy of the governing documents.

Conclusion

The BOC is in a tough spot when it comes to keeping up with technology. While technology evolves at a breakneck pace, the Texas Legislature meets only once every two years to update the BOC. Given that fact, it is reassuring to see the Legislature attempt to keep up with tech through amendments such as those described above. At the end of the day, however, having a business code that is perpetually 2 years behind tech does a disservice to Texas businesses.